AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 3, 2000
REGISTRATION NO. 333-30074
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
AMENDMENT NUMBER 1 TO FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------
NETTAXI.COM
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 7370 82-0486102
(State or Other Jurisdiction of Primary Standard (I.R.S. Employer
Incorporation or Organization) Industrial Identification
Classification Number)
Code)
1696 DELL AVENUE
CAMPBELL, CALIFORNIA 95008
(408) 879-9880
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Executive Offices)
ROBERT A. ROSITANO, JR.
DEAN ROSITANO
NETTAXI.COM
1696 DELL AVENUE
CAMPBELL, CALIFORNIA 95008
(408) 879-9880
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Co-Agents for Service)
-----------------------
COPY TO:
JAMES C. CHAPMAN, ESQ.
CATHRYN S. GAWNE, ESQ.
ROMIN P. THOMSON, ESQ.
SILICON VALLEY LAW GROUP
152 NORTH THIRD STREET, SUITE 900
SAN JOSE, CALIFORNIA 95112
(408) 286-6100
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this registration statement becomes effective.
--------------------
If any of the securities being registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, check the following box and
list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act of 1933, check the following box and list the
Securities Act Registration Statement number of the earlier Registration
Statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the
Securities Act Registration Statement number of the earlier Registration
Statement for the same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF SHARES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE PRICE FEE
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value per share 457,880 shares (1) $ 10.00 (2) $4,578,800 $1,272.91
Common Stock, $.001 par
value per share 150,000 shares (1) $ 7.857 (3) $1,178,550 $ 311.14
Common Stock, $.001 par
value per share 7,632,257 shares (1) $ 1.92 (2) $14,653,933 (2) $3,868.64
Common Stock, $.001 par
Value per share 1,721,250 shares (1) $ 6.375 (2) $10,972,969 (2) $2,896.86
- --------------------------------------------------------------------------------------------
Total 9,961,387 shares (1)(2) $31,384,252 $ 8,349.55
- --------------------------------------------------------------------------------------------
<FN>
(1) The shares of Common Stock being registered can be received by the
holders of convertible debentures, investment options and warrants when
and if they elect convert such debentures and exercise such investment
options and warrants. The number of shares being registered represents
our good faith estimate of the maximum number of shares we may issue
upon conversion of the debentures and exercise of the investment options
and warrants. The actual number of shares of Common Stock received upon
conversion of the convertible debentures and exercise of the investment
options and warrants may vary from this number. In addition to the
shares set forth in the table, the amount of shares to be registered
under this Registration Statement includes an indeterminate number of
shares issuable upon conversion of or in respect of the convertible
debentures and the warrants, as such number may be adjusted as a
result of stock splits, stock dividends and antidilution provisions in
accordance with Rule 416 under the Securities Act of 1933.
<PAGE>
(2) Calculated in accordance with Rule 457(c) under the Securities Act
of 1933.
(3) Calculated in accordance with Rule 457(g) under the Securities Act of
1933.
</TABLE>
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SECTION 8(a), MAY DETERMINE.
Pursuant to Rule 429 under the Securities Act of 1933, the Prospectus included
as part of this Registration Statement shall be deemed to be a combined
prospectus which shall also relate to our Registration Statement on Form S-1
(Registration No. 333-78129). An aggregate of $1,272.91 has previously been paid
as the registration fee for the 457,880 remaining shares of Common Stock carried
forward from the prior Registration Statement (No. 333-78129.) This
Registration Statement and said prior Registration Statement, are collectively
referred to herein as the "Registration Statement".
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities, and it is not soliciting an offer to buy these
securities, in any state where the offer or sale is not permitted.
Subject to Completion, April 3, 2000
[GRAPHIC OMITTED]
9,961,387 SHARES
COMMON STOCK
-------------------
We have prepared this prospectus to allow RGC International Investors
LDC and Wall Street Trading Group or their pledgees, donees, transferees or
other successors in interest, to use a "shelf" registration process to sell up
to 9,961,387 shares of our common stock which they have acquired or may acquire
upon conversion of convertible debentures and exercise of investment options and
warrants previously acquired in private placements. We will receive no proceeds
from the sale of these shares, with the exception of the proceeds from the
exercise of the investment options and warrants.
Our common stock is listed on the NASD O-T-C Market Bulletin Board
under the symbol "NTXY." On March 30, 2000, the closing price of our common
stock was $5.9375 per share.
-------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF MATERIAL ISSUES TO
CONSIDER BEFORE PURCHASING OUR COMMON STOCK.
-------------------
1
<PAGE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
This prospectus also amends our prospectus dated August 13, 1999.
The date of this prospectus is ________________, 2000.
2
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
Prospectus Summary . . . . . . . . . . . . . . . . . 4
Risk Factors.. . . . . . . . . . . . . . . . . . . . 8
Cautionary Note Regarding Forward-Looking Statements 21
Use of Proceeds. . . . . . . . . . . . . . . . . . . 22
Price Range of Common Stock and Dividend Policy. . . 22
Capitalization . . . . . . . . . . . . . . . . . . . 24
Selected Financial Data. . . . . . . . . . . . . . . 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . 26
Business . . . . . . . . . . . . . . . . . . . . . . 39
Management.. . . . . . . . . . . . . . . . . . . . . 70
Related Party Transactions . . . . . . . . . . . . . 84
Selling Stockholders . . . . . . . . . . . . . . . . 88
Principal Stockholders . . . . . . . . . . . . . . . 90
Description of Capital Stock . . . . . . . . . . . . 92
Shares Eligible for Future Sale. . . . . . . . . . . 102
Plan of Distribution . . . . . . . . . . . . . . . . 104
Legal Matters. . . . . . . . . . . . . . . . . . . . 107
Experts. . . . . . . . . . . . . . . . . . . . . . . 107
Where You Can Find Additional Information. . . . . . 107
Index to Financial Statements. . . . . . . . . . . . F-1
</TABLE>
"Nettaxi," "Netro News," "URL," and "Internet the City" are trademarks and
service marks of Nettaxi. All other trademarks, service marks or tradenames
referred to in this prospectus are the property of their respective owners.
3
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. You should read the entire prospectus, including
"Risk Factors" and our financial statements and the related notes, before
deciding to invest in our common stock.
NETTAXI
We were organized in 1997 to capitalize on a significant opportunity that
exists today through the convergence of the media and entertainment industries
with the vast communications power of the Internet. We are defining a new type
of Internet company -- an e-commerce-based online community and portal to the
Internet -- that is dedicated to providing content-rich communities and an entry
point on the Internet for both consumers and businesses. Our site is designed
to seamlessly integrate content with e-commerce services for consumers and
businesses. Nettaxi.com provides comprehensive information about news, sports,
entertainment, health, politics, finances, lifestyle, and areas of interest to
the growing number of Internet users. Our mission is to establish our site as
an entry point or 'portal' to the Internet by continuing to develop premium
online communities which are both content-rich to our subscribers, the
"citizens" of our communities, and providing easy-to-use e-commerce services to
businesses of all sizes which reside in these communities.
While we have incurred significant losses since our site was launched, traffic
to our online community has increased consistently from a membership base of
60,000 citizens in December 1998 to a membership base of over 1.8 million
citizens in December 1999. This increase in our membership base has also
resulted in corresponding increases in both the number of web pages and
advertising banners viewed by visitors. Our records indicate that the
Nettaxi.com Web site had over 45.8 million visitors, 125 million page views and
180 million advertising impressions for the month of December 1999. A visit by
a user to a page on our web site represents one page view and each advertisement
that appears on that page to which a visitor is exposed is called an
advertisement impression. Based on unique visitors to our site, PC Data Online
ranked Nettaxi.com as the 289th most visited site in the world at the end of
November 1999. The "100hot", an industry ranking of the top Internet sites
based upon unique visits, ranked Nettaxi.com as the 12th most popular site on
the Web during this same month.
We now have a number of powerful business tools and resources,
including:
- - a growing database of user profiles;
- - a meta-search engine that enables users to search multiple sites
simultaneously and return the results, including comparative product
pricing and availability, to one page;
4
<PAGE>
- - commerce-enabled web site hosting services for businesses and citizens;
- - web-based e-mail for all citizens;
- - unlimited private label e-mail accounts for businesses;
- - comparative shopping services;
- - promotions and advertising opportunities for all business members; and
- - Nettaxi.com's award-winning CD-ROM, "Nettaxi.com: The Experience", bundled
with free Internet access, used to drive citizens to specific Internet
communities and businesses in a fun, entertaining and educational manner.
We are now poised to build on our early success by implementing a growth
strategy that, if successful, should make us a major ready-to-use e-commerce
storefront host, and allow us to meet our goal of becoming one of most
frequented community-based portals on he Internet. Our strategic growth plan
includes:
- - execution of our community service business model;
- - continued expansion of our co-branded content partnerships and portal
service offerings to Nettaxi.com citizens;
- - continued development of an expandable infrastructure;
- - widespread distribution of our CD-ROM product with free Internet access to
assist our partners in their customer acquisition strategies, educate
computer users about the Internet and introduce them to our site; and
- - an aggressive subscriber acquisition program.
While we believe that the objectives of our strategic growth plans our
reasonably attainable, we caution you that our ability to achieve these goals
are subject to the risks described in "Risk Factors" below, including the
limited resources that we currently have available to pursue our plans, our
reliance on third parties for development of software and content and for
essential business operations, and the uncertainties associated with the
rapidly-changing business and technological environment for Internet companies.
Our principal executive offices are located at 1696 Dell Avenue, Campbell,
California 95008. Our telephone number at this address is (408) 879-9880.
5
<PAGE>
THE OFFERING
Common stock offered by selling 5,756,762 shares(1)
stockholders
Common stock to be outstanding 45,502,819 shares(1)(2)
after this Offering
Use of proceeds Other than the proceeds from the
exercise of the investment options
and the warrants, none of the
proceeds from the sale of the
common stock offered by this
prospectus will be received by us.
Any proceeds received by us will
be utilized for working capital
and general corporate purposes.
O-T-C Market Bulletin Board Symbol: NTXY
- ----------
(1) Includes all shares issuable, as of March 15, 2000, upon conversion
of the convertible debentures and exercise of the investment options
and the warrants and the 916,906 shares currently held by RGC
International Investors LDC as a result of previous conversions of
debentures. Pursuant to our registration rights agreement with RGC
International Investors, LDC, we are required to register twice as
many shares of common stock as are currently issuable upon conversion
of the convertible debentures and warrants.
(2) Does not include 21,446,915 shares reserved for issuance upon exercise
of outstanding stock options and warrants, other than the warrants
which can be exercised for the common stock offered by this prospectus.
6
<PAGE>
SUMMARY FINANCIAL DATA
Set forth below are summary statements of operations data for the period
from October 23, 1997, date of incorporation, to December 31, 1997, the years
ended December 31, 1998 and 1999, and summary balance sheet data as of December
31, 1997, 1998 and 1999. This information should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and "Management's
Discussion and Analysis of Financial Condition and esults of Operations",
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the Period from October 23, 1997, date of incorporation,
to December 31,1997 and the Years ended December 31, 1998 and 1999
1997 1998 1999
----------- ------------ ------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C>
Net revenues $ 144,900 $ 258,000 $ 5,032,800
----------- ------------ ------------
Gross profit $ 57,500 $ 18,200 $ 1,029,000
----------- ------------ ------------
Loss from operations $ (142,100) $(3,082,300) $(9,402,500)
----------- ------------ ------------
Net loss $ (159,700) $(3,113,600) $(9,880,400)
----------- ------------ ------------
Net loss available to common shareholders $ (327,200) $(3,127,900) $(9,880,400)
----------- ------------ ------------
Basic loss per share $ (0.06) $ (0.32) $ (0.46)
----------- ------------ ------------
Diluted loss per share $ (0.06) $ (0.32) $ (0.46)
WEIGHTED-AVERAGE COMMON SHARES:
----------- ------------ ------------
Basic outstanding shares 5,483,500 9,724,781 21,274,203
----------- ------------ ------------
Diluted outstanding shares 5,483,500 9,724,781 21,274,203
----------- ------------ ------------
BALANCE SHEET DATA:
Working capital (Deficiency) $ (222,900) $ 300,400 $(2,053,000)
----------- ------------ ------------
Total assets $2,082,300 $ 1,652,700 $ 6,031,200
----------- ------------ ------------
Long-term liabilities $ 773,500 $ 5,400 $ 3,200,000
----------- ------------ ------------
Total stockholders' equity (Deficiency) $ 973,400 $ 1,332,100 $(2,000,300)
----------- ------------ ------------
</TABLE>
7
<PAGE>
RISK FACTORS
You should consider carefully the following risks before you decide to buy
our common stock. Our business, financial condition or results of operations
could be materially and adversely affected by any of the following risks.
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND
EXPECT LOSSES FOR THE FORESEEABLE FUTURE
We were incorporated in October 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. Since
our inception, we have incurred net losses, resulting primarily from costs
related to developing our Web site, attracting users to our Web site and
establishing the Nettaxi.com brand. At December 31, 1999, we had an accumulated
deficit of $13,336,400. Losses have continued to grow faster than our revenues
during our limited operating history. This trend is reflective of our
continued investments in technology and sales and marketing efforts to grow
the business. Because of our plans to continue to invest heavily in marketing
and promotion, to hire additional employees, and to enhance our Web site
and operating infrastructure, we expect to incur significant net losses for the
foreseeable future. We believe these expenditures are necessary to strengthen
our brand recognition, attract more users to our Web site and generate greater
online revenues. If our revenue growth is slower than we anticipate or our
operating expenses exceed our expectations, our losses will be significantly
greater. We may never achieve profitability.
WE REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES
We currently believe that we have sufficient cash to fund our operations
through December 2000. After that time, we will be required to seek additional
capital to sustain our operations. We expect to generate a portion of the
necessary cash flow through advertising and hosting revenues, but will also need
to obtain capital through other sources such as equity or debt financing. We
cannot assure you that we will be able to achieve and sustain positive cash flow
or profitability or that we will have other sources available to provide the
financial resources necessary to continue our operations. Given our limited
resources and our history of losses from operations, we will also need to raise
additional funds in order to fund expansion of our business, to develop new
or enhanced services or products, to respond to competitive pressures or
to acquire complementary products, businesses or technologies. No assurances
can be given, however, that we will be able to obtain such additional resources.
If we are unsuccessful in generating anticipated resources from one
8
<PAGE>
or more of the anticipated sources, and unable to replace the shortfall with
resources from another source, we may be able to extend the period for which
available resources would be adequate by deferring the creation or satisfaction
of various commitments, deferring the introduction of various services or entry
into various markets, and otherwise scaling back operations. If we are unable
to generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected.
WE ARE ENGAGED IN LITIGATION WITH ONE OF THE SELLING STOCKHOLDERS
On March 31, 2000, we tendered the sum of $2,588,800 as payment in full of
the outstanding principal and interest of the convertible debentures in favor of
RGC International Investors, LDC. That same day, we filed a Complaint in the
Superior Court of the State of California for the County of Santa Clara
(Case No. CV788836) against RGC and certain RGC affiliates, seeking declaratory
relief regarding our ability to prepay the outstanding convertible debentures
held by RGC, damages for fraud and breach of fiduciary duty and
rescission of the underlying securities purchase agreement, and requests
injunctive relief against further conversions of the convertible debentures and
exercises of the conversion options by RGC.
Shortly after filing the Complaint, we received from RGC a mandatory
redemption notice demanding immediate redemption by us of RGC's outstanding
convertible debentures. In its notice, RGC claimed that its right to redemption
is based upon our alleged failure to maintain registration under the Securities
Act of 1933, as amended, of the shares of Nettaxi.com common stock underlying
the convertible debentures or otherwise issuable under the terms of the
debentures. RGC also claims that the mandatory redemption amount under the
terms of the convertible debentures, including penalties, equals $33,239,116.41.
Additional information regarding the Complaint and the mandatory redemption
notice is contained in the section of this prospectus entitled "Legal
Proceedings".
We intend to vigorously pursue our action against RGC, including our belief
that we have the right to prepay the convertible debentures. However, there can
be no assurance that we will be successful in our claims, that RGC will fail in
its attempt to effect a mandatory redemption of the convertible debentures, or
that if successful, that RGC will not be able to obtain the mandatory redemption
amount it seeks.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES FREQUENTLY ENCOUNTERED BY EARLY
STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS
Due to our limited operating history, we are subject to many of the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. Among other things, we are faced
with the need to establish our credibility with customers, advertising, content
providers, and companies offering e-commerce products and services, and such
parties are often understandably reluctant to do business with companies that
have not had an opportunity to establish a track record of performance and
accountability. For example, our ability to enter into exclusive relationships
to provide content over the Internet will be dependent on our ability to
demonstrate that we can handle high volumes of traffic through our site.
Similarly, early stage companies must devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
also make significant investments to establish brand recognition. If we are
unable to overcome some of these obstacles, we may be unable to achieve our
business goals and raise sufficient capital to expand our business.
OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE
CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES
We had revenues of approximately $5,032,800 and $258,000 for the years ended
December 31, 1999 and 1998, respectively. While our growth rate has been strong,
it is unlikely that revenue will continue to grow at this rate in the future and
our performance during these periods should not be taken as being indicative of
future trends. In addition, approximateley $1,285,000 of the revenues for the
year ended December 31, 1999 were derived from credit card transaction
processing fees, a revenue stream that has declined significantly and will not
be significant in future periods. Accurate predictions regarding our revenues in
the future are difficult and should be considered in light of our limited
operating history and rapid changes in the ever evolving Internet market. For
example, our ability to generate revenues in the future is dependent in part on
the success of our capital-raising efforts and the investments that we intend to
make in sales and marketing, infrastructure, and content development. Our
revenues for the foreseeable future will remain primarily dependent on the
number of customers that we are able to attract to our Web site, and secondarily
on sponsorship and advertising revenues. We cannot forecast with any degree of
certainty the number of visitors to our Web site, the number of visitors who
will become customers, or the amount of sponsorship and advertising revenues.
Similarly, we cannot provide any guarantees regarding the revenues that will be
generated from e-commerce products and services that we intend to make available
on our site.
9
<PAGE>
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
In addition to the uncertainties regarding the rate of growth of our future
revenues, we anticipate that our operating results will fluctuate significantly
from quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that may emerge in Internet e-commerce and advertising spending. For
example, we believe that the use of our Web site will be somewhat lower during
periods of the year if the patterns that currently effect traditional media,
such as television and radio where advertising sales are lower during the first
and third calendar quarters because of the summer vacation period and post
winter holiday season slowdown, develop in the Internet industry. It is likely
that similar seasonal patterns will develop in the Internet industry and thus
result in decreasing revenues for us during periods of the year. Quarterly
results may also vary for some of the same reasons and because it is difficult
to predict the long-term revenue growth of our business. If investments in
marketing and content development are delayed, we may experience corresponding
delays in anticipated revenues from such investments, thereby leading to uneven
quarterly results. Because of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of investors
in future periods, then our stock price may decline.
OUR NEED TO RAISE ADDITIONAL CAPITAL MAY CAUSE OUR STOCKHOLDERS TO EXPERIENCE
SIGNIFICANT DILUTION IN THE FUTURE
It is likely that we will need to raise additional funds in the future in
order to pursue our business objectives. If additional funds are raised through
the issuance of equity or convertible debt securities, the percentage ownership
of our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common stock. This may make an investment in our common stock
less attractive to other investors, thereby weakening the trading market for our
common stock.
FUTURE CONVERSION OF THE DEBENTURES AND EXERCISE OF THE WARRANTS AND INVESTMENT
OPTIONS MAY SIGNIFICANTLY DILUTE YOUR HOLDINGS; WE NEED TO REGISTER ADDITIONAL
STOCK FOR SUCH CONVERSIONS
As of March 15, 2000, an aggregate of $2,400,000 principal amount of
debentures were outstanding, which debentures were convertible into shares of
our common stock. Such debentures entitle the holder to exercise investment
options to purchase additional shares of our common stock upon conversion of the
debentures. If fully converted and exercised on March 15, 2000, the
debentures and investment option would be convertible into an aggregate of
4,414,856 shares of our common stock, but this number of shares could prove to
be significantly greater in the event of a decrease in the trading price of the
common stock due to required adjustments in the conversion price.
10
<PAGE>
Purchasers of our common stock could therefore experience substantial dilution
of their investment upon conversion of the debentures and exercise of the
investment options. In addition, as of March 15, 2000, warrants to purchase
150,000 shares of common stock issued to the purchasers of debentures and
exercisable over the next five years at a price of $7.857 (subject to
adjustment) were outstanding. We do not currently have enough shares registered
under the Securities Act of 1933 to provide freely tradable stock upon
conversion of the remaining debentures and exercise of the conversion option and
warrants. Additionally, the holder of the debentures is the holder of 734,026
shares of our common stock, received pursuant to prior conversions of a portion
of the convertible debentures, which are not freely tradeable for the same
reason. Our agreement with the holder of the debentures, conversion option
and warrants requires us to maintain this registration and our failure to do so
could cause us to incur certain penalties. The shares of common stock into
which the debentures may be converted and the investment options and the
warrants may be exercised and the 734,026 shares held by the debenture holders
are being registered pursuant to this registration statement; however, there
can be no assurance that such registration will be declared effective. For
a discussion of the conversion formula, please refer to the section below
entitled "Description of Capital Stock--Warrants and Debentures".
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE
We plan to pursue aggressive marketing campaigns online and in traditional
media to promote the Nettaxi.com brand and attract an increasing number of
visitors to our Web site. We believe that maintaining and strengthening the
Nettaxi.com brand will be critical to the success of our business. This
investment in increased marketing carries with it significant risks, including
the following:
- - Our advertisements may not properly convey the Nettaxi.com brand image, or
may even detract from our image. Advertising in print and broadcast media is
expensive and is often typically difficult to modify quickly in order to take
into account feedback that may indicate that we have failed to convey the
optimal message. If our advertisements fail to positively promote our brand and
image, the damage to our business may be long-lasting and costly to repair.
- - Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our Web site
at levels commensurate with their costs. We may fail to choose the optimal mix
of television, radio, print and other media to cost effectively deliver our
message. Moreover, if these efforts are unsuccessful, we will face difficult and
costly choices in deciding whether and how to redirect our marketing dollars.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
SPONSORSHIP AND ADVERTISING REVENUES
To date, we have relied principally on outside advertising agencies to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. Our internal sales team
currently has nine members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
11
<PAGE>
If we do not develop an effective internal sales force, our business will be
materially and adversely affected by our inability to attract sponsorship and
advertising revenues.
WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR
ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO
MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES
We depend on third parties for important aspects of our business,
including:
- - Internet access;
- - development of software for new Web site features;
- - content; and
- - telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms, and there is no guarantee that we will be
able to renew these agreements at all. Further, we cannot be sure that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively.
WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND
ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS
We maintain substantially all of our computer systems at our Campbell,
California site and the Santa Clara, California site of Exodus Communications.
We are heavily reliant on the ability of Exodus to house and service our Web
site. This system's continuing and uninterrupted performance is critical to our
success. Growth in the number of users accessing our Web site may strain its
capacity, and we rely on Exodus to upgrade our system's capacity in the face of
this growth. Exodus also provides our connection to the Internet. Sustained or
repeated system failures or interruptions of our Web site connection services
would reduce the attractiveness of our Web site to customers and advertisers,
and could therefore have a material and adverse effect on our business due to
loss of membership and advertising revenues.
In 1999 and 1998, we experienced several interruptions and degradations of
service as a result of our third party service provider's inability to deliver
the contractual bandwidth required to handle our traffic volume. These
interruptions result in decreased Web usage volume and therefore impact our
ability to serve advertising impressions for our customers. These interruptions
can materially impact our revenues. We estimate that during 1998 we lost
approximately $35,000 in revenue because of this, and during 1999 we lost an
additional $35,000 in revenues.
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In addition, our operations are dependent in part on our ability to protect
our operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins or other similar events.
Furthermore, our servers are vulnerable to computer viruses, break-ins and
similar disruptive problems. The occurrence of any of these events could result
in interruptions, delays or cessations in service to our users and result in a
decrease in the number of visitors to our site.
WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT
Our business plan contemplates a period of significant expansion.
In order to execute our business plan, we must grow significantly. This
growth will strain our personnel, management systems and resources. To manage
our growth, we must implement operational and financial systems and controls and
recruit, train and manage new employees. These individuals have had little
experience working with our management team. We cannot be sure that we will
be able to integrate new executives and other employees into our organization
effectively. In addition, there will be significant administrative burdens
placed on our management team as a result of our status as a public company. If
we do not manage growth effectively, we will not be able to achieve our
financial and business goals.
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our
Chief Operating Officer. The loss of the services of any of our executive
officers could materially and adversely affect our business due to their
experience with our business plan and the disruption in the conduct of our
day-to-day operations. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future.
INTENSE COMPETITION FROM OTHER INTERNET-BASED BUSINESSES MAY REDUCE OUR MARGINS
AND MARKET SHARE AND CAUSE OUR STOCK PRICE TO DECLINE
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software.
Competition could result in price reductions for our products and services,
reduced margins or loss of market share. Consolidation within the online
commerce industry may also increase competition.
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We currently or potentially compete with a number of other companies,
including a number of large online communities and services that have expertise
in developing online commerce, and a number of other small services, including
those that serve specialty markets. Many of our potential competitors have
longer operating histories, larger customer bases, greater brand recognition in
other business and Internet markets and significantly greater financial,
marketing, technical and other resources than us.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES
We intend to establish numerous strategic relationships with popular Web
sites to increase the number of visitors to our Web site. There is intense
competition for placements on these sites, and we may not be able to enter into
these relationships on commercially reasonable terms or at all. Even if we enter
into relationships with other Web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees to
establish these relationships. Our inability to enter into new distribution
relationships and expand our existing ones could have a material and adverse
effect on our business due to our inability to increase the number of users of
our site.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our Web site. We
could incur substantial, unanticipated costs if we need to modify our Web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
Web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our Web-savvy audience for new services, products and
enhancements, our users may not use our Web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS
Our Nettaxi.com brand and our Web address, www.nettaxi.com, are critical to
our success. We have filed a trademark application for "Nettaxi", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring Web addresses that are confusingly similar to our
addresses, which could harm our business. Also, while we have entered into
confidentiality agreements with our employees, contractors and suppliers in
order to safeguard our trade secrets and other proprietary information, there
can be no assurance that technology will not be misappropriated or that others
may lawfully develop similar technologies.
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<PAGE>
WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL
THIRD PARTY SYSTEMS ARE NOT YEAR 2000-COMPLIANT
We have not devised a Year 2000 contingency plan. Although we did not
experience any Year 2000-related problems on January 1, 2000, and have not
experienced any such problems to date, the failure of our internal systems, or
any material third party systems, to be Year 2000-compliant could have a
material and adverse effect on our business, results of operations and financial
condition if the compliance problems significantly impair access to and use of
our Web site.
To date, we have not incurred any material costs in identifying or
evaluating Year 2000 compliance issues. Most of our costs have related to, and
are expected to continue to relate to, the upgrades or replacements, when
necessary, of software or hardware, as well as costs associated with time spent
by employees in the evaluation process and Year 2000 compliance matters
generally. These expenses are included in our operating and capital
expenditures budget and are not expected to exceed $100,000. However, if these
costs are significantly higher than expected, they could have a material and
adverse effect on our business, results of operations and financial condition
due to the need to spend substantial amounts on compliance.
We may fail to discover Year 2000 compliance problems in our systems that
will require substantial revisions or replacements. In the event that the
operational facilities that support our business, or our Web-hosting facilities,
are not Year 2000 compliant, portions of our Web site may become unavailable and
we would be unable to deliver services to our users. In addition, there can be
no assurance that third party software, hardware or services incorporated into
our material systems will not need to be revised or replaced, which could be
time-consuming and expensive. Our inability to fix or replace third party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs and other business interruptions. Moreover, the
failure to adequately address Year 2000 compliance issues in our software,
hardware or systems could result in claims of mismanagement, misrepresentation
or breach of contract and related litigation, which could be costly and
time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside our control will be Year 2000 compliant. The failure by these entities
to be Year 2000 compliant could result in a systemic failure beyond our control,
including, for example, a prolonged Internet, telecommunications or electrical
failure, which could also prevent us from delivering our services to our users,
decrease the use of the Internet or prevent users from accessing our services.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions has
been a successful strategy used by other Internet companies. We do not have any
present understanding relating to any such acquisition or investment. If we were
to buy a content, service or technology company, the amount of time and level of
resources required to successfully integrate their business operation could be
substantial. The challenges in assimilating their people and organizational
structure, and in encountering potential unforeseen technical issues in
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<PAGE>
integrating their content, service or technology into ours, could cause
significant delays in executing other key areas of our business plan. This
could include delays in integrating other content, services or technology into
our communities, or moving forward on other business development relationships,
as management and employees, both of which are time constrained, may be
distracted. In addition, the key personnel of the acquired company may decide
not to work for us, which could result in the loss of key technical or business
knowledge to us. Furthermore, in making an acquisition, we may have to incur
debt or issue equity securities to finance the acquisition, the issuance of
which could be dilutive to our existing shareholders.
WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS
We do not expect to collect sales or other similar taxes in respect of
transactions engaged in by customers on our Web site. However, various states
or foreign countries may seek to impose sales tax obligations on us and other
e-commerce and direct marketing companies. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and cause purchasing through our
Web site to be less attractive to customers as compared to traditional retail
purchasing. The United States Congress has passed legislation limiting for three
years the ability of the states to impose taxes on Internet-based transactions.
Failure to renew this legislation could result in the imposition by various
states of taxes on e-commerce. Further, states have attempted to impose sales
taxes on catalog sales from businesses such as ours. A successful assertion by
one or more states that we should have collected or be collecting sales taxes on
the sale of products could have a material and adverse effect on our business
due to the imposition of fines or penalties or the requirement that we pay for
the uncollected taxes.
WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS
At December 31, 1999 we had net operating loss carryforwards available to
reduce future taxable income that aggregated approximately $11,200,000 for
Federal income tax purposes. These benefits expire through 2019. Pursuant to a
"change in ownership" as defined by the provisions of the Tax Reform Act of
1986, utilization of our net operating loss carryforwards may be limited, if a
cumulative change of ownership of more than 50% occurs within any three-year
period. We have not determined if an ownership change has occurred. If it has,
we may not be able to take full advantage of potential tax benefits from our
net operating loss carry forwards.
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WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if Web
usage and e-commerce does not continue to grow. Web usage may be inhibited for a
number of reasons, including:
- - inadequate Internet infrastructure;
- - security concerns;
- - inconsistent quality of service;
- - unavailability of cost-effective, high-speed service;
- - imposition of transactional taxes; or
- - limitation of third party service provider's ability and willingness to
invest in new or updated equipment to handle traffic volume.
If Web usage grows, the Internet infrastructure may not be able to support
the demands placed on it by this growth, or its performance and reliability may
decline. We are highly dependant on third party service providers. Any
interruption experienced by these service providers may have a material impact
on our business due to our inability to serve our advertising customers or end
users. In addition, Web sites, including ours, have experienced a variety of
interruptions in their service as a result of outages and other delays occurring
throughout the Internet network infrastructure. If these outages or delays
frequently occur in the future, Web usage, including usage of our Web site,
could grow slowly or decline. This may have a material impact on future
revenues.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH
IS UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Web as an effective medium of commerce by consumers.
Rapid growth in the use of the Web and commercial online services is a recent
phenomenon. Demand for recently introduced services and products over the Web
and online services is subject to a high level of uncertainty. The development
of the Web and online services as a viable commercial marketplace is subject to
a number of factors, including the following:
- - e-commerce is at an early stage and buyers may be unwilling to shift their
purchasing from traditional vendors to online vendors;
- - insufficient availability of telecommunication services or changes in
telecommunication services could result in slower response times; and
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<PAGE>
- - adverse publicity and consumer concerns about the security of commerce
transactions on the Internet could discourage its acceptance and growth.
ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our Web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our Web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to further develop due to the loss of anticipated revenues.
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB
ADVERTISING AND SUBJECT US TO LIABILITY
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant barrier
to e-commerce and communications over the Web. Any well-publicized compromise of
security could deter more people from using the Web or from using it to conduct
transactions that involve transmitting confidential information, such as
purchases of goods or services. Furthermore, decreased traffic and e-commerce
sales as a result of general security concerns could cause advertisers to reduce
their amount of online spending. To the extent that our activities or the
activities of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
disrupt our business, damage our reputation and expose us to a risk of loss or
litigation and possible liability. We could be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Claims could also be based on other misuses of personal
information, such as for unauthorized marketing purposes. We may need to spend a
great deal of money and use other resources to protect against the threat of
security breaches or to alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our Web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other Web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our Web site. Claims may also be based on statements made and actions taken as a
result of participation in our chat rooms or as a result of materials posted by
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members on bulletin boards at our Web site. We also offer e-mail services, which
may subject us to potential risks, such as:
- - liabilities or claims resulting from unsolicited e-mail;
- - lost or misdirected messages;
- - illegal or fraudulent use of e-mail; or
- - interruptions or delays in e-mail service.
- - These claims could result in substantial costs and a diversion of our
management's attention and resources.
Efforts to regulate or eliminate the use of mechanisms which automatically
collect information on users of our Web site may interfere with our ability to
target our marketing efforts and tailor our Web site offerings to the tastes of
our users.
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a Web site. Web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available Web browsers allow users to elect to
remove these mechanisms at any time or to prevent such information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could have a material and adverse effect on our
business, results of operations and financial condition due to increased costs
of doing business. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The law
governing the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth and
development of e-commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. We also may be subject
to future regulation not specifically related to the Internet, including laws
affecting direct marketers.
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WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS
ACTIVITIES
On July 9, 1999, we were named as one of several defendants in a lawsuit
filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit
arises out of a series of events relating to certain assets our operating
company, Nettaxi Online Communities, purchased from SSN Properties in October
1997. The complaint alleges that we owed, and either intentionally or
negligently breached, fiduciary duties to the plaintiffs. The suit also claims
that we either intentionally or negligently interfered with the plaintiffs'
contract or prospective advantage. While our officers and directors believe
that the suit is without merit, we cannot provide you with any assurances that
we will prevail in this dispute. If the plaintiffs successfully prosecute any
of their claims against us, the resulting monetary damages and reduction in our
working capital could significantly harm our business. For more information
please see the section of this prospectus called "Legal Proceedings".
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE
As of February 28, 2000, 5,698,219 shares of our common stock were
Immediately eligible for sale in the public market without restriction or
Further restriction under the Securities Act of 1933, unless purchased by or
issued to any "affiliate" of ours, as that term is defined in Rule 144
promulgated under that act. Additionally, we have filed a registration statement
on Form S-8 (File No. 333-32678) to register all shares of common stock under
our 1998 and 1999 stock option plans. As a result, shares issued upon
exercise of stock options, including options for 1,194,144 shares that were
exercisable as of February 15, 2000, are eligible for resale in the public
market without restriction. If our stockholders sell substantial amounts of our
common stock under Rule 144 or pursuant to the aforementioned registration
statement, the market price of our common stock could be adversely affected and
our ability to raise additional capital at that time through the sale of our
securities could be impaired.
WE NEED TO INCREASE THE NUMBER OF SHARES OF COMMON STOCK AUTHORIZED IN OUR
ARTICLES OF INCORPORATION
We have issued a significant number of shares of our common stock and
options warrants, debentures and other rights to acquire shares of our common
stock. Currently, if all of the outstanding options, warrants, depentures and
other rights to acquire shares of our common stock were converted into shares of
common stock by the holders thereof, the total number of shares then issued and
outstanding would exceed the 50,000,000 shares authorized in our Articles of
Incorporation. In order to insure that we have enough shares authorized to
permit all of the holders of outstanding options, warrants, debentures and other
rights to acquire shares of our common stock to convert such rights, we intend
to seek necessary board and shareholder approval to increase the number of
shares authorized in our Articles of Incorporation. There can be no assurance
that such an increase will be approved. In the event that we do not receive the
required approvals, we would be unable to effect issuances of stock pursuant to
conversions and / or exercises of such options, warrants, debentures and other
rights.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our board of directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock.
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OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have reached historical highs within the last 52 weeks and
have reflected valuations substantially above historical levels. During the
same period, these companies' stocks have also been highly volatile and have
recorded lows well below historical highs. We cannot assure you that our stock
will trade at the same levels of other Internet stocks or that Internet stocks
in general will sustain their current market prices.
Factors that could cause such volatility may include, among other things:
- - actual or anticipated fluctuations in our quarterly operating results;
- - announcements of technological innovations;
- - conditions or trends in the Internet industry; and
- - changes in the market valuations of other Internet companies.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains "forward-looking statements." In some cases, you
can identify forward-looking statements by terminology such as "may," "will,"
"should," "could," "expects," "plans," "intends," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue" or the negative of such terms
and other comparable terminology.
These forward-looking statements include, without limitation, statements
about:
- - our market opportunity;
- - our strategies;
- - competition;
- - expected activities and expenditures as we pursue our business plan, and
- - the adequacy of our available cash resources.
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Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
The accompanying information contained in this prospectus, including,
without limitation, the information set forth under the headings "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business" identify important factors that could adversely
affect actual results and performance. All forward-looking statements
attributable to us are expressly qualified in their entirety by the foregoing
cautionary statement.
USE OF PROCEEDS
Other than the proceeds from the exercise of the investment options and the
warrants, none of the proceeds from the sale of the common stock offered by this
prospectus will be received by us. The holders of the investment options and
warrants are not obligated to exercise their rights and warrants, and there can
be no assurance that we will receive any additional proceeds. If, however, all
the investment rights and warrants are exercised, the gross proceeds to us would
be approximately $4.5 million, assuming exercise as of March 15, 2000. We
currently intend to use the proceeds as follows:
- - Approximately $ 1,000,000 of the proceeds will be used to expand out
marketing and promotion campaigns in traditional and online media;
- - Approximately $ 1,000,000 of the proceeds will be used to continue to
improve out Internet and systems infrastructure and support;
- - Approximately $ 1,000,000 of the proceeds will be used to further develop
our online sales force;
- - The balance of the proceeds, which should be approximately $1.5 million
will be used for working capital and general corporate purposes, including
possible acquisitions of or investment in complementary businesses, products
or technologies.
Pending these uses, the net proceeds will be invested in short-term,
investment grade instruments, certificates of deposit or direct or guaranteed
obligations of the United States.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Our common stock has been traded on the NASD O-T-C Market Bulletin Board
under the trading symbol "NTXY" since October 1, 1998. Prior to that date, our
common stock was not actively traded in the public market. The following table
sets forth, for the periods indicated, the high and low closing prices for our
common stock as reported by various Bulletin Board market makers. The
quotations do not reflect adjustments for retail mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
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<TABLE>
<CAPTION>
PERIOD LOW CLOSE HIGH CLOSE
- ----------------------------------------------------------------------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1998:
Fourth Quarter (October 1 - December 31, 1998) $ 4.500 $ 8.750
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter (January 1 - March 31, 1999) $ 6.625 $ 17.625
Second Quarter (April 1 - June 30, 1999) $ 11.500 $ 29.500
Third Quarter (July 1 - September 30, 1999) $ 7.437 $ 16.500
Fourth Quarter (October 1 - December 31, 1999) $ 2.218 $ 7.500
FISCAL YEAR ENDING DECEMBER 31, 2000:
First Quarter (January 1 - March 15, 2000) $ 1.437 $ 8.093
</TABLE>
On March 15, 2000, the closing price for our common stock on the Bulletin
Board was $5.50 per share.
To date, no dividends have been declared or paid on any of our capital
stock. We currently intend to retain earnings, if any, to fund the development
and growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansion.
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CAPITALIZATION
The following table sets forth, as of December 31, 1999, the capitalization
of Nettaxi.com and the pro forma capitalization of Nettaxi.com after giving
effect to the conversion of $5,000,000 of convertible debentures. This
information should be read in conjunction with our Consolidated Financial
Statements and the related Notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
----------------------------------------------------
(A) (B) ProForma
(Unaudited) As Adjusted
Actual Pro Forma (Unaudited)
------------- ------------ ------------
<S> <C> <C> <C>
Long-term liabilities:
Capital lease obligations (including current portion) 5,400 -- 5,400
5% Convertible note payable 3,200,000 (3,200,000)
------------- ------------
Total long-term obligations (including current portion) 3,205,400 5,400
Stockholders' equity (net capital deficiency):
Preferred stock, $0.001 par value, 1,000,000 -
shares authorized;
no shares issued or outstanding
Common stock subscribed (95,000) (95,000)
Common stock, $0.001 par value 20,000 300 20,300
Additional paid-in capital 11,902,500 3,199,700 15,102,200
Deferred Compensation (491,400) (491,400)
Accumulated deficit (13,336,400) - (13,336,400)
Total stockholders' equity (deficiency) (2,000,300) 3,200,000 1,199,700
Total capitalization $ 1,205,100 $ 1,205,100
</TABLE>
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SELECTED FINANCIAL DATA
Set forth below are summary statements of operations data for the period
from October 23, 1997, date of incorporation, to December 31, 1997, the years
ended December 31, 1998 and December 31, 1999, and summary balance sheet data as
of December 31, 1997, 1998 and 1999. This information should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
For the Period from October 23, 1997, date of incorporation,
to December 31,1997, the Year ended December 31, 1998, and 1999
1997 1998 1999
----------- ------------ ------------
STATEMENT OF OPERATIONS DATA:
- -----------------------------
<S> <C> <C> <C>
Net revenues $ 144,900 $ 258,000 $ 5,032,800
----------- ------------ ------------
Gross profit $ 57,500 $ 18,200 $ 1,029,000
----------- ------------ ------------
Loss from operations $ (142,100) $(3,082,300) $(9,402,500)
----------- ------------ ------------
Net loss $ (159,700) $(3,113,600) $(9,880,400)
----------- ------------ ------------
Net loss available to common shareholders $ (327,200) $(3,127,900) $(9,880,400)
----------- ------------ ------------
Basic loss per share $ (0.06) $ (0.32) $ (0.46)
----------- ------------ ------------
Diluted loss per share $ (0.06) $ (0.32) $ (0.46)
----------- ------------ ------------
WEIGHTED-AVERAGE COMMON SHARES:
Basic outstanding shares 5,483,500 9,724,781 21,274,203
----------- ------------ ------------
Diluted outstanding shares 5,483,500 9,724,781 21,274,203
----------- ------------ ------------
BALANCE SHEET DATA:
Working capital (Deficiency) $ (222,900) $ 300,400 $(2,053,000)
----------- ------------ ------------
Total assets $2,082,300 $ 1,652,700 $ 6,031,200
----------- ------------ ------------
Long-term liabilities $ 773,500 $ 5,400 $ 3,200,000
----------- ------------ ------------
Total stockholders' equity (Deficiency) $ 973,400 $ 1,332,100 $(2,000,300)
- ------------------------------------------ ----------- ------------ ------------
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of Nettaxi should be read in conjunction with the Consolidated
Financial Statements and the Related Notes included elsewhere in this
prospectus. This discussion contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including, but not limited to, those set forth under "Risk Factors" and
elsewhere in this prospectus.
OVERVIEW
We were incorporated in October 1997 and launched our Web site in July
1998. Located in Campbell, California, we are a developer of commerce-enabled
and content-rich communities that offer subscribers, or "citizens", a place to
build their home pages or businesses on the Internet.
The Nettaxi.com website, at http://www.nettaxi.com, is structured as a
virtual "urban" environment, populated by subscribers referred to as "citizens",
that is divided into thematic "communities," and from there into "streets" and
"homes." Nettaxi.com provides access to news, entertainment, sports, financial,
and travel information and services such as free e-mail, personal home pages,
chat and messages.
To date, our revenues have been derived principally from the sale of
advertisements. We sell a variety of advertising packages to clients, including
banner advertisements, event sponsorships, and targeted and direct response
advertisements. Currently, our advertising revenues are derived principally from
short-term advertising arrangements, averaging one to six months, in which we
guarantee a minimum number of impressions for a fixed fee. Advertising revenues
are recognized ratably in the period in which the advertisement is displayed,
provided that we have no significant remaining obligations and that collection
of the resulting receivable is probable. Payments received from advertisers
prior to displaying their advertisements on the site are recorded as deferred
revenues and are recognized as revenue ratably when the advertisement is
displayed. To the extent minimum guaranteed impression levels are not met, we
defer recognition of the corresponding revenues until guaranteed levels are
achieved. We expect to continue to derive the majority of our revenue for the
foreseeable future from the sale of advertising space on our Web site.
In the third quarter of 1999, the Company began providing website hosting
and internet connectivity services for corporate customers. Our services are
delivered through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers pay
monthly fees for the professional services utilized, one-time installation fees,
and connectivity charges. These "hosting" revenues are recognized in the period
the services are provided.
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In addition to advertising revenues, we derive other revenues from royalties
from the distribution of our CD-ROM tutorial product and our premium account
membership subscriptions. Royalty revenues result from relationships with
computer manufacturers that bundle and distribute our CD-ROM product with their
products. Our membership programs offer premium services for a monthly fee,
providing additional services such as unlimited personal e-mail accounts for
family or friends, unlimited Nettaxi Site Builder Web pages, themed Web page
templates, a personal event calendar, discussion groups, and options to
customize personal homepages with pictures, colors and content.
In May 1999, we completed the merger with Plus Net, Inc., a California
corporation, which has allowed us to provide our users with a web based e-mail
program and a robust meta search engine. Plus Net also has an e-commerce
processing engine which enables the acceptance and processing of online credit
card transactions. We believe this merger also enhances our electronic commerce
and advertising opportunities.
As a result of our merger with Plus Net, Inc. in May 1999, we received
revenues from credit card processing fees during the first half of 1999, with
minimal revenues being earned in the third quarter of 1999. The contract through
which these fees have been derived terminated in December 1999 and we
anticipate that revenues of this type will be minimal in the foreseeable future.
We also receive revenues from e-commerce transactions. Our recent
e-commerce arrangements generally provide us with a share of any sales resulting
from direct links from our site. Revenues from these programs will be recognized
in the month that the service is provided. To date, revenues from e-commerce
arrangements have not been material. However, we expect e-commerce derived
revenues to become a more significant portion of our total revenues in the
foreseeable future, as we increase the number of contractual relationships with
parties offering e-commerce related products and services which can be made
available to our subscribers and parties seeking to make online sales to our
subscribers and other visitors to our site.
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To date, we have entered into business and technology license arrangements
in order to build our website community, provide community-specific content,
generate additional traffic, and provide our subscribers with additional
products and services, including e-commerce tools.
We intend to continue to investigate potential acquisitions and to seek
additional relationships with content providers that fall within the scope of
our business strategy, and will serve to increase our subscriber base and
overall site traffic. Acquisitions carry numerous risks and uncertainties and we
cannot guarantee that we will be able to successfully integrate any businesses,
products, technologies or personnel that might be acquired in the future.
RESULTS OF OPERATIONS - Comparison of the twelve months ended December 31, 1999
and 1998
NET REVENUES. Net revenues for the year ended December 31, 1999 increased
1,851% to approximately $5.03 million from $258,000 in the year ended December
31, 1998. The absolute dollar increase is the result of the increase in the
number of advertisers and the average contract duration and value (the result of
higher web site traffic to nettaxi.com web pages), an increase in revenues from
the corporate web hosting, transaction processing fee revenue, and to a lesser
extent, increases in our royalties and customization fees associated with the
distribution of our CD ROM product. Barter revenues accounted for approximately
7% of total revenues for the twelve months ended December 31, 1999. One customer
accounted for approximately 17% of the total revenues in the twelve months ended
December 13, 1999. For the year ended December 31, 1998, four customers
accounted for approximately 28%, 21%, 13% and 12% of revenues.
ADVERTISING REVENUES. Advertising revenues for the year ended December 31,
1999 and 1998 were approximately $2.67 million and approximately $177,000,
respectively, which represented 53% and 69%, respectively, of total net
revenues. The year over year increase in absolute dollars resulted from an
increase in the number of advertisers as well as the increase in average
contract commitments of these advertisers as a result of increased web traffic
to our web site.
TRANSACTION PROCESSING FEES. Transaction processing fees were approximately
$1.29 million for the year ended December 31, 1999, which represented 19%, of
total net revenues. There were no transaction processing fees in 1998.
Transactions fees consist of revenue derived from credit card evaluations and
from the processing of on-line credit card transactions. The contract through
which these fees have been derived terminated in December, 1999 and we do not
expect revenues of this type to be significant in future periods.
HOSTING REVENUES. Our hosting revenues were approximately $945,000 for the
year ended December 31, 1999, which represented 19%, of total net revenues.
There were no hosting revenues in 1998. In the third quarter of 1999, the
Company began providing internet hosting and connectivity services for corporate
customers. Our services are delivered through a state-of-the-art Internet data
center located in Southern California using a high-performance Internet backbone
network. Customers pay monthly fees for the professional services utilized,
one-time installation fees, and monthly connectivity charges. These "hosting"
revenues were recognized in the period the services were provided.
COST OF OPERATIONS. Cost of operations were approximately $4.00 million and
$240,000 for the years ended December 31, 1999 and 1998, respectively. The
substantial absolute dollar increases for the twelve month period in 1999 over
1998 is the result of increased costs for co-location expenses (Internet
connection charges), equipment costs and depreciation of equipment, amortization
of intangible assets, and expenses for third party content and development. In
the third quarter of 1999, we began providing Internet connectivity services to
corporate customers and required purchases of additional bandwidth to service
these customers. These costs are expected to continue to increase as our web
traffic increases and our corporate customer require additional bandwidth for
our "citizens".
SALES AND MARKETING EXPENSES. Sales and marketing expenses consisted
primarily of salaries of our sales and marketing personnel, marketing,
promotion, advertising and related costs. Sales and marketing expenses were
approximately $4.79 million and $746,000 for the twelve month periods ended
December 31, 1999 and 1998, respectively. The absolute dollar increases in the
twelve month period in 1999 over the comparable period in 1998 in sales and
marketing expenses was primarily attributable to expansion of our online and
print advertising, public relations and other promotional expenditures as well
as increased sales and marketing personnel and related expenses required to
implement our marketing
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strategy. In the third quarter of 1999, the Company began to implement
aggressive marketing campaigns online and in traditional media to promote the
Nettaxi.com brand and attract an increasing number of visitors to our Web site.
We expect sales and marketing expenses to increase significantly in future
periods. These increases will be principally related to hiring additional sales
and marketing personnel and increased spending on advertising in a variety of
media to increase brand awareness and attract additional visitors to our Web
site. There can be no assurance that these increased expenditures will result in
increased visitors to our Web site or additional revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $2.19 million and $635,000 for the twelve month periods ended
December 31, 1999 and 1998, respectively. The absolute dollar increases for both
the twelve month period in 1999 over 1998 primarily attributable to ongoing
updating of the infrastructure and technological development of our web site.
The increase also includes increased salaries and associated hiring costs that
are a result of the highly competitive nature of hiring in the internet software
marketplace. We experienced substantial costs for engineer consultants during
the twelve month period ended December 31, 1999 and expects these increased
costs to continue as we continue to recruit and retain personnel to meet the
research and development requirements.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for our executive,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses were
approximately $3.46 million and $1.05 million for the respective twelve month
periods ended December 31, 1999 and 1998, respectivley. The increase in absolute
dollars for the twelve month period in 1999 over 1998 was primarily due
to increases in the number of general and administrative personnel and the
increase in fees for professional services and amortization of deferred
compensation expenses, related to the issuance of common stock and options to
consultants. We expect general and administrative expenses to grow as we hire
additional personnel and incur additional expenses related to the growth of
our business and our operation as a public company.
ASSET IMPAIRMENT. For the year ended December 31, 1998 operating expenses
includes a one time adjustment of $667,000 for asset impairment. Asset
impairment write down was to adjust the carring amount of portions of the
urchased technology, namely the web to database software application to its net
realizable Value. For the perios ended December 31, 1999, no asset impairment
write-down was recorded
INTEREST EXPENSE. Net interest expense was approximately $351,100 and
$59,000 for the respective twelve month periods ended December 31, 1999 and
1998.
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<PAGE>
The net interest expense for the twelve month period ended December 31, 1999
and 1998 related to the convertible promissory note that was issued on March 31,
1999 and to amortization of deferred interest related to warrants issued in
conjunction with the convertible promissory note.
OTHER INCOME. In the twelve months ended December 31, 1998 we realized a
gain of $28,500, from the disposal of capital equipment. No gain was realized in
1999.
INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards
available to reduce future taxable income that aggregate approximately
$11,200,000 for Federal income tax purposes. These benefits expire through 2019.
Pursuant to a "change in ownership" as defined by the provisions of the Tax
Reform Act of 1986, utilization of our net operating loss carryforwards may be
limited if a cumulative change of ownership of more than 50% occurs over a
three-year period. We have not determined if an ownership change has occurred.
In the twelve months ended December 31, 1999 we recorded a tax
provision which relates to earnings made by Plus Net, Inc. during its fiscal
period before our merger.
RESULTS OF OPERATIONS - Comparison of the period October 23, 1997, date of
incorporation, to December 31, 1997 and the twelve months ended December 31,
1998
NET REVENUES. Net revenues for the twelve months ended December 31,
1998 were approximately $258,000 and for the period ended December 31, 1997
approximately $144,900. The revenues for the 1997 period were principally
derived from royalties from the distribution of our CD-ROM tutorial product.
Revenues for the twelve months ended December 31, 1998 reflect the shift from
the initial start-up phase of the Company to the current business model that
derives a majority of its revenue from the sale of banner advertisements.
ADVERTISING REVENUES. Advertising revenues for the twelve months ended
December 31, 1998 were approximately $177,000 or approximately 69% of total
revenues. There were no advertising revenues for the period ended December 31,
1997. The Company began the sale of banner advertising on the internet in the
third quarter of 1998.
ROYALTY REVENUES. Our royalty revenues were approximately $61,700 for the
twelve months ended December 31, 1998, which represented approximately 24% of
total revenues, and approximately $132,300 for the period ended December 31,
1997, which represented approximately 91% of total revenues. The Company
initially derived its revenues from the distribution of the CD-ROM tutorial
product.
COST OF OPERATIONS. Cost of operations were approximately $239,800 for
the twelve months ended December 31, 1998 and $87,400 for the period ended
December 31, 1997. The substantial absolute dollar is the result of increased
costs for co-location expenses (Internet connection charges), software and
equipment costs, and depreciation of equipment as a result of build-out of our
web site.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consisted
primarily of salaries of our sales and marketing personnel. Sales and
marketing expenses were approximately $745,600 and $3,100 for the twelve
month period ended December 31, 1998 and the period ended December 31, 1997,
respectively. The absolute dollar increase represents the shift from the early
research and development stages of the Company to the current business model as
an online community generating revenues from the sales of advertising that
required the shift in resources to focus on the sales and marketing efforts to
promote the brand awareness of the Company and increased traffic on our web
site.
We expect sales and marketing expenses to increase significantly in future
periods. These increases will be principally related to hiring additional sales
and marketing personnel and increased spending on advertising in a variety of
media to increase brand awareness and attract additional visitors to our Web
site. There can be no assurance that these increased expenditures will result in
increased visitors to our Web site or additional revenues.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $634,700 and $36,500 for the twelve month period ended December
31, 1998 and the period ended December 31, 1997, respectively. The absolute
dollar increases in research and development expenses were primarily
attributable to ongoing updating of the infrastructure and technological
development of our web site, increased salaries that are a result of the
highly competitive nature of hiring in the internet software marketplace. We
expect these increased costs to continue as we continue to recruit and retain
personnel to meet the research and development requirements of the Company.
GENERAL AND ADMINSITRATIVE EXPENSES. General and administrative expenses
consisted primarily of salaries and related costs for our executive,
administrative, and finance personnel, as well as legal, accounting and other
professional service fees. General and administrative expenses were
approximately $1.05 million and $160,000 for the twelve month period
ended December 31, 1998 and the period ended December 31, 1997, respectively.
The increase in absolute dollars in general and administrative expenses was
primarily due to increases in the number of general and administrative personnel
and the increase in fees for professional services. We expect general and
administrative expenses to grow as we hire additional personnel and incur
additional expenses related to the growth of our business and our operation
as a public company.
ASSET IMPAIRMENT. For the twelve months ended December 31, 1998 operating
expenses includes a one time adjustment of $667,000 for asset impairment.
Asset impairment write down was to adjust the carrying amount of portions of
the purchased technology, namely the web to database software application, to
its net realizable value. For the period ended December 31, 1997, no asset
impairment write-down was recorded.
INTEREST INCOME / EXPENSE. Net interest expense for the twelve months ended
December 31, 1998 was approximately $59,000 and $17,000 for the period ended
December 31, 1997. The net interest expense for both periods was related to the
convertible promissory note that was issued on November 1, 1997 which was
converted into shares of common stock in September 1998.
INCOME TAXES. The provision for income taxes for the year ended December
31, 1998 and the period ended December 31, 1997 consisted of minimum state
taxes. At December 31, 1998, we had net operating loss carryforwards available
to reduce future taxable income that aggregate approximately $ 1,227,000
for Federal income tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, the Company had cash and cash equivalents of
approximately $988,000, compared to approximately $466,000 at December 31, 1998.
Net cash used in operating activities equaled approximately $5.36 million
and $665,800 for the twelve-month periods ended December 31, 1999 and 1998,
respectively. We had significant negative cash flows from operating activities
for both of the twelve month periods primarily from our net operating losses,
adjusted for non-cash items, and increases in accounts receivable balances due
to the time lag between revenue recognition and the receipt of payments from
advertisers. These factors were offset by significant increases in accounts
payable and accrued expenses.
Net cash used in investing activities was approximately $2.16 million and
$124,600 for the twelve month periods ended December 31, 1999 and 1998,
respectively. Substantially all of the cash used in investing activities for
both periods was primarily related to the purchase of capital equipment in
connection with the build out of our Web site and infrastructure.
Net cash provided by financing activities was approximately $8.04 million
and $1.21 million for the twelve month periods ended December 31, 1999 and 1998,
respectively. Net cash provided by financing activities in 1998 consisted
primarily of net proceeds from the issuance of our common stock. Net cash
provided by financing activities in 1999 consisted of both net proceeds from
issuance of common stock and issuance of a convertible promissory note.
[/R]
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We incurred net losses of approximately $9.88 million and $3.13 million for
the year ended December 31, 1999, and 1998, respectively. At December 31, 1999,
we had an accumulated deficit of approximately $13.34 million. The net losses
and accumulated deficit resulted from the significant operational,
infrastructure and other costs incurred in the development and marketing of our
services and the fact that revenues failed to keep pace with such costs.
As a result of our expansion plans and our expectation that our operating
expenses, especially in the areas of sales and marketing, will continue
to increase significantly, we expect to incur additional losses from
operations for the foreseeable future. To the extent that increases in our
operating expenses precede or are not subsequently followed by commensurate
increases in revenues, or that we are unable to adjust operating expense
levels accordingly, our business, results of operations and financial condition
would be materially and adversely affected. There can be no assurance that
we will ever achieve or sustain profitability or that our operating losses
will not increase in the future.
We currently believe that we have sufficient cash to fund our operations
through December 2000. After that time, we will be required to seek additional
capital to sustain our operations. We expect to generate a portion of the
necessary cash flow through advertising and hosting revenues, but will also need
to obtain capital through other sources such as equity or debt financing.
We recently completed a private placement of our common stock. As a result,
we raised $23,650,000 in exchange for 15,766,667 shares of common stock issued
to investors. The investors also received warrants to purchase up to an
additional 15,766,667 shares of our common stock exercisable at an exercise
price of 4.00 All of the investors completed subsciprtion agreements and
represented to the Company that they were accredited investors, purchasing the
shares for their own Account.
We are currently negotiating with other prospective investors; however to
date, no agreements for additional financing have been consummated. We cannot
assure you that we will be able to achieve and sustain positive cash flow or
profitability or that we will have other sources available to provide the
financial resources necessary to continue our operations. If we are
unsuccessful in generating resources from one or more of the anticipated sources
and are unable to replace any shortfall with resources from another source, we
may be able to extend the period for which available resources would be
adequate by deferring the creation or satisfaction of various commitments,
deferring the expansion or introduction of various services, and otherwise
scaling back operations. If we were unable to generate the required resources,
our ability to meet our obligations and to continue our operations would
be adversely affected.
Given our limited resources and our history of losses from operations, we
Will also need to raise additional funds in order to fund expansion of our
business, to develop new or enhanced services or products, to respond to
competitive pressures or to acquire complementary products, businesses or
technologies. No assurances can be given, however, that we will be able to
obtain such additional resources. If we are unsuccessful in generating
anticipated resources from one
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<PAGE>
or more of the anticipated sources, and unable to replace the shortfall with
resources from another source, we may be able to extend the period for which
available resources would be adequate by deferring the creation or satisfaction
of various commitments, deferring the introduction of various services or entry
into various markets, and otherwise scaling back operations. If we are unable
to generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected.
IMPACT OF THE YEAR 2000
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems may therefore recognize a date using "00" as the year 1900 rather than
the year 2000. As a result, computer systems and/or software used by many
companies and governmental agencies may need to be upgraded to comply with Year
2000 requirements or risk system failure or miscalculations causing disruptions
of normal business activities.
STATE OF READINESS. The third party vendors upon which we materially rely
are Exodus Communications and Alchemy Communications, Inc., which house and
service our Web equipment and provide our connection to the Internet. Both
Exodus and Alchemy have informed us that they believe their systems to be Year
2000 compliant.
Although as of February 28, 2000 we have experianced no material technical
problems related to the Year 2000, we will continue to seek verification from
other key vendors, distributors and suppliers that they are Year 2000 compliant
or, if they are not presently compliant, to provide a description of their plans
to become so. To the extent that vendors failed to provide certification that
they are Year 2000 compliant, we have terminated and replaced these
relationships.
We have conducted an internal assessment of all material information
technology and non-information technology systems at our headquarters for Year
2000 compliance. We experienced no problems with these systems on January 1,
2000 or since that time, and believe that these material systems are currently
Year 2000 compliant.
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<PAGE>
COSTS. To date, we have not yet incurred any material costs in
identifying or evaluating Year 2000 compliance issues. Most of our costs have
related to, and are expected to continue to relate to, the upgrades or
replacements, when necessary, of software or hardware, as well as costs
associated with time spent by employees in the evaluation process and Year 2000
compliance matters generally. These expenses are included in our operating and
capital expenditures budget and are not expected to exceed $100,000. However,
if these costs are significantly higher than expected, they could have a
material and adverse effect on our business, results of operations and financial
condition.
RISKS. Although as of February 28, 2000 we have experianced no material
technical problems related to the Year 2000, there can be no assurance that we
will not discover Year 2000 compliance problems in our systems that will
require substantial revisions or replacements. In the event that the operational
facilities that support our business, or our Web-hosting facilities, are not
Year 2000 compliant, we may be unable to deliver goods or services to our
customers and portions of our Website may become unavailable. In addition, there
can be no assurance that third party software, hardware or services incorporated
into our material systems will not need to be revised or replaced, which could
be time-consuming and expensive. Our inability to fix or replace third party
software, hardware or services on a timely basis could result in lost revenues,
increased operating costs and other business interruptions, any of which could
have a material and adverse effect on our business, results of operations and
financial condition. Moreover, the failure to adequately address Year 2000
compliance issues in our software, hardware or systems could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies and others outside our control will be Year
2000-compliant. The failure by these entities to be Year 2000-compliant could
result in a systemic failure beyond our control, including, for example, a
prolonged Internet, telecommunications or electrical failure, which could also
prevent us from delivering our services to our users, decrease the use of the
Internet or prevent users from accessing our services, any of which would have a
material and adverse effect on our business, results of operations and financial
condition.
CONTINGENCY PLAN. We do not currently have a contingency plan to deal
with the worst case scenario that might occur if technologies on which we depend
are not Year 2000-compliant and fail to operate effectively after the Year 2000.
We have taken into consideration the results of our Year 2000 compliance
evaluation and the responses received from distributors, suppliers and other
third parties with which we conduct business in determining the need for and
nature and extent of any contingency plans.
If our present efforts to address the Year 2000 compliance issues discussed
above are not successful, or if distributors, suppliers and other third parties
with which we conduct business do not successfully address such issues, our
users could seek alternate suppliers of our products and services. Any material
Year 2000 problem could require us to incur significant unanticipated expenses
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to remedy and could divert our management's time and attention, either of which
could have a material and adverse effect on our business, operating results and
financial condition.
This is a Year 2000 readiness disclosure statement within the meaning of
the Year 2000 Information and Readiness Disclosure Act P.L. 105-271; however,
the disclosures made herein do not affect our liabilities under the federal
securities laws.
MARKET RISK
We could be exposed to market risk related to any and all of our debt
obligations for financing working capital and capital equipment requirements in
the future. Historically, we have financed such requirements from the issuance
of both preferred and common stock. In addition, we have augmented our equity
financing activities via the issuance of convertible debt. We continue to
consider financing alternatives, which may include the incurrence of long term
indebtedness. Actual capital requirements may vary based upon the timing and
success of the expansion of our operations. We believe that based on the terms
and maturities of any future debt obligations that the market risk would be
minimal. We currently do not have any material market rate risks.
EFFECTS OF INFLATION
Due to relatively low levels of inflation in 1997, 1998 and 1999, inflation
has not had a significant effect on our results of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosure About Segments of an
Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. Statement of Financial Accounting Standards
No.131 requires that public companies report information about operating
segments in their annual financial statements and in subsequent condensed
financial statements of interim periods issued to shareholders. This statement
also requires that public companies report information about their products and
services, the geographic areas in which they operate and their major customers.
Reportable operating segments are determined based on the management approach,
as defined by Statement of Financial Accounting Standards No. 131. The
management approach is based on the way that the chief operating decision-maker
organizes the segments within an enterprise for making operating decisions and
assessing performance. We have determined that we do not have any separately
reportable business segments.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, Employer's Disclosure about Pension
and Other Post retirement Benefits, which standardized the disclosure
requirements for pension and other post retirement benefits. The adoption of
Statement of Financial Accounting Standards No. 132 had no impact on the
Company's current disclosures.
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." Statement of Financial Accounting Standards No.133
establishes accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. Statement of Financial Accounting Standards No. 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. In June 1999,
The FASB Issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the effective date of FASB Statement No. 133"
which amends SFAS No. 133 to be effective for all fiscal quarters or all
fiscal years beginning after June 15, 2000.
Historically, we have not entered into derivatives contracts either to
hedge existing risks or for speculative purposes. Accordingly, we do not expect
adoption of the new standard to have a material impact on our results from
operations, financial position or cash flows.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position No. 98-1, Software for Internal Use, which provides
guidance on accounting for the cost of computer software developed or obtained
for internal use. Statement of Position 98-1 is effective for financial
statements for fiscal years beginning after December 13, 1998. We do not expect
that the adoption of Statement of Position 98-1 will have a material impact
on its consolidated financial statements.
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BUSINESS
OUR BUSINESS
We were organized in 1997 to capitalize on a significant opportunity that
still exists today, through the convergence of the media and entertainment
industries with the vast communications power of the Internet. We are defining
a new type of Internet company -- an e-commerce-based online community and
portal to the Internet -- that is dedicated to providing content-rich
communities and an entry point on the Internet for both consumers and
businesses. Our site is designed to seamlessly integrate content with
e-commerce services for consumers and businesses. Nettaxi.com provides
comprehensive information about news, sports, entertainment, health, politics,
finances, lifestyle, and areas of interest to the growing number of Internet
users. Our mission is to establish our site as an entry point or 'portal' to
the Internet by continuing to develop premium online communities which are both
content-rich to our subscribers, the "citizens" of our communities, and provide
easy-to-use e-commerce services to businesses of all sizes which reside in these
communities. By successfully achieving this, we expect to continue to
generate substantial revenues through advertising fees and e-commerce revenues
and transaction fees through the sale of products online.
INDUSTRY BACKGROUND
THE INTERNET
GROWTH OF THE INTERNET AND E-COMMERCE. The Internet has rapidly become a
significant global medium for communications, entertainment, news, information
and commerce. Commercialization of the Internet began in the mid-1980s, with
e-mail providing the primary means of communication. However, it was the
Internet's World Wide Web, which provided a means to link text and pictures,
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that led to the blossoming of e-commerce and sparked the explosive growth of the
Internet in the 1990s. Today, millions of people around the world have
the capability to send and receive information, and purchase products and
services, through the Internet.
GROWTH OF ONLINE ADVERTISING AND DIRECT MARKETING. The Web has become an
attractive medium for advertisers, offering a level of targetability,
flexibility, interactivity and measurability not available in traditional media.
The Web enables advertisers to demographically target their messages to specific
groups of consumers as well as to change their advertisements frequently in
response to market factors, current events and consumer feedback. Moreover,
advertisers can track more accurately the effectiveness of their advertising
messages by receiving reports of the number of advertising impressions delivered
to consumers and the resulting click-through rate to their Web sites.
THE INTERNET AS A MARKETING TOOL. Over 50 million companies and households
around the world use the Internet as a communications link through e-mail,
interactive advertisement, bulletin boards, research and online discussion
groups. At its most basic level, the Internet serves as a seemingly endless
catalog of marketing messages and advertising platforms presented in an
interactive fashion. Companies like IBM, Apple, AT&T, Microsoft and Lotus are
investing millions of dollars to develop new state-of-the-art tools and services
aimed at helping companies expand electronic business through the Internet.
Business is rapidly adopting the Internet as the means through which it can
efficiently and economically conduct marketing, research and customer support.
With the number of users growing monthly at an estimated rate of 10%, or one
million users, the Internet is the fastest growing global telecommunications
network in the world. Large and small companies are embracing the Internet as a
fundamental communication tool used to conduct daily business.
ADVANTAGES OF THE INTERNET FOR CONTENT COMPANIES. The Internet offers
content providers significant and attractive economic mechanisms that combine
cost advantages with practices that are conducive to revenue generation or
premiums. Significantly, the Internet provides information dissemination at a
materially lower cost than do other forms of media, notably, both printed paper
and private networks. The Internet also offers the potential for easier access
to content, which can expand market coverage. We believe that by using the
capabilities of the Internet to enrich the convenience, utility, time, or
entertainment value of content, Internet content providers can garner
significant and even premium revenues.
The Internet also enables providers to change and enhance the form and mass
delivery of content so that information is dynamic, interactive, real-time, and
personalized, as opposed to static, passive and bland as traditional media is
trending. The ability to personalize content on a mass scale promises to offer
compelling utility to subscribers as well as a mechanism for providers to
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sustain those same subscribers. Otherwise static information can be made to
come alive by using the multiple forms of media, such as hyper-text, audio, and
graphics, that are all made possible through the Internet.
THE NEED FOR ONLINE COMMUNITIES
As the Internet continues to grow, users seek from the Web the same
opportunity for expression, interaction, sharing, support and recognition they
seek in the everyday world. To date, a typical Internet user's experience
surfing the Web has been essentially one-way-searching and viewing Web sites
containing professionally created content on topics of general interest such as
current events, sports, finance, politics and weather. However, the Web in
general does not provide a context for users to publish, promote, search and
view personal Web pages. As a result, users publishing personal Web sites have
had limited means of attracting visitors to their sites or interacting with or
receiving recognition from visitors. Internet search and navigational sites
serve a valuable function for users seeking to navigate the Internet for
aggregated Web content; however, these sites are not primarily focused on
providing a platform for publishing and aggregating the rapidly increasing
volume of personalized content created by users or enabling such users to
interact with each other.
Similarly, Web users engaged in passive browsing are increasingly seeking
ways of interacting and communicating with other individuals with similar
interests and accessing personalized content. While users are generally able to
obtain relevant professionally created content through traditional navigational
sites such as Web directories and search engines, the source of such content is
usually the media and not fellow Web users. Often, the most relevant content for
a user is generated by other users who share an interest in what is published;
however, most Web sites are not dedicated to providing a platform for
aggregating and accessing user-created content.
An important response to the perceived needs of Internet users, and the
weaknesses of traditional Web navigational or content sites, has been the
emergence of community Web sites. Community sites provide a single online
destination where like-minded users can interact and quickly find pertinent
information, products and services related to their particular interests or
needs. Community sites generally offer free services including access to e-mail
accounts, chat rooms, message boards, news and entertainment. Through these
features, online communities seek to establish a close relationship with their
audience and evolve over time according to the interests of their members. As a
result, we believe that users tend to be loyal to and spend more time online at
community sites.
Online communities also provide advertisers an attractive means of
promoting their products and services and allow businesses to reach the growing
number of users who will be purchasing goods over the Internet in the future. To
date, advertisers and businesses have typically used traditional navigational
sites and professionally created content sites to promote their products and
services online. However, online communities allow advertisers and businesses to
reach highly targeted audiences within a more personalized context, thus
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providing the opportunity to increase advertising efficiency and improve the
likelihood of a successful sale.
OUR SOLUTION
Nettaxi was born of the vision of co-founders Robert and Dean Rositano,
veterans of the Internet service provider industry. Even before founding
Nettaxi, they recognized that there was an enormous market for learning tools
targeted to beginner-level Internet users, and they were actively involved with
the development of the Ques Mega Web Directory. In 1994, they co-founded Simply
Interactive, Inc. to develop and market sophisticated, interactive Web learning
tools for this vast untapped marketplace. In connection with a substantial
early-stage financing of that company, which entailed the merger of Simply
Interactive, Inc. with another early-stage enterprise software development
company, the management control and focus of the combined entity shifted away
from Web learning tools. As a result of this shift in focus, Robert and Dean
left Simply Interactive to continue pursuit of their vision.
The founders believed that to survive and thrive in the increasingly
crowded Internet industry, they needed to develop a website with a strong
persona. To accomplish this, they set out to create a comprehensive
theme-oriented website, targeted to the rapidly-growing "family" and home-based
business markets, which would provide up-to-date premium content,
ready-to-use e-commerce storefront services, and the ability to purchase an
expanding variety of goods and services, all within a single integrated web
community. Their goal was to position their new website not only as an entry
point to the Internet, but also as an attractive, premium online destination, in
contrast to merely acting as a web junction point, for content and
e-commerce services, and to generate substantial revenues through monthly
subscriptions, banner advertising, and e-commerce transaction fees.
Nettaxi launched its new online community in October 1997. Immediately
recognizing the value of developing and acquiring the tools necessary to drive
new users to the website, the founders acquired the assets of Simply Interactive
in November 1997, including the rights to Internet the Citytm, the
sophisticated interactive Internet training CD-ROM that the Rositanos had
developed while at Simply Interactive. Upon acquiring these rights, we moved
quickly to implement numerous modifications to the training tool, including
principally:
- - integrating the Nettaxi "taxicab" in the main user interface;
- - developing and integrating promotional information regarding the Nettaxi
Web site community, including its free services, features and benefits;
and
- - creating the mechanism whereby users could launch into the Nettaxi
community Web site directly from within the CD-ROM environment.
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Since launching our website in October 1997, we have been engaged primarily
in continued development and enhancement of our online website community, and
building traffic to the website. To these ends, we have been actively pursuing
corporate relationships in several areas that are key to the successful
implementation of our strategy, including co-marketing, content, and technology.
Thus far, we have been successful in securing co-marketing relationships
whereby Nettaxi bundles its CD-ROM product with products of other companies, as
described in more detail below. In addition, we have entered into agreements
with eCharge, InfoSpace.com, Cybereps, and other companies for important
service enhancements to our community website.
While we have incurred significant losses since our site was launched,
traffic to our online community has increased consistently from a membership
base of 60,000 citizens in December 1998, to a membership base of over 1.8
million citizens in December 1999. This increase in our membership base has
also resulted in corresponding increases in both the number of web pages and
advertising banners viewed by visitors. Our records indicate that the
Nettaxi.com web site had over 45.8 million visitors, 125 million page views and
180 million advertising impressions for the month of December 1999. A visit by
a user to a page on our web site represents one page view and each advertisement
that appears on that page to which a visitor is exposed is called an
advertisement impression. Based on unique visitors to our site, PC Data Online
ranked Nettaxi.com as the 289th most visited site in the world at the end of
November 1999. The "100hot", an industry ranking of the top Internet sites based
upon unique visits, ranked Nettaxi.com as the 12th most popular site on the Web
during this same month. We believe that the success of our site confirms the
original vision of the founders that we can deliver a powerful new model with
the capability to generate substantial economic returns. By integrating
ready-to-use e-commerce capabilities with thematic community-based content and
e-commerce Web sites, we are creating a number of powerful business tools and
resources:
USER PROFILE DATABASE. A substantial database of user profiles, according
to their interests, which enables us to offer large, highly targeted audiences
to our advertisers, and command the higher advertising rates that
demographically segmented audience profiles dictate.
META-SEARCH ENGINE. A search engine that enables users to search multiple
sites simultaneously and return the results, including comparative product
pricing and availability, to one page.
WEB SITE TRAFFIC DRIVER. The ability to drive traffic to Nettaxi
subscriber Web sites, via our search engine, which first searches and lists
Nettaxi's premium providers' and subscribers' Web sites, then scours the World
Wide Web for additional search matches. We believe this feature will drive
customers to Nettaxi community e-commerce sites, thereby propelling transaction
processing fees and drawing new e-commerce business to our community.
EXPANDED RELATIONSHIPS. Opportunities to develop an expanded range of
relationships, by virtue of being able to match premium content providers with
consumer bases. We believe that such a combination not only increases the
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variety of revenue-generating e-commerce services we offer to subscribers, but
also helps keep us at the forefront of new developments in products and
services that will attract additional subscribers, retain, current subscribers,
and encourage subscription upgrades.
POSITIVE PUBLIC PERCEPTION. The goodwill, trust, and loyalty of both
parents and children by providing a site on the World Wide Web where parents can
feel comfortable about their children's participation, and where children can
enjoy their own privacy. We believe that providing parents with filtering
technologies that make adult-content sites "invisible" to underage users will
attract family subscribers and many of their friends and relatives.
OUR STRATEGY
OUR STRATEGIC GROWTH PLAN
We are now poised to build on our early success by implementing a growth
strategy that should make us a major ready-to-use e-commerce storefront host,
and allow us to meet our goal of becoming one of the most frequented
community-based portals on the Internet. Our strategic growth plan includes:
- - execution of Nettaxi.com's Community Service Business Model (see below);
- - continued expansion of our co-branded content partnerships and portal
service offerings to Nettaxi.com citizens;
- - continued development of an expandable infrastructure;
- - widespread distribution of our CD-ROM product with free Internet access to
assist our partners in their customer acquisition strategies, educate
computer users about the Internet and introduce them to our site; and
- - an aggressive subscriber acquisition program.
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Nettaxi.com's Community Service Model
[Graphic omitted]
[Graphic includes three circles describing the inter-relation of contents
community and commerce]
Our strategy to create affinity-based communities leverages three key areas
of each community by:
1. Focusing on major community opportunities where the ability for
professionals, teams, experts, celebrities, and artists to extend themselves to
their base of constituents is untapped;
2. Utilizing our proprietary technologies and infrastructure to facilitate
private label development of individual and affinity group "brands". We will
provide the medium and tools to promote and establish an on-line presence for
these citizens; and
3. Incorporating content and commerce, with the community infrastructure to
create virtual communities and empower these communities to grow by using our
award- winning CD-ROM, " Nettaxi.com: The Experience" bundled with free Internet
access.
Content and commerce are well established online by many of the target
affinity-based communities. What they miss is the ability for small businesses,
fans and consumers, professionals, and sponsors to all leverage their interests
within a community. Most individual sites are designed to maximize the
interests of the on-line site versus the interests of the constituents or
"citizens". For example, NASCAR and the NBA all have very well-trafficked sites
for content, but they fail to provide teams and drivers with a way to promote
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themselves and engage fans. In addition, small and large sponsors are not
provided commercial opportunities outside of branding via advertising programs.
Today many small businesses are not on-line for a number of reasons. Small
businesses do not have a presence on the web that leverages their interests or
affinity base, which leaves them trying to compete in large shopping arenas
where their ability to extend and enhance their "brand" is expensive and offers
very little value-added to the consumer.
Nettaxi.com will engage these small businesses by hosting their web sites,
providing commerce enabled back end systems to sell merchandise, offer virtual
merchandise commission opportunities, and locate businesses within
affinity-based communities where these businesses can differentiate themselves
via their local presence and specialized offerings to a highly targeted
audience.
The key to our success involves focusing on creating value for all of our
citizens. Critical among these is successfully establishing a model where
sports teams, professionals, experts, celebrities, and artists engage their fans
and audiences with rich content, entertainment, and commerce offerings in a
trusted, simple, easy, and fun way on the internet. With a focus on the value
delivered to each citizen, the community will develop through methods and
promotional efforts designed by us.
OUR GOALS
We believe that the current structure and future developments of the
Nettaxi website offer us a strong variety of sources for garnering significant
revenue. These sources include:
<TABLE>
<CAPTION>
<C> <S>
- - E-COMMERCE Direct Nettaxi sales of products, including products
linked to events in subscribers' Remind Me files, and
products targeted
to users and subscribers on the basis of their
interests and patterns of activity when surfing
Nettaxi.com;
Transaction processing fees from credit card and
eCharge processing services;
Support service fees, where applicable, for
providing specific business services that support the
e-commerce activities of Nettaxi subscribers;
Percentage splits with subscribers of the list price of
goods sold through their e-commerce storefronts in
Nettaxi communities; and
Sales commissions negotiated with vendors for
products sold directly by Nettaxi and through
Nettaxi subscriber e-commerce storefronts.
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- -------------------------------- --------------------------------------------------------
- - ADVERTISING Spot and banner advertising can be sold at premium
prices to advertisers, by virtue of offering them
large, highly targeted audiences that are
demographically segmented, as well as the
opportunity to rotate and keep "fresh" the ads
presented to a viewer;
- -------------------------------- --------------------------------------------------------
- - SUBSCRIPTION FEES Premium service account monthly subscription fees;
- -------------------------------- --------------------------------------------------------
Co-branding and licensing of our CD-ROM product
- - CD ROM DISTRIBUTION ROYALTIES to select third parties;
</TABLE>
In order to realize our strategic initiatives, we will seek to accomplish
the following principal goals:
DEVELOP INFRASTRUCTURE, BUILD PREMIUM CONTENT, LAUNCH E-COMMERCE. Over the
next 12 months, we are looking to further develop our managerial and technical
infrastructure, enhance the quality and depth of our content by developing new
relationships with premium content providers, develop and customize e-commerce
systems to meet our requirements, establish relationships with fulfillment
operations to support our e-commerce services, and launch our e-commerce
products and services.
REFINE OFFERING AND EXPAND DEMAND. Once our initial strategic goals have
been accomplished, we are looking to refine our offering of products and
services and expand demand by enhancing consumer services through call center
automation and e-mail service and deploying an aggressive marketing campaign to
create real excitement about our site. We also hope to raise additional capital
for brand development and expansion of our operations.
GAIN SIGNIFICANT MARKET SHARE AND CONSOLIDATE COMPETITORS. Within two to
three years, we hope to gain significant market share and consolidate our
competitive position by acquiring strategic online community companies and
continue an aggressive plan of infrastructure expansion.
As previously described, our ability to achieve the objectives of our
strategic growth plans are subject to the risks set forth in the section of this
prospectus called "Risk Factors" including the limited resources we have, our
ability to obtain additional resources, our reliance on third parties for the
development of software and content as well as the uncertainties involved with
the rapidly changing business and technological environment for Internet
companies.
RECENT ACQUISITION
In May 1999, we completed the merger with Plus Net, Inc. Plus Net was
founded in 1998 and has licensed a wide range of Internet related tools to
generate revenue opportunities. Plus Net operates a portal website on the World
Wide Web with a robust search engine that brings back the top ten results of the
web's most popular search engines and return results within a specific subject
category, while enhancing electronic commerce and advertising opportunities.
Plus Net also has an e-commerce processing engine which is compatible with
interfaces enabling the acceptance of online credit card transactions and the
processing of these transactions with banking institutions. The Plus Net
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e-commerce capabilities also support consumer buying opportunities and programs
designed to prevent credit card fraud. These features will accelerate our
research and development efforts, and will enrich the Internet experience of our
subscribers. We intend to continue to implement and integrate the services
offered by Plus Net throughout 2000. The Plus Net merger also provides us with
access to a large pool of potential subscribers and provides us with an
opportunity to substantially increase the citizenship base within our community.
OUR WEB SITE AND SERVICES
OUR WEBSITE
The Nettaxi.com website, at http://www.nettaxi.com, is structured as a
virtual "urban" environment, populated by subscribers referred to as "citizens",
that is divided into broad "zones," which are further divided into thematic
"communities," and from there into "streets" and "homes."
When users first arrive at Nettaxi.com, they are in the broad "urban"
environment, where they find links to the "zones," which include categories such
as:
- Member Services, Registration, and Communities;
- community information links such as Message Boards, and
- links to premium content such as Sports Scores, Weather, Stock
Quotes, or Travel.
Clicking on one of the links -- for example, Communities -- takes users to
the next level, where they can choose from an extensive list of categories, or
"communities." Choosing one community, such as the Arena District theemed to
sports events and activities, takes users to a list of subcategories, or
"streets," such as the basketball-oriented Hoops Avenue. Once on the "street,"
users can select to visit any of the various "homes," which are the individual
web pages of our subscribers.
Clicking on a premium content link in the "urban" environment follows a
similar pattern, but may differ in the number and types of category and
subcategory levels, depending on the content they offer. The premium content
links lead to the special web pages of our major content providers, as opposed
to subscriber pages.
NETTAXI'S "TAXI"
A key feature of our site is that users in a hurry to get somewhere will be
able to "step into" a "taxi", a specially configured search engine, which they
will find waiting in all areas and levels of our environment. Users simply type
in a "destination" such as "sports," and they are immediately whisked first to
our main sports areas which include the relevant premium content provider's
website, followed by the Top 10 subscriber sports "homes," and then on to other
sports sites, including those on the rest of the web. As a result, the search
engine has the ability to drive traffic to e-commerce sites in our community,
including premium content providers' sites, thereby propelling transaction
processing fees and drawing new e-commerce business to the community. In
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addition, our search engine provides greater value to our users since it
presents small, manageable groups of "destination" choices in response to a
search, as opposed to an overwhelming volume of listings turned up by most other
search engines.
We are exploring the possibility of eventually serving content to users
based on their preferences, which will be determined by tracking their
activities as they surf through our overall Web site. The result will be
content that is automatically and seamlessly customized to a user's interests
and tastes so that, for example, two different users with differing interests
who take a "taxi" using the same search term might arrive at separate
destinations or, if at the same destination, are likely to be offered some
differences in content, based on their patterns of activity.
CONTENT
A key component of our current and future plans is the continued
development of relationships with providers of premium content in a variety of
categories. The purpose of these relationships is not to directly generate
revenue, but rather to enhance the quantity and quality of information and
content on our web site. We believe that enhanced information and content may
lead to increased visitors to our site as well as increased subscriptions to our
services. To date, we have established formal relationships with some premium
content providers. The companies listed below provider substantially all of the
content on our Web site that is currently provided by outside parties. The
providers are listed in order by the amount of content they provide to us.
- - INFOSPACE.COM, INC. We have a nonexclusive content distribution agreement
with Infospace.com, an aggregator of a broad range of content services,
including sports scores, late-breaking news, weather, concerts, public record
searches, phone/address searches, classified ads, and daily horoscopes, for
syndication to Internet portals and destination sites. The term of the agreement
is one year. Although this agreement is technically a revenue sharing
agreement, it generates less than one percent of our revenues. Infospace.com
currently provides the majority of our outside party content.
- - SOLUTIONS MEDIA, INC. ("SPINRECORDS.COM"). We have a non-exclusive
agreement with Spin Records to co-brand its content, which includes digital
audio/video music files in the MP3 format, which Spin Records has licensed from
independent artists. This audio/video content is downloadable by our
subscribers from Spin Records for banner advertisements shown on these
co-branded content pages, and e-commerce revenues for our citizens who purchase
licensed content or merchandise from these co-branded web pages. Also under the
terms of this agreement, both Spin Records and Nettaxi.com are required to
co-market, advertise and promote the other party's website. This agreement has
a term of one year, and currently accounts for approximately 13% of our
revenues.
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- - BIG NETWORK.COM. We have entered into a co-marketing agreement with Big
Network.com which will provide our subscribers with immediate access to the
BigNetwork.com suite of classic board and card games including chess, checkers,
backgammon, reversi, spades, morph and more. The nonexclusive agreement will
also allow our subscribers to interact in real time with the 200,000 registered
members of BigNetwork.com. This arrangement also allows our subscribers to
embed Java-based games into their own Web sites. For those subscribers who
have developed and integrated their own personal Web pages into our community,
they will be able to create an interactive gaming environment suited to the
specific needs of their visitors. The term of the agreement is one year. This
agreement is an expense sharing agreement and generates less than one percent of
our revenues.
- - PI GRAPHIX. We have a nonexclusive linking agreement with PI Graphix, a
provider of an online community with e-commerce capabilities and extensive
graphics capabilities under which we have linked and co-branded our site with
theirs in order to increase traffic. The term of the agreement is one year.
Although this agreement is technically a revenue sharing agreement, it generates
less than one percent of our revenues.
- - NETOPIA, INC. We have a nonexclusive agreement with Netopia, a provider
of next generation products including web site services and high-speed
connectivity to the Internet, under which Netopia provides us with technology
that enhances our ability to provide services to our subscribers. The term of
the agreement is two years. This agreement is an expense sharing agreement and
generates less than one percent of our revenues.
- - SPIN MEDIA NETWORK, INC. ("SPINWAY"). We have entered into an exclusive
agreement, effective November 1999, with Spinway to offer a co-branded free
Internet Service Provider, or "ISP", service to our subscribers. Under the
terms of this agreement, we share advertising revenues with Spinway that are
derived from the sales to advertising clients of pop-up video advertisements
viewed by subscribers as they log on to this ISP service. Also under the terms
of this agreement, we are able to offer a paid ISP service through Spinway on a
non-exclusive basis. The term of this agreement is two years. This agreement
currently accounts for less than one percent of our revenues.
Under our agreements, we provide co-branding services to the content
providers listed above. The content included on our web site is branded with
the logo and similar brand features of the relevant providers. We also increase
the traffic to their own web sites by linking our sites so that end users can
easily move from our web site to theirs. We are also working to identify and
develop a selection of relationships with providers of proprietary information
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content, particularly individuals and organizations with archives and databases
that could be easily rendered into digital format. We believe that a carefully
developed selection of such databases, would act as a powerful attraction to
the type and volume of subscribers that our advertisers find desirable.
Our subscribers also provide personal or entrepreneurial/commercial content
that is available on our website. We offer each of our subscribers, free of
charge, 10 megabytes of server space to use for a home page and e-mail. In
addition, subscribers have access to free, easy-to-use website design software
to build their web home page, and they can designate the community and street
where they would like to have their home page located.
E-MAIL SERVICES
Our e-mail services surpass those of other portals and full-featured
internet service providers by being available though both Post Office Protocol,
POP, and the Web, IMAP. To the best of our knowledge, ours is the only service
today to simultaneously offer subscribers both types of e-mail access for free.
Nettaxi's e-mail service also allows its Citizens and small businesses to offer
a free Web-based email service with a unique domain name, e.g., [email protected],
giving the domain name free promotion with every email sent. There's no software
for the user to download and all mail and maintenance are provided by Nettaxi,
with no added inconvenience to the webmaster. The look and feel can be
customized to look like the subscriber's home page.
POP e-mail is the type most commonly used by Internet service providers.
Its primary advantage for users is that messages are sent and received quickly
and with more privacy, because they do not stay resident on a server for any
length of time. Its greatest disadvantage is that e-mail messages, once
delivered to a user, are generally no longer available for download again, so
that a user who downloads e-mail to a home computer, for example, will generally
not be able to download the same mail at a later time to another computer, such
as one at work.
IMAP, or web-based e-mail, most commonly used by portal services, allows
users to retrieve e-mail messages from any location that offers access to the
Internet and a specific website. Sending and receiving messages may be a bit
slower than POP services, but messages are stored on a server, can be retrieved
multiple times, and remain available until they are either specifically deleted
by the user, or a set amount of time has passed.
Subscribers to all levels of our services will have both POP and IMAP
e-mail capabilities, and a distinct @nettaxi.com address or @ their own custom
domain name.
"REMIND ME" SERVICE
As a special feature, we will offer our subscribers Remind Me, a service
that functions like an electronic datebook. Subscribers can enter their
important dates and appointments, with requests to be reminded of them at
specified times, which can be as far ahead as a month or a few hours. Remind Me
is structured to allow users to specify the type of event being listed, such as
a birthday or anniversary, by simply entering important dates and their
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corresponding event. Keywords in these fields trigger Remind Me to suggest
event-appropriate products and/or services. Some of these will be available at
no charge to subscribers, e.g., electronic greeting cards and virtual flowers.
Others will be available for purchase or subscription directly through us or
through our subscriber "storefronts" and advertiser sites, driving traffic to
both, and offering us opportunities for generating revenues through transaction
processing and other fees, where appropriate.
E-COMMERCE SERVICES
One of the key features that we will offer members is the opportunity to
become on-the-spot entrepreneurs. We are currently developing
ready-to-use-commerce capabilities that are aimed at providing members and
corporate clients who wish to launch an online e-business with a bundled
ready-to-use variety of services designed to meet their needs. These services
will include a customized storefront, customer order processing, account
management, credit card processing, and, in certain cases, back-end order
fulfillment needs. In conjunction with these product offerings, member or
corporate clients will be able to purchase advertising packages within their
communities to help market their products or services, as well as email tools
that will provide them the capability to direct market to their customer base.
COMMERCIAL WEB SITE HOSTING. Premium account subscribers will be provided
with commercial website hosting services, on top-of-the-line servers with
redundant capabilities, to maintain an online presence 24 hours a day, 7 days a
week. Hosting services will include full commerce capability, including major
credit card and eCharge services, for secure online transactions, driving
traffic to the site, and a variety of other commerce-related services, such as
sourcing and fulfillment.
WHOLESALE SUPPLY OF PRODUCTS. As part of our ready-to-use e-commerce
business services, we intend to offer subscribers sourcing services to provide
them with the products they are marketing at wholesale prices and on a
just-in-time basis, eliminating the need for warehousing. Through negotiating
with vendors, we will be able to provide subscribers with the convenience of
access to a group of reputable, quality suppliers identified as appropriate to
their business, and the ability to source products at wholesale and discounted
price levels normally reserved for large commercial enterprises. These services
will be on an optional per transaction, or contract volume basis. We benefit by
receiving a pre-negotiated commission/transaction fee from the wholesale vendor
for each sale.
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Our recent merger with Plus Net will also enhance our e-commerce ability.
Plus Net has recently launched e-commerce processing operations which is
compatible with interfaces enabling the acceptance of online credit card
transactions and the processing of these transactions with banking institutions.
The Plus Net e-commerce capabilities also support programs designed to prevent
credit card fraud.
INTERNET THE CITY CONNECTED CD ROM
It is a well-recognized truism that technology, and personal computers
particularly, are typically not used to their fullest potential. Paradoxically,
while vast arrays of information and services are already available to
proficient Internet users, prospective or neophyte users typically postpone or
limit their usage due to their lack of understanding and experience in
navigating the Internet. While it is true that 42.9% of U.S. households owned
personal computers in 1998, less than half of those households are active
Internet users. Furthermore, trends indicate that the remaining 57.1% of
households still without computers are steadily joining the ranks of computer
users and potential Internet users.
Our Internet training CD-ROM was born from management's conviction
that an enormous untapped opportunity to capture the novice user lies in
effectively initiating and tutoring this huge market in a one-on-one,
interactive, entertaining way. The CD-ROM, called Internet the City is a
comprehensive, interactive training tool that enables new and intermediate users
to learn about and begin using the many powerful capabilities and features of
the Internet.
The professionally produced CD-ROM features an animated cyber-cabbie --
URLtm -- who takes users wherever they wish to go. During the tour, URLtm
explains and demonstrates how features such as e-mail, chat rooms, search
engines, Web sites, etc., work and can actually connect the user to our website.
The CD-ROM, with its "front end" connection feature, is a key component of
our marketing and promotions plan. The CD-ROM serves as vehicle to drive
users to our website in a manner that is far more efficient than traditional
means of advertising and promotion. We intend to explore a variety of options
for establishing co-branding and sponsorship opportunities for promoting and
distributing the CD-ROM.
We currently have an agreement with Media Technology Services to provide
CD-ROM duplication, delivery and packaging services. We also have an agreement
with Fountain Technologies, which bundles the CD-ROM with computer systems from
its Quantex Microsystems and Pionex Technologies subsidiaries. Under the
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one-year agreement, we receive a per copy royalty of $0.45. With our targeted
approach to distribution, we potentially allow users of specific interests to
connect to a community which addresses their interests. We have established
an agreement with Apple Computer whereby Apple bundles the CD-ROM with its K-12
curriculum bundle and as an optional upgrade to its iMac computer. We receive a
$1.00 per copy royalty under this agreement which is currently in place until
November, 2000. In the future, we plan to offer the CD-ROM to numerous computer
software and hardware manufacturers, as well as other types of manufacturers,
for bundling with their respective products.
We have entered into an agreement with eBay, an online trading community,
under which we will develop a customized version of our instructional CD-ROM
product designed to familiarize end users with the services of eBay. This
product is expected to include basic Internet tutorials, a Nettaxi tour and
step-by-step interactive instructions on how to register on eBay, how to place a
bid and how to list an item for sale on the eBay site. Both companies will
finance development of the product and market and distribute it upon completion.
We will receive cash payments based on the number of new customers who use the
CD-ROM to join eBay.
CUSTOMER ACCOUNT PLANS
We adhere to the principle that providing excellent customer service is
integral to attracting and, more importantly, retaining subscribers. To that
end, we have focused on the development of a customer service organization
keenly focused on satisfying demand and creating customer loyalty.
To provide subscribers, or "citizens," with choices that suit their
individual needs, we offer both free and premium accounts, on a tiered basis
similar to the way that cable systems do. Premium accounts are configured from
a large menu of options, to attract subscribers and address the needs and
desires of particular segments of online users.
BASIC FREE CITIZEN ACCOUNT. Like most portals, we offer a free basic
service package, the "free citizen" account, to attract a large number of
subscribers. We benefit through providing a broad variety of subscriber
Web pages and a substantial database of user profiles, which enables us to
offer large, highly targeted audiences to our advertisers, and command the
higher advertising rates that demographically segmented audience profiles
dictate.
This account offers the following package of features and services:
- A four page Virtual Office;
- Free Internet access
- MyNettaxi, personal start page;
- 25 Megs of disk space;
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- Web Statistics - for analyzing who is coming to their site and when;
- E-mail service for one personal e-mail account with a
[email protected] address;
- Remind Me service, an electronic datebook;
- Web hosting services for a free website - for personal or
entrepreneurial use -- with a /citizens/userID web address, or URL,
located in the subscriber's community of choice;
- Child protection tools;
- Special discounts on selected Nettaxi merchandise; and
- Access to chat sessions, message boards, and shopping, as well as
premium content such as weather, sports scores, stock quotes,
services such as travel arrangements and packages, introductions to
people who share common interests, and more.
Each account is allotted 25 megabytes of storage space for use.
Subscribers are provided with free, easy-to-use software for designing and
building their web page, tips and techniques for making their Web sites
attractive and exciting to visit, and our search engine to drive traffic to
their website.
PREMIUM ACCOUNTS. Our premium accounts are especially attractive to
entrepreneurs who would like to establish an e-commerce storefront on a
ready-to-use basis. Citizens can build premium accounts from a menu of options,
allowing them the ability to pick and choose which items they are interested in.
Option can be added for additional fees. In addition to the services which are
provided to free service account subscribers, premium account holders are
provided with the following options:
- Nettaxi Virtual Office, which allows users to build and maintain
their own virtual office, including their own message boards, chat
rooms, calendar and task manager, address book, etc. Users can build
their virtual office through and easy-to-use Web-based interface;
- Free Internet access;
- E-mail service for unlimited e-mail accounts, each with a distinct
@nettaxi.com address or your own domain and customized look
and feel;
- Commerce capability, including major credit card and eCharge
services, for secure online transactions;
- Access to Nettaxi-sponsored advertising and banner ads, and
other cross-promotion opportunities;
- Unique domain name;
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- Disk space for Web page hosting; and
- Web statistics for analyzing who is coming to their site and when.
Premium subscribers are provided with professional website services for the
initial Web site's design and launch, to showcase the products and/or services
in an effective manner, as well as free, easy-to-use software for updating the
site at any time. In addition, subscribers are provided with special tips and
techniques for making their Web sites attractive and exciting to visit, as well
as mechanisms to drive traffic to their website, including our search engine and
strategically placed, highly visible links to the site from other desirable web
locations. Subscribers wishing to have their own domain are charged a one-time
fee to register the domain with InterNIC for a two-year period.
CUSTOMER ASSISTANCE
To maintain Nettaxi.com as a portal that truly serves its subscribers and
reflects their interests and needs, we invite and encourage subscribers and
visitors to send in their comments and suggestions. We track visitor and
subscriber activities, and carefully monitor the nature and content of their
comments, as part of our strategy for continuing product refinement and
development.
Regardless of the type of account selected, subscribers have access to free
online help at any time by simply clicking on our Help icon and by visiting the
Message Boards, where they can review information posted by other subscribers,
or post a query of their own. Subscribers can also find information on billing
matters, special promotions, upcoming events, etc., quickly and easily on the
Nettaxi.com home page.
If they are unable to find what they are looking for, or if the information
they find is confusing, subscribers can submit queries, to which we will
actively and promptly respond with appropriate information or guidance. We are
also currently in the process of establishing and deploying
subscriber-to-subscriber support services, which are provided by online
volunteers in exchange for free account upgrades or other premiums.
WEB HOSTING
We began providing Internet hosting and connectivity for corporate
customers in 1999. Our services are delivered through a state-of-the-art
Internet data center located in Southern California using a high-performance
Internet backbone network. Customers pay monthly fees for the professional
services utilized, one-time installation fees, and monthly connectivity charges.
These "hosting" revenues are recognized in the period the services were
provided.
For the first twelve months ended December 31, 1999, web hosting revenues
accounted for 19% of total revenues.
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ADVERTISING
ADVERTISING SALES AND DESIGN
We seek to distinguish ourselves from our competition through the creation
of advertising and sponsorship opportunities that are designed to build brand
loyalty for our corporate sponsors by seamlessly integrating their advertising
messages into our content. Through our close relationship with our subscribers,
we have the ability to deliver advertising to specific targets within our site's
theme content areas, allowing advertisers to single out and effectively deliver
their messages to their respective target audiences. For example, an advertiser
can target its message solely to women with an interest in recreation and
sports. We believe that such sophisticated targeting is a critical element for
capturing worldwide advertising budgets for the Internet. Additionally, we
intend to expand the amount and type of demographic information our site
collects from our members, which will allow us to offer more specific data to
our advertising clients.
We intend to build a direct sales organization of professionals dedicated
to maintaining close relationships with advertisers and advertising agencies
nationwide. We also intend to enter into arrangements with a number of
third-party advertising sales representatives pursuant to short-term agreements
that in general may be terminated by either party, without notice or penalty.
The sales organization would consult regularly with advertisers and agencies on
design and placement of their Web-based advertising, provide customers with
advertising measurement analysis and focus on providing a high level of customer
service and satisfaction.
Currently, advertisers and advertising agencies enter into short-term
agreements, on average one to two months, pursuant to which they receive a
guaranteed number of impressions for a fixed fee. Advertising on our site
currently consists primarily of banner-style advertisements that are prominently
displayed at the top of pages on a rotating basis throughout our online
community, including members' personal Web sites. From each banner
advertisement, viewers can hyperlink directly to the advertiser's own website,
thus providing the advertiser an opportunity to directly interact with an
interested customer. Our standard cost per thousand impressions depends upon a
number of factors including the location of the advertisement, its size and the
extent to which it is targeted for a particular audience. Discounts from
standard cost per thousand impressions rates may be provided for higher volume,
longer-term advertising contracts.
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We intend to increase our advertising revenues by focusing on a number of
key strategies, including expanding our community content expanding our
advertising customer base, increasing the cost per thousand impressions charged
to advertisers by continuing to improve our ability to target advertisements to
demographically distinct groups, increasing page views, increasing the average
size and length of our advertising contracts, increasing the number of our
direct sales representatives, and continuing to invest in improving advertising
serving and advertising targeting technology.
We also offer special sponsorship and promotional advertising programs,
including contests, sampling and couponing opportunities to build brand
awareness, generate leads and drive traffic to an advertiser's site. We also
intend to sell sponsorships of special interest pages where topically focused
content is aggregated on a permanent area within a neighborhood.
ADVERTISING CUSTOMERS
Recently we have begun to successfully attract both mass market consumer
product companies as well as technology-related businesses advertising on the
Internet. Due to our advantages as a community Web site, we believe that we are
well positioned to capture a portion of the growing number of consumer product
and service companies seeking to advertise online.
BANNER ADVERTISING FOR SUBSCRIBERS
To help support and drive traffic to the e-commerce storefronts of our
Platinum Service account subscribers, and expand co-branding opportunities, we
intend to offer special cross-promotion opportunities, including periodic
Nettaxi-sponsored advertising and banner ads at a variety of locations
throughout our website. The banners will be of the same high quality as those
sold at premium prices to outside advertisers. Placement of the banner ads will
be determined by a variety of factors, including appropriateness of location,
opportunities for co-branding, and eventually even the activity patterns of
visitors and subscribers to our website.
We intend to implement special software on our website in the immediate
future. The software allows us to track a user surfing through the overall
website, follow the user's patterns of activity, present ads that are targeted
and relevant to the user's interests, and recommend particular products or
services, based on the user's activity profile.
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In addition, the software will be able to track the particular banner and
other advertising to which the user has been exposed while visiting our site.
This will provide us with a record of the number and type of advertisement views
accessed by users over a specified period of time, useful for determining rates
for outside advertisers wishing to have a presence on our website. It will
also provide us with the opportunity to rotate the particular ads it presents to
a user to keep the ads "fresh" and appropriate in context. Eventually, we hope
to expand our activity tracking functions to include serving content to users
based on their preferences. The result will be content that is customized for a
user, automatically and seamlessly.
We have also licensed advertisement management software from Accipiter
Technology, and written some custom code to extend the software's capabilities.
The software tracks how many ads are served on the website, which areas and
which pages to which they were served, and how many people have "clicked" on
them. The software allows us to manage its advertisement selection and
placement by providing an accurate advertisement count on both a real-time and a
compiled-over-a-specified-time basis, information crucial to billing an
advertiser. The software also provides advertisers with the ability to audit
their advertisement performance on our website on a real-time basis. We provide
a user ID and password to the advertiser, who can then come onto the website and
track their ads at any time.
LINKING AGREEMENTS. We are continuously looking for opportunities to
connect our website through links with other sites in a way that will increase
the number of visitors to, and potential new subscribers for, our community. We
have entered into a linking and promotion agreement with PI Graphix, which
provides e-commerce systems and related information services on its own website.
Under the agreement, our Web sites are linked and we work with PI Graphix to
develop methods of increasing cross traffic between the sites. Our agreement
with PI Graphix permits us to allow end users to post three-dimensional
descriptions of the products they wish to sell on our website.
ADVERTISING PROGRAMS. We plan to invest in online advertising to drive
traffic to our site by placing advertisements on selected high volume sites, as
well as purchasing targeted keywords on several popular search engines such as
Yahoo!, Excite, Lycos, Infoseek and others. We also plan to advertise in
traditional media such as print, radio and broadcast, on a selective, highly
targeted basis, to increase the awareness of our site.
PUBLIC RELATIONS SUPPORT. By virtue of its broad appeal and
"entrepreneurial" focus, we anticipate that a targeted public relations campaign
will yield material results in building both national and targeted local and
regional awareness for Nettaxi. We do not currently have an agreement with a
national public relations professional, but intend to enter into an arrangement
with a suitable public relations company in the future.
TRADE PUBLICATIONS. An effective and extreme inexpensive method of
bolstering awareness of the Nettaxi brand is editorial inclusion in trade
publications that target the various industry groups with which we seek to do
business. We believe that several factors make us a prime candidate for
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editorial coverage in trade publications for the Internet industry, as well as
the general media. They include:
- - Our integration of online community with premium content and ready-to-use
e-commerce services;
- - Our "entrepreneurial" focus; and
- - The growth of traffic to our online community website.
We will seek out high-impact editors and reporters at publications that
serve the Internet industry. We will also seek to place articles and columns
written by our staff and management in various publications. This will serve to
enhance our credibility and establish and promote our management and staff as
experts.
OPERATIONS AND INFRASTRUCTURE
ADMINISTRATIVE OPERATIONS
To provide our subscribers with the most efficient, flexible, and
innovative services possible, our administrative operations combine in-house and
outsourced services and functions. Our strategy is to keep our in-house staff
small, with a focus on core competencies in technical and research and
development areas, and to outsource other functions and projects on an
as-needed basis.
Internal functions currently include account management, traffic
management, website service updates, and other network functions that rely on
UNIX shell scripts; the continued development and updating of the Internet the
City CD-ROM to add to its capabilities and increase co-branding opportunities;
and establishing and managing relationships with premium content providers,
product vendors, and other appropriate parties. We intend to further develop
our in-house production facilities to support the development of original
content, including interactive content for our site and specialty content for
our advertisers.
Outsourced functions include providing and maintaining network hardware and
Internet connections, providing premium content for our site and providing
subscribers with selected e-commerce business services, including credit card
and eCharge billing services, and managing an extensive product database and
tracking its related customer activities.
INFRASTRUCTURE & SYSTEMS
The development of an infrastructure with an Internet-centered network and
database system that allows us to serve information and facilitate e-commerce
transactions on behalf of our subscribers' Web sites is integral to the
implementation of our web community and ready-to-use e-commerce storefront
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concept. to accommodate the substantial transaction volume that we anticipate as
we build our online community of subscribers, or "citizens", vendors, and
information. At this time, the basic components of our technology
infrastructure are substantially in place and operational.
Our UNIX-based electronic network for Nettaxi.com operates on a one
terabyte Ethernet backbone, with two Cisco Systems Ethernet switches that
prevent collisions on the network. Traffic direction for the web servers is
handled by Arrowpoint's CS-100, which tracks server load conditions in real time
and sends traffic to the most appropriate server to spread around and balance
the load. The network is comprised primarily of Sun Microsystems high-capacity
servers, and include a mix of Enterprise 450s, Ultra 1, and Ultra 5 models, all
running the newest version of Sun's Solaris operating environment for network
systems. These servers collectively provide approximately 1.6 terabytes of hard
drive space for subscriber capacities.
In addition, the network currently includes NT servers to handle
registration and selected other database functions, using Microsoft's SQL
database software. However, we have embarked on an ambitious program to shift
our database functions over to a 3-tier database connectivity architecture that
relies heavily on Web Objects technology - database connectivity software
licensed from Apple Computer--to provide more robust and easier-to-use
capabilities for subscription registration, browsing through our communities,
and subscriber personalization of web pages, and to allow us to track and
extract user profile and activity data more easily and in more detail.
SERVER MAINTENANCE
Our electronic network is located both at Alchemy Communications in
Southern California and at the Exodus Communications Internet Data Center in
Santa Clara, California. Exodus Communications is a provider of server hosting
and provides our web site with its connection to the World Wide Web. Exodus
operates Internet Data Centers in several US locations, as well as in London,
and includes several major Internet companies among its clients.
Through its network co-location agreement with Exodus, we are provided with
a secure location for its network servers, multiple high-speed Internet
connections, and access to 24-hour-a-day, 7-day-a-week technical support
personnel and services. Exodus also provides critically important routing,
redundancy, and maintenance services for the network and its Internet
connections, as well as a back-up power supply capable of continuing network
operations for up to a week in the event of a power failure.
COMPETITION
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially-available software. We
currently or potentially compete with a number of other companies for users,
advertisers and electronic commerce marketers, including a number of large
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online communities and services that have expertise in developing online
commerce, and a number of other small services, including those that serve
specialty markets.
Other companies that are primarily focused on creating Internet online
communities include Tripod and AngelFire, subsidiaries of Lycos; Yahoo,
theGlobe.com, Xoom.com, Alloy Online iVillage and Tripod and, in the future,
Internet communities may be developed or acquired by companies currently
operating Web directories, search engines, shareware archives, content sites,
Internet Service Providers and other entities, which may have more resources
than ours.
In addition, we currently and in the future face competition from
traditional media companies, a number of which, including Disney, CBS, Fox and
NBC, have recently made significant acquisitions or investments in
Internet companies.
Furthermore, we compete for users and advertisers with other content
providers and with thousands of Web sites operated by individuals, the
government and educational institutions. Such providers and sites include AOL,
Angelfire, CNET, CNN/Time Warner, Excite, Hotmail, Infoseek, Lycos, Microsoft,
Netscape, Switchboard, Xoom, ESPN.com, ZDNet.com and Yahoo!
We believe that the following are the principal competitive factors for
companies seeking to create online communities on the Internet:
- - community cohesion and interaction;
- - customer service;
- - brand recognition;
- - Web site convenience and accessibility;
- - price;
- - quality of search tools; and
- - system reliability.
Once our e-commerce functions become fully operational, we will also be
competing with companies in the online commerce market. This market is new,
rapidly evolving and intensely competitive. Current and new competitors can
launch new Web sites at relatively low cost. The products and services that
might be offered through our site will compete with other retailers and direct
marketers, some of which may specifically target our potential customers. We
anticipate that we will compete with various mail-order and Web-based retailers;
various traditional retailers, either in their physical or online stores;
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various online service providers that offers products of interest to our
potential customers, including AOL, Microsoft, and other providers mentioned
above; and e-commerce Web sites, such as Amazon.com, Etoys and CDnow.
We believe that the following are the principal competitive factors in the
online commerce market:
- - brand recognition;
- - quality of site content;
- - merchandise selection;
- - convenience;
- - price;
- - customer service; and
- - reliability and speed of fulfillment.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition in other business
and Internet markets and significantly greater financial, marketing,
technical and other resources than us. In addition, other online services
may be acquired by, receive investments from or enter into other commercial
relationships with larger, well-established and well-financed companies as use
of the Internet and other online services increases. Therefore, our competitors
with other revenue sources may be able to devote greater resources to
marketing and promotional campaigns, adopt more aggressive pricing policies and
devote substantially more resources to Web site and systems development than us
or may try to attract traffic by offering services for free. Increased
competition may result in reduced operating margins, loss of market share and
diminished value of our brand.
A key factor that will set us apart from other portals in the future is our
ability to offer subscribers of ready-to-use e-commerce capabilities, including
full hosting of a subscriber's domain, e-commerce storefront building, and
fulfillment and billing services. However, our e-commerce functions are not
yet fully operational, and there can be no assurance that we will successfully
develop these capabilities or that we will be able to compete successfully
against other e-commerce providers who may develop similar services. Further,
as a strategic response to changes in the competitive environment, we may,
from time to time, make pricing, service or marketing decisions or
acquisitions that could have a material adverse effect on our business,
results of operations and financial condition. New technologies and the
expansion of existing technologies may increase the competitive pressures on us
by enabling our competitors to offer a lower-cost service. Certain Web-based
applications that direct Internet traffic to certain Web sites may channel users
to services that compete with us. Any and all of these events could have a
material adverse effect on our business, results of operations and financial
condition.
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INTELLECTUAL PROPERTY
We currently have pending applications before the United States Patent and
Trademark Office for trademark and service mark protection for "Nettaxi", as a
brand name for our website, "Internet the City", the Company's CD-ROM training
product, "URL", our animated guide character, and the Nettaxi "taxicab". If
these applications are approved, protection will be available for the periods
prescribed by law.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our suppliers in order to limit access to and disclosure of our
proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. While we intend
to pursue registration of our trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available online.
We also rely on technologies that we license from third parties, such as
the suppliers of key database technology, the operating system and specific
hardware components for our products and services. These licenses extend for
terms ranging from one year to perpetuity and are subject to satisfaction of
conditions laid out in the specific licensing agreements. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
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GOVERNMENT REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies.
We take measures to ensure our compliance with all such regulations as
promulgated by these agencies from time to time. The Federal Communications
Commission sets standards and regulations regarding communications and related
equipment.
There are currently few laws and regulations directly applicable to the
Internet. It is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. The growth of the market for online commerce may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. Tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on our business, results of operations and financial condition. In
addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in a particular state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or regulation,
or the application of laws or regulations from jurisdictions whose laws do not
currently apply to our business, could have a material adverse effect on our
business, results of operations and financial condition.
LEGAL PROCEEDINGS
On March 31, 2000, we tendered the sum of $2,588,800 as payment in full of
the outstanding principal and interest of the convertible debentures in favor of
RGC International Investors, LDC. That same day, we filed a Complaint in the
Superior Court of the State of California for the County of Santa Clara (Case
No. CV788836) against RGC International Investors LDC and certain RGC
affiliates, seeking declaratory relief regarding our ability to prepay
the outstanding convertible debentures held by RGC. It also seeks damages
for fraud and breach of fiduciary duty and rescission of the underlying
securities purchase agreement and restitution, and requests injunctive relief
against further wrongful conduct by RGC.
The factual basis for our Complaint stems from the March 31, 1999
securities purchase agreement between RGC and Nettaxi.com whereby RGC loaned us
the sum of $5,000,000 in exchange for convertible debentures containing our
promise to repay this sum, with interest, on or before March 31, 2004, warrants
to purchase up to 150,000 shares of our common stock, and conversion options
giving RGC the right to purchase, at the existing conversion price, the same
number of shares as were converted at the time of exercise of the respective
option. Our Complaint alleges that we were induced to enter into the
securities purchase agreement and accompanying agreements in reliance upon
certain promises and representations made by RGC, including representations that
(i) RGC would be our "partner" for future rounds of financing; (ii) RGC would
avoid taking any action which might harm us or our stockholders; (iii) RGC would
use its best efforts to promote our growth and expansion; (iv) RGC would not
place its own interests above ours; (v) RGC, when converting the debentures to
common stock, would not detrimentally impact the value of our common stock; (vi)
RGC would only sell our common stock in a strong market; (vii) RGC would assist
us in listing our common stock on NASDAQ and positioning our stock for a
secondary public offering; (viii) RGC would provide us with additional financing
when needed; (ix) we could prepay any debt to RGC, including the convertible
debentures, using outside financing; and (x) RGC intended to purchase our
securities for its own account and for investment.
Our Complaint alleges that at the time RGC made these promises and
representations, it knew them to be false and did not intend to perform them.
Rather, we believe that RGC's actual intent was to manipulate the price of our
common stock through short sales and cause the common stock price to decline,
thus obtaining a more favorable conversion rate. Beginning in April 1999, the
price of a share of our common stock declined from $32.00 to approximately $5.00
in November 1999. At the same time, RGC denied our requests for additional
financing and refused to approve financing proposals from third parties.
Commencing in November 1999, RGC began to convert the convertible
debentures and immediately sell the resulting common stock into the open market.
We believe that as a direct result of this conduct, the price of our common
stock fell to approximately $1.00 per share and the conversion price decreased
accordingly. Given this impact of the convertible debentures, NASDAQ refused to
list our common stock.
Accordingly, we have tendered to RGC the sum of approximately $2.6 million,
which represents the aggregate amount of principal and interest currently due
under the convertible debentures. Our Complaint requests a judicial
determination that we have the right to prepay the convertible debentures. It
also claims damages in excess of $20 million based on securities fraud and
manipulation of stock prices, and requests rescission of the securities purchase
agreement and the accompanying agreements and restitution of the parties'
respective positions. Finally, we have requested that the court enjoin RGC from
any further wrongful conduct and that we be awarded attorneys' fees and costs of
suit
Shortly after filing the Complaint, we received from RGC a mandatory
redemption notice demanding immediate redemption by us of RGC's outstanding
convertible debentures. In its notice, RGC claimed that its right to redemption
is based upon our alleged failure to maintain registration under the Securities
Act of 1933, as amended, of the shares of Nettaxi.com common stock underlying
the convertible debentures or otherwise issuable under the terms of the
debentures. RGC also claims that the mandatory redemption amount under the
terms of the convertible debentures, including penalties, equals $33,239,116.41.
In May 1999, we filed a registration statement on Form S-1 (File No.
333-78129) covering the common stock then issuable upon conversion of the
convertible debentures and exercise of RGC's conversion options and warrants.
This registration statement was declared effective in August 1999. Due to the
steep decline in our stock price resulting from the actions of RGC, the
conversion price of the convertible debentures has decreased since the effective
date of the registration statement, and the number of shares issued or issuable
pursuant to the convertible debentures, conversion options and warrants has
increased significantly. Accordingly, in February, 1999 we filed a new
registration statement on Form S-1 (File No. 333-30074) covering additional
common stock. This registration statement has not yet been declared effective
by the Securities and Exchange Commission, and therefore conversions of the
convertible debentures by RGC since February 18, 2000 have resulted in the
issuance of restricted common stock. Under the terms of the convertible
debentures and accompanying registration rights agreement, the failure to make
available shares of registered common stock upon such conversions may be deemed
a default and may constitute grounds for mandatory redemption of the convertible
debentures with accompanying financial penalties.
We intend to vigorously pursue our action against RGC, including our belief
that we have the right to prepay the convertible debentures.
On July 9, 1999, after our public announcement of the filing our
registration statement on form S-1 (File No. 333-78129) four disaffected
shareholders in Simply Interactive, Inc., led by Ronald Ventre, filed an action
in the Santa Clara County Superior Court against Warren J. Kaplan, Frank
McGrath, Bruno Henry, Alan K. Fetzer, Robert Divenere,
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Robert A. Rositano, Sr., Robert A. Rositano, Jr., Dean Rositano, Glenn Goelz,
Nettaxi.com, Nettaxi Online Communities, Inc., SSN Properties, LLC and others.
The case number is CV 783127. Other than the brief settlement negotiations
referred to below, there has been no activity on this matter since the action
was filed.
Mr. Kaplan was formerly the chief executive officer and a director of
Simply Interactive. He also became a member of SSN Properties and is currently
the chief operating officer of AboveNet Communications, Inc. Mr. McGrath was a
director of Simply Interactive. He also became a member of SSN Properties and
is currently a vice president of MCI WorldCom. Messrs. Henry, Fetzer, and
DiVenere were all former officers of Simply Interactive, and Mr. Henry also
served as a director of Simply Interactive. Robert A. Rositano, Sr. was a
director of Simply Interactive and became the managing member of SSN Properties.
He currently owns more than 5% of the outstanding shares of our common stock
following a distribution by SSN Properties to its members in March 1999. Robert
A. Rositano, Jr. was formerly an executive vice president of Simply Interactive
and served as a director until May 1996. He is currently chief executive
officer, secretary and a director of Nettaxi. Dean Rositano was formerly an
executive vice president of Simply Interactive and served as a director until
May 1996. He is currently president, chief operating officer and a director of
Nettaxi. Mr. Goelz was the chief financial officer of Simply Interactive from
August 1996 to July 1997 and joined us as chief financial officer in April 1999.
All individual defendants held shares, or options to purchase shares, of Simply
Interactive.
Distinctions can be made between the claims that the Ventre group is
pursuing against us and the other defendants. As to us, the suit claims that we
owed, and either intentionally or negligently breached, fiduciary duties to the
Ventre group. The suit also claims that we either intentionally or negligently
interfered with the Ventre group's contract or prospective advantage. The Ventre
group is seeking the following relief against us:
- an unstated amount of compensatory and special damages in the sum of
their investments in Simply Interactive, plus prejudgment interest;
- an accounting of profits;
- punitive damages; and
- costs of suit, including attorney fees as permitted by law.
The Ventre group's claims against the other defendants, while not clear, include
all of the claims described above with respect to us as well as other claims of
ineffective management, waste of assets and similar claims. In addition to the
relief described above with respect to us, the Ventre group seeks the following
from the other defendants:
- declaratory relief concerning the validity of the election of the
board of directors of Simply Interactive; and
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- orders for the inspection of corporate records in, and the
holding of shareholder meetings for, Simply Interactive.
The factual basis for the proceedings as alleged by the Ventre group can be
summarized as follows. The Ventre group alleges that between February and April
1996, they made a series of investments in Simply Interactive and thereby became
minority shareholders. Thereafter, according to the complaint, the board of
directors of Simply Interactive, without due diligence and disclosure to the
minority shareholders, increased the debts and expenses of Simply Interactive.
The Ventre group then alleges that the defendants raised capital through the
sale of $5.5 million principal amount of convertible notes, secured by all the
assets and properties of Simply Interactive, to three of the defendants, that
the minority shareholders were not given notice of the proposed financing and an
opportunity to participate, and that the entire transaction is void or voidable
because the board of directors of Simply Interactive was improperly constituted
at the time. The Ventre group goes on to allege that SSN Properties, which
acquired the notes from the original purchaser, foreclosed on the assets of
Simply Interactive without reason in August 1997. Finally, the complaint
alleges that the assets formerly used by Simply Interactive were transferred to
us through a series of transactions in violation of fiduciary obligations owed
by the defendants to the minority shareholders of Simply Interactive.
Our officers and directors believe that the Ventre group's claims are without
merit and that significant issues of proof exist with regard to the relevant
facts as alleged in the complaint. For example, the individual defendants have
advised that the issuance of the notes followed numerous failed attempts to
raise additional funds from outside sources, and that foreclosure occurred only
after Simply Interactive's default in its obligations to make required interest
payments. Moreover, while the complaint does include us as defendants with
respect to the allegations arising out of the events described above, our
current operating company, Nettaxi Online Communities, was not launched until
September 1997.
In fact, Nettaxi Online Communities did purchase certain assets from SSN
Properties in October 1997, including the original Internet the City CD-ROM
product; a domain name; furniture, fixtures, and equipment; plus other assets
which have since been abandoned. However, the assets acquired by Nettaxi Online
Communities from SSN Properties at that time represented less than 50% of the
value of the foreclosed assets. As described in the notes to our financial
statements, the aggregate value of the assets acquired by Nettaxi Online
Communities from SSN Properties was $2,000,000, which amount was verified by an
independent appraiser.
In 1998, we experienced several significant functional problems with portions of
a purchased technology program, namely the web to database software application,
due to those components incompatability with subsequent releases of upgraded
versions of its operating system. Following attempts to make these components
of the acquired technology compatible, we decided, in December 1998, not to
spend additional monies on these components but to replace them. We wrote off
the unamortized portion of this impaired technology that reduced the value of
the assets by approximately $700,000. Currently, the unamortized cost of the
remaining assets purchased from SSN Properties as a percentage of our total
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assets is approximately 10%. Moreover, the role of these assets, which were
intended to be revenue-generating products in Simply Interactive's business
model, is substantially different for us in that we view them primarily as a
tool to drive traffic to our site and not necessarily as an independent revenue
source. It should also be noted that our business model for an online community
is substantially different than Simply Interactive's objective of licensing,
distribution, and sale of the CD-ROM product and marketing and sales of the
impaired software application described above.
Since the action was filed, discussions regarding a possible settlement
have taken place. However, Ventre's group has demanded that Robert A. Rositano,
Sr., Dean Rositano and Robert A. Rositano, Jr. give them shares of our common
stock having an approximate value of $2.08 million. Given that the Ventre
group's original investment in Simply Interactive was approximately $675,000,
and that the officers and directors of Nettaxi believe that the Ventre group's
claims are without merit, the demand was rejected and the defendants intend to
vigorously defend the litigation. In its agreement with us for the original
sale and purchase of the assets, SSN Properties agreed to indemnify us against
claims that might be brought by Simply Interactive with respect to rights that
Simply Interactive might have in the transferred assets. We are currently
seeking confirmation of the indemnity obligation from SSN Properties.
EMPLOYEES
As of December 31, 1999, we had 29 employees, including:
- - 3 in customer support;
- - 9 in product development;
- - 13 in sales, marketing and business development; and
- - 4 in administration.
We believe that our future success will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified technical
and managerial personnel, and upon the continued service of our senior
management and key technical personnel. The competition for qualified personnel
in our industry and geographical location is intense, and there can be no
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assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future. From time to time, we also engage independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
FACILITIES
Our headquarters are currently located in a leased facility in Campbell,
California, consisting of approximately 8,600 square feet of office space to
accommodate management, operations, and research and development functions,
which is under a lease that expires in April 2002. We also lease 580 square
feet of office space in Las Vegas, Nevada which we use for general
administrative purposes. This lease was entered into on May 27, 1999 and has a
one-year term and we have an option to renew it for an additional two years. We
believe that our current facilities are adequate for our present needs.
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MANAGEMENT
<TABLE>
<CAPTION>
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
Our directors, executive officers and other key employees, and their ages, as of
February 28, 2000 are as follows:
<S> <C> <C>
NAME AGE POSITION
- -------------------------- --- -----------------------------------------------------
Robert A. Rositano, Jr.(1) 30 Chief Executive Officer, Secretary and Director
- -------------------------- --- -----------------------------------------------------
Dean Rositano(1) 27 President and Director
- -------------------------- --- -----------------------------------------------------
Glenn Goelz 42 Vice President, Chief Financial Officer and Treasurer
- -------------------------- --- -----------------------------------------------------
Robert Speicher 44 Vice President of Sales and Marketing
- -------------------------- --- -----------------------------------------------------
Brian Stroh 29 Vice President of Information Services
- -------------------------- --- -----------------------------------------------------
Andrew Garroni (2) (3) 44 Director
- -------------------------- --- -----------------------------------------------------
Ron R. Goldie 48 Director
- -------------------------- --- -----------------------------------------------------
<FN>
(1) Robert A. Rositano, Jr. and Dean Rositano are brothers.
(2) Member of Compensation Committee
(3) Member of Audit Committee
</TABLE>
Each director holds his office until the next annual meeting on the
stockholders and until his successor is elected and qualified. Executive
officers are appointed by and serve at the pleasure of our board of directors.
Robert A. Rositano, Jr. Mr. Rositano Jr. co-founded Nettaxi Online
Communities, Inc., a Delaware corporation , in October, 1997. He has served as
Chief Executive Officer and Secretary of Nettaxi since the reorganization with
Swan Valley and prior to that served in the same capacities with Nettaxi Online
Communities from its inception. He has over seven years of experience in the
internet service provider and Internet industry. In February 1995, he
co-founded Simply Interactive, Inc. , an Internet/intranet software company,
and served as Executive Vice President in the areas of Inside Sales, Customer
Service and Product Development until he co-founded Nettaxi Online
Communities. In January 1994, he co-founded Digital Data Express, a company
focused on beginner level Internet users, and served as Chief Executive Officer
until February 1995 when Digital Data Express was acquired by Simply
Interactive. From 1992 to 1994, Mr. Rositano was hired on as the third employee
at Netcom On-line Communications in 1992 and served as a senior sales and
account manager until 1993.
Dean Rositano. Mr. Rositano co-founded Nettaxi Online Communities in
October, 1997. He has served as President of Nettaxi since the reorganization
with Swan Valley and prior to that served in the same capacities with Nettaxi
Online Communities. He has over seven years of experience in the ISP and
Internet industry. In February 1995, he co-founded Simply Interactive, Inc., an
Internet/intranet software company, and served as Vice President of Technology
until he co-founded Nettaxi Online Communities. While at Simply Interactive, he
assembled a digital production studio and produced the Internet the City CD-ROM
in a three month time frame on three platforms, Windows 3.1, Windows 95, and
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Macintosh. In January 1994, he co-founded Digital Data Express and served as
President and Chief Executive Officer until February 1995 when Digital Data
Express was acquired by Simply Interactive. At Digital Data Express, Mr.
Rositano co-produced and directed the world's first Internet training video
"Introduction to the Internet."
Glenn Goelz. Mr. Goelz was appointed Vice President, Chief Financial
Officer and Treasurer in April, 1999. He has 19 years of broad financial
experience across several high technology fields. Prior to joining Nettaxi, he
was a principal of his own consulting firm specializing in strategic business
and financial consulting to multinational firms and Internet start-up companies.
From August 1997 to January, 1999 Mr. Goelz served as the Vice President of
Finance and Operations for Pictra, Inc., a photo e-commerce start-up company.
From April 1996 to July 1997, he served in various capacities with Simply
Interactive, including Vice-President-Controller and Chief Financial Officer.
From April of 1995 to April 1996, Mr. Goelz served as the Worldwide Controller
at Logitech, Inc., a worldwide provider of computer mice and senseware. Prior to
this, Mr. Goelz served as the Corporate Controller at Auspex Systems, Inc. a
provider of high performance data servers from 1993 to 1995. Mr. Goelz earned
his Bachelor's degree in Business and Economics, with a concentration in
accounting, from Lehigh University.
Robert Speicher. Robert Speicher joined Nettaxi in October, 1999 to serve
as our Vice President of Sales and Marketing. From November, 1994 through
October, 1999; Speicher was Executive Vice President and General Manager at Wood
Associates, a marketing and promotions company. Prior to that, he served as
President of Plastech Marketing, Inc., a company that introduced biodegradable
polymer technologies to the promotional merchandise industry. He has also served
as Vice President of Sales at Multidate Corporation, a company dedicated to
providing automation solutions for the financial services industry. He earned
his Bachelor's degree from San Diego State University and his MBA from
Pepperdine University.
Brian Stroh. Mr. Stroh was appointed Vice President of Information
Services in October, 1997. He has close to four years of experience in the
Internet service provider and Internet industry. From December 1995 to June
1996 he was head of Customer Service of a customer service, inside sales
department which grew to eight employees. He assisted in the development of a
robust call center and customer database. He also served in a managerial role,
assisting in the development of the second edition to Ques Mega Web Directory.
Mr. Stroh earned his Bachelor's degree from the University of Colorado at
Boulder.
Andrew Garroni. Mr. Garroni has served as a director since completion of
our merger with Plus Net in May 1999. Under the terms of our merger agreement
with Plus Net, Mr. Garroni was appointed as a member of the board of directors.
Mr. Garroni has over 20 years experience in the development and management of
start-up entertainment companies. He currently serves as Executive Producer of
Showtime's movie series "Naked City," a position he has held since January,
1998. From 1990 to September, 1998 he served as President of Axis Films
International, Inc. supplying films to cable television networks such as Home
Box Office, Showtime Networks and DBS providers like Direct TV. He began his
career in New York as a principal partner in the motion picture Production
Company Cinerex Associates, Inc. whose clients included Twentieth Century Fox
and Orion Pictures. While in New York, he helped create Magnum Motion Pictures
and Magnum Entertainment. Mr. Garroni has a Bachelor's degree in Marketing from
Fairleigh Dickinson University.
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Ron R. Goldie. Mr. Goldie has served as a director since completion of
our merger with Plus Net in May 1999. Under the terms of our merger agreement
with Plus Net, Mr. Goldie was appointed as a member of the board of directors.
From March 1990 to December 1995 he was a senior partner at the law firm of
Jeffer, Mangels, Butler and Marmaro. From March 1996 to February 1997 he was a
senior partner at Coudert Brothers. From February 1997 to March 1998 he was a
senior partner at Stroock and Lavan. In March, 1999 he became a senior member
of the corporate department of Mitchell Silberberg and Knupp, a ninety year old
Los Angeles based law firm. Mr. Goldie specializes in business planning and
transactions ranging from local to international matters. The practice includes
a range from mergers and acquisitions, securities practice, secured and asset
based lending transactions, advising regarding structure and development and
general and corporate business matters. Mr. Goldie received his Bachelor's
degree and Law degree from the University of Southern California, and was
admitted to the California Bar in 1975.
EMPLOYMENT AGREEMENTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
EXECUTIVE EMPLOYMENT AGREEMENTS. On August 1, 1998 Nettaxi Online
Communities, Inc. entered into executive employment agreements with Robert A.
Rositano, Jr. and Dean Rositano, and these agreements continued in effect after
the reorganization with Swan Valley Snowmobiles, Inc. Pursuant to the terms of
their individual executive employment agreements, Robert A. Rositano, Jr. is to
perform the duties Chief Executive Officer and serve as a member of the board of
directors, and Dean Rositano is to perform the duties of President and serve as
a member of the board of directors. Each executive employment agreement provides
for an annual base salary of $125,000 which may be increased by the board of
directors, in its discretion. The base salary also is to increase by ten
percent per annum, which increase shall be cumulative for each year. Under the
executive employment agreements, each executive is also eligible for annual
bonus compensation in the minimum amount of $50,000 up to a maximum amount equal
to the base salary then payable. The board of directors is to determine the
amount of the annual bonus based upon performance targets established by the
board of directors. Under the executive employment agreements, Robert A.
Rositano, Jr. and Dean Rositano each received warrants to purchase up to 883,952
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shares of the common stock of Nettaxi Online Communities. The warrants were to
vest over three years and vesting was accelerated upon the reorganization with
Swan Valley. Robert A. Rositano, Jr. and Dean Rositano each exercised their
warrants in September, 1998. They have each been granted registration rights
with respect to shares of common stock issued upon exercise of the warrants and
they have each waived any such rights with respect to this registration
statement. Each executive is eligible to receive three weeks paid vacation for
the first year of employment and four weeks per year thereafter. They are also
eligible to participate in the health, life insurance, medical, retirement and
other benefit programs which we may offer from time to time. Each executive
receives a car allowance in an amount not to exceed $600 per month plus
insurance and costs of repair and may be reimbursed for other reasonable
expenses incurred during the course of performing their duties.
The term of the executive employment agreements is four years and they are
automatically renewed for successive periods of one year unless terminated prior
to such renewal. We may terminate either executive at any time with or without
cause. The term "cause" is defined in the executive employment agreements as:
- - conviction or plea of no contest to a felony;
- - willful gross misconduct materially injurious to Nettaxi;
- - willful and material failure to substantially perform duties other than a
failure resulting from disability;
- - violation of the agreement's covenant not to compete; or
- - disclosure of material confidential information without prior written
consent.
If any executive is terminated without cause, he is to receive severance pay
equal to:
- - the base salary for the remainder of the term;
- - minimum bonus plus any pro rata bonus in excess of the minimum bonus;
- - pre payment of all automobile allowance for the remaining period of the
term; and
- - continued coverage for life, health and disability insurance for the
remainder of the term.
The above amounts shall be due in one lump sum payment three days following the
termination of his employment without cause. If there is a "change in
control" with respect to Nettaxi, the executives may terminate their executive
employment agreements and be entitled to severance in the amount of three years
of annual benefits to be realized in accordance with the terms of the executive
employment agreements, payable in one lump sum. "Change in control" is defined
in the executive employment agreements as:
- - any change of equity such that more than 50% of the outstanding shares
of our outstanding shares are transferred to a third party;
- - debt ownership such that more than 50% of our outstanding shares are
transferred to a third party; or
- - a sale of 70% or more of our assets.
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The executive employment agreements also contain covenants restricting the
disclosure of our confidential information, the solicitation of our employees or
agents and the ability of the executives to engage in competing activities with
us.
In the course of the previous year, as a result of our limited human
resources both Robert A. Rositano and Dean Rositano have performed other
responsibilities not necessarily within the scope of the definition of their
positions under the executive employment agreements.
OTHER EXECUTIVE EMPLOYMENT AGREEMENTS. We have also entered into
employment agreements with each of Messrs. Glenn Goelz and Robert Speicher. Each
agreement has a term of three years and automatically renews for successive
periods of one year unless terminated prior to such renewal. We may terminate
him at any time with or without cause. The term "cause" is defined in the
executive employment agreements as:
- - conviction or plea of no contest to a felony;
- - willful gross misconduct materially injurious to Nettaxi;
- - willful and material failure to substantially perform duties other than a
failure resulting from disability; or
- - disclosure of material confidential information without prior written
consent.
Messrs. Goelz and Speicher are eligible to receive severance pay if he is
terminated without cause or if Nettaxi experiences a change in control and
either of them elects to terminate the agreement. The severance payment would
be:
- - the base salary for the remainder of the term;
- - minimum bonus plus any pro rata bonus in excess of the minimum bonus; and
- - continued coverage for health and other benefits for the remainder of the
term.
Additionally, the vesting of all options to purchase common stock of the Company
would be accelerated immediately. The severance payment would be due in one
lump sum three days following the termination of employment. "Change in control"
is defined in the employment agreements as:
- - any change of equity such that more than 50% of the outstanding shares
of our outstanding shares are transferred to a third party;
- - debt ownership such that more than 50% of our outstanding shares are
transferred to a third party; or
- - a sale of substantially all of our assets.
The employment agreements also contains covenants regarding the assignment of
inventions, restricting the disclosure of our confidential information, the
solicitation of our employees or agents and the ability of Mr. Goelz to engage
in competing activities.
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Our agreement with Mr. Goelz was entered into as of April 1, 1999. Under
the agreement, Mr. Goelz is employed as Chief Financial Officer of the Company
and is expected to perform the duties consistent with the position including the
management of the financial operations of the Company and the hiring of
personnel. Mr. Goelz receives a base salary of $125,000 until August 1, 1999 at
which time the base salary will increase to $150,000. He is also eligible for
annual bonus compensation in the minimum amount of $50,000 up to a maximum
amount equal to the base salary then payable. The board of directors is to
determine the amount of the annual bonus based upon performance targets
established by the board of directors. He also is to receive options to purchase
up to 250,000 shares of our common stock, which vest over three years, under our
1998 Stock Option Plan. He receives three weeks paid vacation for the first year
of employment and four weeks per year thereafter. He is also eligible to
participate in the health and other benefit programs which we may offer from
time to time.
Our agreement with Mr. Speicher was entered into as of September 1999. Under
the agreement, he is employed as Vice President of Sales and Marketing and is
expected to perform the duties consistent with the position including the
management and supervision of the sales and marketing operations and duties of
the Company and the hiring of personnel. Mr. Speicher receives an annual base
salary of $175,000. He is also eligible for annual bonus compensation in the
minimum amount of $50,000 up to a maximum amount equal to the base salary then
payable. The board of directors is to determine the amount of the annual bonus
based upon performance targets established by the board of directors. He also is
to receive options to purchase up to 250,000 shares of our common stock, which
vest over three years, under our 1998 Stock Option Plan. He receives three weeks
paid vacation for the first year of employment and four weeks per year
thereafter. He is also eligible to participate in the health and other benefit
program which we may offer from time to time.
BOARD COMMITTEES
The Compensation Committee of the board of directors determines the
salaries and incentive compensation of our officers and provides recommendations
for the salaries and incentive compensation of our other employees. The
compensation committee also administers our 1998 Stock Option Plan. There is
currently only one member of the Compensation Committee, Mr. Garroni. Prior to
May 3, 1999, we did not have a Compensation Committee or any other committee of
the board of directors that performed any similar functions.
The Audit Committee of the board of directors reviews, acts on and reports
to the board of directors with respect to various auditing and accounting
matters, including the selection of our independent auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices. Mr. Garroni is currently the
only member of the audit committee.
The board of directors does not have a nominating committee.
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DIRECTORS' COMPENSATION
Directors who are also employees of Nettaxi receive no compensation for
serving on the board of directors. With respect to directors who are not
employees, we intend to reimburse such directors for all travel and other
expenses incurred in connection with attending meetings of the board of
directors and any committees of the board of directors. Non-employee directors
are also eligible to receive grants of non-qualified stock options under our
1998 stock option plan and our 1999 stock option plan. We intend to grant our
non-employee directors, subject to shareholder ratification, options to purchase
common stock under our stock option plans to provide us with an effective way to
recruit and retain qualified individuals to serve as members of the board of
directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We did not have a Compensation Committee or other committee of the board of
directors performing similar functions during the fiscal years ending December
31, 1997 and 1998. Messrs. Robert A. and Dean Rositano are each officers of
Nettaxi and, as members of the board of directors, participated in deliberations
of the board of directors relating to the compensation of our executive
officers. As indicated above, the board of directors established a Compensation
Committee as of May 3, 1999.
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EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by or paid to our Chief Executive
Officer and President, collectively, the "named executives" during the years
ended December 31, 1998 and 1999:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE(1)
ANNUAL COMPENSATION LONG-TERM COMPENSATION
- --------------------------------------------------------------------------------------- -----------
NAME AND YEAR SALARY ($) BONUS ($) NUMBER OF SECURITIES
PRINCIPAL UNDERLYING WARRANTS/
POSITION OPTIONS (#)
- ---------------------------------------------- ------------------------ ------------- -----------
<S> <C> <C> <C> <C>
Robert A. Rositano, Jr. 1998(2) $ 95,917(3) - 1,012,347
Chief Executive Officer --------------------- ------------------------ ------------- -----------
1999 156,550 132,500 600,000
- ---------------------------------------------- ------------------------ ------------- -----------
Dean Rositano 1998(2) $ 95,917(3) - 1,012,347
President --------------------- ------------------------ ------------- -----------
1999 156,550 132,500 600,000
<FN>
(1) The columns for "Other Annual Compensation" "Restricted Stock Awards" "LTP Payouts" and
"All Other Compensation" have been omitted because there is no compensation required to be reported.
(2) Information set forth herein includes services rendered by the Named Executives while
employed by Nettaxi Online Communities, Inc. prior to the reorganization with Swan Valley
Snowmobiles, Inc. and by Nettaxi following the reorganization with Swan Valley. No other executive
officer or employee received compensation in excess of $100,000 during this period.
(3) For each Named Executive, includes $93,000 in cash compensation and 16,574 shares of
common stock issued to each of the Named Executives in February, 1998 in lieu of salary earned in
1998 having an ascribed value of $2,198 as determined by the board of directors.
</TABLE>
77
<PAGE>
WARRANT AND OPTION GRANTS IN LAST YEAR
The following table sets forth information concerning warrants and options
granted to the named executives during 1999.
<TABLE>
<CAPTION>
WARRANT AND OPTION GRANTS DURING YEAR ENDED DECEMBER 31, 1999
Number of % of Total
Securities Warrants/
Underlying Options Exercise
Warrants/ Granted to Price Per Potential Realizable Value at Assumed
Options Employees Share Expiration Annual Rates of Stock Price Appreciation
NAME Granted (#) in 1999 ($/Sh) Date for Option Term
- --------- ----------- ----------- ----------- ---------- -----------------------------------------
5% 10%
-----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- --------- ----------- ----------- ----------- ---------- -----------------------------------------
Robert A. 600,000 21.1% $ 8.125 8/07 $ 2,391,000 $ 5,937,000
Rositano,
Jr.
- --------- ----------- ----------- ----------- ---------- -----------------------------------------
Dean 600,000 21.1% $ 8.125 8/07 $ 2,391,000 $ 5,937,000
Rositano
</TABLE>
No SARs were granted to either of the Named Executives during 1999.
Each warrant and option represents the right to purchase one share of our common
stock. In 1999, we granted officers, employees and consultants warrants and
options to purchase an aggregate of 2,614,000 shares of our common stock.
The options shown may terminate before their expiration dates if the optionee's
status as an employee or consultant is terminated or upon the optionee's death
or disability
The options for each of the named executives were granted pursuant to our
1998 stock option plan and vest in the following manner:
- options to purchase 100,000 shares vest in 12 monthly installments;
and
- options to purchase 500,000 shares vest upon our achievement of
specific business objectives which have been established by the board of
directors.
The amounts indicated in the columns under the heading "Potential
Realizable Value at Assumed Annual Rates of Stock Price Appreciation for Option
Term" Amounts represent hypothetical gains that could be achieved for the
respective warrants and options if exercised at their end of their respective
terms. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission and
do not represent our estimate or projection of the future prices of the common
stock. Actual gains, if any, on any exercises of warrants and options are
dependent upon the future performance of our common stock and overall stock
market conditions. The amounts reflected in the table may not necessarily be
achieved.
78
<PAGE>
WARRANT AND OPTION EXERCISES AND YEAR-END OPTION VALUES
The following table sets forth information with respect to the named
executives concerning their exercise of warrants during 1999 and exercisable and
unexercisable stock options held by them as of December 31, 1999.
<TABLE>
<CAPTION>
AGGREGATE WARRANT AND OPTION EXERCISES IN 1999 AND YEAR END OPTION VALUES
Shares Value Value of Unexercised In-the-
Acquired On Realized Number of Unexercised Money Options at Year
NAME Exercise (#) ($) Options at Year End(#) End($)
- ------------- ------------ ---------- ----------------------------------------------------- ----------------------------
Exercisable Unexercisable Exercisable Unexercisable
- --------------------------------------- ---------------------- ----------------------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Robert A.
Rositano, Jr.
0 $ 0.00 43,333 596,667 $ 21,370 $ 64,110
- --------------------------------------- ---------------------- ----------------------------- ------------ --------------
Dean Rositano
0 $ 0.00 43,333 596,667 $ 21,370 $ 64,110
- --------------------------------------- ---------------------- ----------------------------- ------------ --------------
</TABLE>
No SARs were owned or exercised by any of the Named Executives
during 1999.
The amounts shown in the columns under the heading "Value of Unexercised
In-the-Money Options at Year End" are based on a per share fair market value of
our common stock equal to $2.937 at December 31, 1999, the closing price for our
common stock on that date as reported by various market makers for our common
stock on the Over-The-Counter Market Bulletin Board. Each of the named
executives has options to purchase 40,000 shares of common stock which were "in
the money" at year end. Options to purchase 10,000 of these shares were
exercisable and the remaining options to purchase 30,000 had yet to become
exercisable.
EMPLOYEE BENEFIT PLANS
1999 STOCK OPTION PLAN. Our 1999 Stock Option Plan was adopted by the
board of directors in January 2000. It will be presented to our stockholders
for ratification at our annual meeting of stockholders to be held in the summer
of 2000. The following description of our 1999 Stock Option Plan is a summary
and qualified in its entirety by the text of the plan, which is filed as an
exhibit to the registration statement of which this prospectus is a part.
The purpose of the 1999 Stock Option Plan is to enhance our profitability
and stockholder value by enabling us to offer stock based incentives to
employees, directors and consultants. The 1999 Stock Option Plan authorizes the
grant of options to purchase shares of common stock to employees, directors and
consultants of Nettaxi and its affiliates. Under the 1999 Stock Option Plan, we
may grant incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 and non-qualified stock options. Incentive stock
options may only be granted our employees.
79
<PAGE>
The number of shares available for options under the 1999 Stock Option Plan
is 3,300,000. The 1999 Stock Option Plan is administered by the Compensation
Committee of the board. Subject to the provisions of the 1999 Stock Option Plan,
the Compensation Committee has authority to determine the employees, directors
and consultants of Nettaxi who are to be awarded options and the terms of
such awards, including the number of shares subject to such option, the fair
market value of the common stock subject to options, the exercise price per
share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award and generally
cannot have a duration of more than 10 years. If the grant is to a stockholder
holding more than 10% of our voting stock, the exercise price must be at least
110% of the fair market value on the date of grant. Terms and conditions of
awards are set forth in written agreements between Nettaxi and the respective
option holders. Awards under the 1999 Stock Option Plan may not be made after
the tenth anniversary of the date of its adoption but awards granted before that
date may extend beyond that date.
If the employment with Nettaxi of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the 1999 Stock Option Plan, the holder
may exercise the option, to the extent exercisable on the date of termination of
employment, until the earlier of the option's specified expiration date and 90
days after the date of termination. If an option holder dies or becomes
disabled, both incentive and non-qualified stock options may generally be
exercised, to the extent exercisable on the date of death or disability, by the
option holder or the option holder's survivors until the earlier of the
option's specified termination date and one year after the date of death or
disability.
As of March 15, 2000, options to purchase up to 3,293,333 shares of
common stock had been granted under the 1999 Stock Option Plan, and options to
purchase 6,667 shares were available for future grants. We have registered
the shares subject to issuance under our 1999 Stock Option Plan, pursuant to
our registration statement on form S-8 (File No. 333-32678).
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. Options
issued to employees under the 1999 Stock Option Plan shall expire no later than
ten years after the date of grant. An option becomes exercisable at such time
and for such amounts as determined at the discretion of the board of directors
or the Compensation Committee at the time of the grant of the option. An
optionee may exercise a part of the option from the date that part first becomes
exercisable until the option expires. The purchase price for shares to be
issued to an employee upon his exercise of an option is determined by the board
of directors or the Compensation Committee on the date the option is granted.
The purchase price is payable in full in cash, by promissory note, by net
exercise or by delivery of shares of our common stock when the option is
exercised. The 1999 Stock Option Plan provides for adjustment as to the number
80
<PAGE>
and kinds of shares covered by the outstanding options and the option price
therefor to give effect to any stock dividend, stock split, stock combination or
other reorganization of or by Nettaxi.
1998 STOCK OPTION PLAN. Our 1998 Stock Option Plan was adopted by the
board of directors, and ratified and approved by our stockholders, as of
September 29, 1998. The following description of our 1998 Stock Option Plan is a
summary and qualified in its entirety by the text of the plan, which is filed as
an exhibit to the registration statement of which this prospectus is a part.
The purpose of the 1998 Stock Option Plan is to enhance our profitability
and stockholder value by enabling us to offer stock based incentives to
employees, directors and consultants. The 1998 Stock Option Plan authorizes the
grant of options to purchase shares of common stock to employees, directors and
consultants of Nettaxi and its affiliates. Under the 1998 Stock Option Plan, we
may grant incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986 and non-qualified stock options. Incentive stock
options may only be granted our employees.
The number of shares available for options under the 1998 Stock Option Plan
is 3,000,000. The 1998 Stock Option Plan is administered by the Compensation
Committee of the board. Subject to the provisions of the 1998 Stock Option
Plan, the Compensation Committee has authority to determine the employees,
directors and consultants of Nettaxi who are to be awarded options and the
terms of such awards, including the number of shares subject to such option,
the fair market value of the common stock subject to options, the exercise price
per share and other terms.
Incentive stock options must have an exercise price equal to at least 100%
of the fair market value of a share on the date of the award and generally
cannot have a duration of more than 10 years. If the grant is to a stockholder
holding more than 10% of our voting stock, the exercise price must be at least
110% of the fair market value on the date of grant. Terms and conditions of
awards are set forth in written agreements between Nettaxi and the respective
option holders. Awards under the 1998 Stock Option Plan may not be made after
the tenth anniversary of the date of its adoption but awards granted before that
date may extend beyond that date.
If the employment with Nettaxi of the holder of an incentive stock option
is terminated for any reason other than as a result of the holder's death or
disability or for "cause" as defined in the 1998 Stock Option Plan, the holder
may exercise the option, to the extent exercisable on the date of termination of
employment, until the earlier of the option's specified expiration date and 90
days after the date of termination. If an option holder dies or becomes
disabled, both incentive and non-qualified stock options may generally be
exercised, to the extent exercisable on the date of death or disability, by the
option holder or the option holder's survivors until the earlier of the option's
specified termination date and one year after the date of death or disability.
As of March 15, 2000, no shares had been issued as the result of the
exercise of options previously granted under the 1998 Stock Option Plan,
2,580,166 shares were subject to outstanding options and 419,834 shares were
81
<PAGE>
available for future grants. The exercise prices of the outstanding options
ranged from $0.80 to approximately $44.00. The options under the 1998 Stock
Option Plan vest over varying lengths of time pursuant to various option
agreements that we have entered into with the grantees of such options.
We have registered the 1998 shares subject to issuance under our 1998 Stock
Option Plan pursuant to the Securities Act of 1933 pusuant to our reistration
statement on Form S-8 (File No. 333-32678).
Optionees have no rights as stockholders with respect to shares subject to
option prior to the issuance of shares pursuant to the exercise thereof. Options
issued to employees under the 1998 Stock Option Plan shall expire no later than
ten years after the date of grant. An option becomes exercisable at such time
and for such amounts as determined at the discretion of the board of directors
or the Compensation Committee at the time of the grant of the option. An
optionee may exercise a part of the option from the date that part first becomes
exercisable until the option expires. The purchase price for shares to be
issued to an employee upon his exercise of an option is determined by the board
of directors or the Compensation Committee on the date the option is granted.
The purchase price is payable in full in cash, by promissory note, by net
exercise or by delivery of shares of our common stock when the option is
exercised. The 1998 Stock Option Plan provides for adjustment as to the number
and kinds of shares covered by the outstanding options and the option price
therefor to give effect to any stock dividend, stock split, stock combination or
other reorganization of or by Nettaxi.
401(K) SAVINGS PLAN. Effective June 1, 1999 we instituted the Nettaxi
401(k) Savings Plan . Eligible employees may begin making deferrals under the
401(k) Savings Plan. The 401(k) Savings Plan is intended to be a qualified plan
under Internal Revenue Code Section 401(a), with a cash or deferred option
governed by Section 401(k) Savings of the Internal Revenue Code. Employees may
elect to defer their eligible current compensation up to the statutorily and
401(k) Savings Plan prescribed limits and have the amount of such deferral
contributed to the 401(k) Savings Plan. Contributions to the 401(k) Savings Plan
are invested in the investment funds described in the 401(k) Savings Plan. The
401(k) Savings Plan is filed as an exhibit to the registration statement of
which this prospectus is a part.
82
<PAGE>
INDEMNIFICATION AGREEMENTS
We intend to enter into indemnification agreements with our directors and
officers. These agreements will provide, in general, that we shall indemnify and
hold harmless such directors and officers to the fullest extent permitted by law
against any judgments, fines, amounts paid in settlement, and expenses incurred
in connection with, or in any way arising out of, any claim, action or
proceeding against, or affecting, such directors and officers resulting from,
relating to or in any way arising out of, the service of such persons as our
directors and officers. Currently, directors and officers are entitled to the
benefits of the limitation of liability provided under our charter documents and
the laws of the State of Nevada.
83
<PAGE>
RELATED PARTY TRANSACTIONS
The following describes transactions to which we were or are a party and in
which any of our directors, officers, or significant stockholders, or members of
the immediate family of any of the foregoing persons, had or has a direct or
indirect material interest.
STOCK TRANSACTIONS BY NETTAXI ONLINE COMMUNITIES, INC.
ISSUANCES TO FOUNDERS. Nettaxi Online Communities, Inc. was formed in
October 1997 by Robert A. Rositano, Jr. and Dean Rositano. At the time of
formation, each of them was issued 1,288,044 shares of common stock of Nettaxi
Online Communities in consideration of their efforts in establishing that
company and developing its initial business strategy.
On February 12, 1998, Robert A. and Dean Rositano each were issued an
additional 66,297 shares of Nettaxi Online Communities common stock in lieu of
salary compensation earned by them between October 1997 and January 1998 in the
amount of $11,667.
In March 1998, Robert A. and Dean Rositano each were issued warrants to
purchase 88,395 shares of Nettaxi Online Communities common stock. On August 1,
1998, they were each issued warrants to purchase 883,952 shares of Nettaxi
Online Communities common stock pursuant to the executive employment agreements.
All the warrants issued to Robert A. and Dean Rositano each were exercised in
September 1998.
During 1998, Robert A. and Dean Rositano transferred 129,435 and 137,012
shares, respectively, of Nettaxi Online Communities common stock by gift to
individuals.
All the shares of Nettaxi Online Communities common stock held by Robert A.
and Dean Rositano and their donees were converted into shares of our common
stock in the reorganization with Swan Valley Snowmobiles, Inc. described below.
SSN PROPERTIES, LLC. In October 1997, Nettaxi Online Communities
purchased the assets of Simply Interactive, Inc. from SSN Properties LLC
pursuant to an asset purchase agreement. The purchase price for the assets was
$2,000,000. $1,020,000 was paid pursuant to a convertible interest bearing
promissory note and the remainder of the purchase price was paid by the issuance
of 2,475,066 shares of Nettaxi Online Communities common stock. In September
1998, SSN Properties converted its promissory note with accrued interest in
exchange for 2,792,763 shares of Nettaxi Online Communities common stock. In
September, 1998 Nettaxi Online Communities also issued 176,790 shares of its
Nettaxi Online Communities common stock to SSN Properties in exchange for the
cancellation of a $70,000 accounts payable to SSN Properties. All the shares
of Nettaxi Online Communities common stock held by SSN Properties were converted
84
<PAGE>
into shares of our common stock in the reorganization with Swan Valley
Snowmobiles, Inc. described below. In April, 1999 a pro rata distribution of
the shares of common stock held by SSN Properties was made to all of its
members.
Robert Rositano, Sr., father of Robert A, and Dean Rositano, is a managing
member of SSN Properties.
REORGANIZATION WITH SWAN VALLEY SNOWMOBILES, INC.
In September 1998, Nettaxi Online Communities entered into the
reorganization with Swan Valley with a non-operating public company, Swan Valley
Snowmobiles, Inc., a Nevada corporation incorporated in October 1995. From its
incorporation, Swan Valley engaged in the business of snowmobile repair. During
the first half of 1997, Swan Valley determined that this line of business was no
longer feasible and discontinued its operations. Under the terms of the
reorganization, the Nettaxi Online Communities stockholders received
approximately 2.53 shares of common stock of Swan Valley in exchange for each of
their shares of Nettaxi Online Communities common stock, and Nettaxi Online
Communities became a wholly-owned subsidiary of Swan Valley. An aggregate of
12,000,000 shares were issued to the former Nettaxi Online Communities
stockholders in the reorganization with Swan Valley and the Nettaxi Online
Communities stockholders owned approximately 85% of Swan Valley immediately
after the reorganization. As part of the reorganization, all of the executive
officers and directors of Swan Valley resigned and the executive officers and
directors of Nettaxi Online Communities became the executive officers and
directors of Swan Valley which changed its name to Nettaxi, Inc. (and later
changed its name to Nettaxi.com) Immediately prior to the reorganization, Swan
Valley completed a limited public offering of its common stock which yielded
gross proceeds of $1,000,000 that was available to Nettaxi once the
reorganization was completed.
85
<PAGE>
OTHER AGREEMENTS
In October 1998, each of Robert A. Rositano and Dean Rositano were granted
options to purchase up to 40,000 shares of our common stock under the 1998 Stock
Option Plan and Glenn Goelz was granted options to purchase up to 250,000 shares
of common stock under the 1998 Stock Option Plan. As described above, we have
entered into employment agreements and other compensation arrangements with our
officers.
As described above, in September 1999, we granted Mr. Robert Speicher, our
Vice President of Sales and Marketing options to purchase up to 250,000 shares
of common stock in accordance with our 1998 stock option plan. The exercise
price for the options is equal to their fair market value on the date of grant.
Options to purchase up to 6,944 shares were immediately vested on the date of
grant and the remaining options vest in 12 equal quarterly installments.
As described above, in August 1999 each of Robert A. Rositano, Jr. and Dean
Rositano were granted options to purchase up to 600,000 shares of our common
stock under the 1998 stock option plan. The exercise price for the options is
equal to 110% of their fair market value on the date of grant. The options vest
in the following manner:
86
<PAGE>
- options to purchase 100,000 shares vest in 12 monthly installments;
and
- options to purchase 500,000 shares vest upon our achievement of
specific business objectives which have been established by the board of
directors.
In January 2000, each of Robert A. Rositano and Dean Rositano were granted
options to purchase up to 256,000 shares of our common stock under our 1999
stock option plan. The exercise price for these options was not less than 100%
of the fair market value on the date of grant. The right to purchase 40,000 of
these shares vests in 12 equal quarterly installments. The right to exercise
16,000 of the shares vests in 12 equal monthly installments. The right to
purchase the remaining shares vests upon our achievement of certain business
objectives.
In January 2000, we granted Glenn Goelz and Robert Speicher options
to purchase up to 112,000 and 100,000 shares of common stock, respectively
under our 1999 stock option plan. The exercise price for these options was not
less than the fair market value on the date of grant. The right to purchase
12,000 of the options issued to Mr. Goelz were vested on the date of grant. The
right to purchase the remaining shares vests in 12 equal quarterly installments.
In January 2000, we granted each of our non employee directors at that
time, Andy Garonni, Ron R. Goldie and Steven Antebi, options to purchase up to
150,000 shares of common stock under our 1999 stock option plan. We also granted
options to purchase 150,000 shares of our common stock to Roger Thorton, a
former director. The exercise price for these options was not less than the fair
market value on the date of grant. The right to purchase these shares was
immediately vested.
In February 2000, each of Robert A. Rositano, Jr. and Dean Rositano were
Granted options to purchase up to 384,000 shares of our common stock under our
1999 stock option plan. The exercise price for these options was not less than
100% of the fair market value on the date of grant. The right to puchase 24,000
of these shares vests in 12 equal quarterly installments. The right to purchase
60,000 of these shares vests in 12 equal monthly installments. The right to
purchase the remaining shares vests upon our achievement of certain business
objectives.
In February 2000, we granted Glenn Goetz and Robert Speicher options to
purchase up to 168,000 and 150,000 shares of common stock, respectively, under
our 1999 stock option plan. The exercise price for these options was not less
than the fair market value on the date of grant. The right to purchase 18,000
of the options granted to Mr. Goelz accrued on the date of grant and the
remainder accrued in 12 quarterly installments. The right to puchase the
options granted to Mr. Speicher vests in 12 equal quarterly installments.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
be on terms no less favorable to us than could be obtained from unaffiliated
third parties.
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<PAGE>
SELLING STOCKHOLDERS
This prospectus relates to the offering by the selling stockholders for
resale of shares of our common stock acquired by them upon conversion of
convertible debentures and exercise of warrants which the selling stockholders
received in private placement and other transactions. All of the shares of
common stock offered by this prospectus are being offered by the selling
stockholders for their own accounts.
The following table sets forth information with respect to the common stock
beneficially owned by the selling stockholders as of the date of this
prospectus, including shares obtainable under convertible debentures, and/or
warrants convertible or exercisable within 60 days of such date. The selling
stockholders provided us the information included in the table below. To our
knowledge, each of the selling stockholders has sole voting and investment
power over the shares of common stock listed in the table below. No
selling stockholder, to our knowledge, has had a material relationship with us
during the last three years, other than as an owner of our common stock or
other securities.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF COMMON BENEFICIAL OWNERSHIP OF COMMON
STOCK PRIOR TO THE OFFERING STOCK AFTER THE OFFERING
--------------------------------------------- ---------------------
NUMBER OF
SHARES TO BE
SELLING NUMBER OF SOLD UNDER NUMBER OF PERCENT OF
STOCKHOLDER SHARES THIS PROSPECTUS SHARES CLASS
---------------------- --------------------- --------- ----------
<S> <C> <C> <C> <C>
RGC International
Investors 9,836,387 9,836,387 -- --
- ------------------- ---------------------- --------------------- --------- ----------
Wall Street Trading
Group 125,000 125,000 -- --
- ------------------- ---------------------- --------------------- --------- ---------
</TABLE>
The number of shares set forth in the table represents an estimate of
the number of shares of common stock to be offered by the selling stockholders.
We have assumed the sale of all of the common stock offered under this
prospectus will be sold. However, As the selling stockholders can offer all,
some or none of their shares of common stock, no definitive estimate can be
given as to the number of shares that the selling stockholders will hold after
this offering.
The number of shares of common stock beneficially owned by RGC
International Investors consists of an estimated 9,836,387 shares issuable
upon conversion of debentures and exercise of investment options and an
estimated 150,000 shares issuable upon exercise of warrants. This estimate is
based on the conversion rate of the convertible debentures and the exercise
price of the warrants in effect on March 15, 2000, as described below. The
registration statement that includes this prospectus covers twice the
number of shares issuable as of March 15, 2000, and that number is included
in the table above. This number is our good faith estimate of the maximum number
of shares we may issue upon conversion of debentures and exercise of investment
options and warrants. However, the actual number of shares of common stock
issuable upon conversion of the debentures and exercise of the warrants is
88
<PAGE>
indeterminate, is subject to adjustment as described below, and could be
materially more than such estimated number depending on factors which cannot be
predicted by us at this time, including, among other factors, the future market
price of our common stock and the issuance of our securities at prices below
the then-market price of our common stock. The actual number of shares of common
stock offered hereby, and included in the registration statement of which this
prospectus is a part, includes such additional number of shares of common stock
as may be issued or issuable upon conversion of the debentures or exercise of
the warrants by reason of any stock split, stock dividend or similar
transaction involving Rule 416 under the Securities Act of 1933.
The conversion price for the debentures is equal to the "applicable
percentage" multiplied by the lesser of (i) the average of the lowest closing
bid prices for our common stock on any three trading days, which need not be
consecutive, during the 22 consecutive trading date period ending one trading
day prior to the conversion of the debentures or (ii) $11.88, subject to
adjustment for stock splits, stock dividends, and similar events. Initially,
the applicable percentage was 100%; however, it has been reduced to 80% after
we did not secure the listing or quotation of our common stock on the Nasdaq
National Market by September 27, 1999. As of March 15, 2000, the
conversion price determined under the above-described formula was $1.1416. So,
as of that date, the $2,400,000 principal amount of the debentures, plus accrued
interest thereon, could be converted into approximately 2,207,428 shares, and a
like number of shares could be purchased by exercise of the purchase option at a
price per share equal to the conversion price then in effect. The number of
shares to be issued upon exercise of the warrants is based upon an exercise
price of $7.857, which exercise price is subject to adjustment for stock
dividends, stock splits, reorganizations, reclassifications, combinations, and
dilutive issuances of securities.
RGC International Investors is a party to an investment management
agreement with Rose Glen Capital Management, L.P., a limited partnership of
which the general partner is RGC General Partner Corp. Messrs. Wayne Bloch,
Gary Kaminsky and Steven Katznelson own all of the outstanding capital stock of
RGC General Partner Corp. and are parties to a shareholders agreement pursuant
to which they collectively control RGC General Partner Corp. Through RGC
General Partner Corp., these individuals control Rose Glen Capital Management,
L.P. These individuals disclaim beneficial ownership of our common stock owned
by RGC International Investors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of March 31, 2000 and as adjusted to
reflect the sale of the shares of common stock offered by this prospectus, by:
- each person, or group of affiliated persons, who we know beneficially
owns 5% or more of our common stock;
- each of our directors and executive officers; and
- all of our directors and executive officers as a group.
The percentages of total shares of common stock set forth below assume that
only the indicated person or group has exercised options and warrants which are
exercisable within 60 days of March 31, 2000 and do not reflect the
percentage of common stock which would be calculated if all other holders of
currently exercisable options or warrants had exercised their securities.
Unless otherwise indicated in the footnotes to the table, (1) the following
individuals have sole vesting and sole investment control with respect to the
shares they beneficially own and (2) unless otherwise indicated, the address of
each beneficial owner listed below is c/o Nettaxi.com, 1696 Dell Avenue,
Campbell, California.
<TABLE>
<CAPTION> NUMBER OF SHARES PERCENT OF CLASS
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF BENEFICIALLY OWNED AFTER OFFERING
EXECUTIVE OFFICERS AND DIRECTORS: BENEFICIALLY OWNED (1) CLASS AFTER OFFERING
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
<S> <C> <C> <C> <C>
Robert A. Rositano, Jr. 1,988,577 5.0% 1,988,577 4.4%
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Dean Rositano 2,070,577 5.1% 2,070,577 4.6%
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Glenn Goelz 143,333 * 143,333 *
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Robert Speicher 62,600 * 62,600 *
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Brian Stroh 122,284 * 122,284 *
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Andrew Garroni 225,000 * 225,000 *
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Ron R. Goldie 200,000 * 200,000 *
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
All directors and executive officers as a
group (7 Persons) 4,812,371 12.1% 4,812,371 10.1%
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
OTHER 5% STOCKHOLDERS:
Robert A. Rositano, Sr. 2,705,830 6.8% 2,705,830 6.1%
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
Janice Rose Rositano-Battistella,
Trustee of the Janice Rose Rositano-
Battistella Trust 1,738,018 4.3% 1,738,018 3.9%
- ------------------------------------------ ---------------------- ---------- ---------------------- --------------
<FN>
* Less than one percent.
</TABLE>
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The percentage of class owned after the offering has been calculated by
assuming the conversion of debentures and investment options as of March 15,
2000 and also includes the number of shares issueable upon exercise of warrants
offered by the selling stockholders.
Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock options or warrants held by that person that are
currently exercisable or exercisable within 60 days of March 31, 2000 are
deemed outstanding. Such shares, however, are not deemed outstanding for the
purposes of computing the percentage ownership of each other person.
Robert A. and Dean Rositano are brothers.
The number of shares shown for Robert A. Rositano, Jr. includes 126,666
shares of common stock subject to options that are exercisable within 60
days of March 31, 2000. Excludes 1,153,334 shares of common stock subject
to options that will not be exercisable within 60 days of March 31, 2000.
The number of shares shown for Dean Rositano includes 126,666 shares of
common stock subject to options that are exercisable within 60 days of
March 31, 2000. Excludes 1,153,334 shares of common stock subject to options
that will not be exercisable within 60 days of March 31, 2000.
The number of shares shown for Glen Goelz includes 143,333 shares
of common stock subject to options that will be exercisable within 60 days
of March 31, 2000. Excludes 416,667 shares of common stock subject to
options that will not be exercisable within 60 days of March 31, 2000.
The number of shares shown for Robert Speicher 62,500 includes shares of
common stock subject to options that are exercisable. Excludes
437,500 shares of common stock subject to options that will not be exercisable
within 60 days of March 31, 2000.
The number of shares shown for Brian Stroh includes 16,000 shares of
common stock subject to options that are currently exercisable. Excludes
166,000 shares of common stock subject to options that will not be exercisable
within 60 days of March 31, 2000.
The number of shares shown for Andrew Garroni includes 150,000 shares of
common stock subject to options that are currently exercisable.
The number of shares shown for Ron Goldie includes 150,000 shares of common
stock subject to options that are currently exercisable.
The shares shown for Robert Rositano, Sr. were received as part of a
pro-rata distribution to the members of SSN Properties, LLC in April 1999. Mr.
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Rositano is a managing member of SSN Properties and the father of Robert A.
Rositano, Jr. and Dean Rositano. Mr. Rositano's address is 14836 Three Oaks
Court, Saratoga, California 95070.
The shares shown for Janice Rose Rositano-Battistella, Trustee of the
Janice Rose Rositano-Battistella Trust were received as part of a pro rata
distribution to the members of SSN Properties, LLC in April 1999. Ms.
Rositano-Battistella is the mother of Robert A. Rositano, Jr. and Dean
Rositano. Ms. Rositano-Battistella's address is 143 El Altillo Court, Los Gatos,
California 95030.
DESCRIPTION OF CAPITAL STOCK
The following description of our securities and various provisions of our
articles of incorporation and our bylaws are summaries. Statements contained in
this prospectus relating to such provisions are not necessarily complete, and
reference is made to the articles of incorporation and bylaws, copies of which
have been filed with the Securities and Exchange Commission as exhibits to our
registration statement of which this prospectus constitutes a part, and
provisions of applicable law. Our authorized capital stock consists of
50,000,000 shares of common stock, par value $.001 per share, of which
39,896,057 shares were issued and outstanding as March 31, 2000, and
1,000,000 shares of preferred stock, par value $.001, of which no shares were
issued and outstanding as of March 31, 2000. As of March 31, 2000, we
estimated that there were approximately 383 holders of record of our common
stock.
COMMON STOCK
The holders of outstanding shares of common stock are entitled to share
ratably in dividends declared out of assets legally available therefor at such
time and in such amounts as the board of directors may from time to time
lawfully determine. Each holder of common stock is entitled to one vote for each
share held. Cumulative voting in elections of directors and all other matters
brought before stockholders meetings, whether they be annual or special, is not
provided for under our articles of incorporation or bylaws. However, cumulative
voting rights in the election of our directors currently applies under
California law. California Corporations Code Section 2115 requires us to provide
our stockholders cumulative voting rights in the election of directors because
the average of our property factor, payroll factor and sales factor deemed to be
in California during our latest fiscal year was almost 100%, and over 60% of our
outstanding voting securities are held of record by persons having addresses in
California, and our securities do not currently qualify as a national market
security on NASDAQ. California Corporations Code Section 2115 is discussed in
greater detail below. The common stock is not entitled to conversion or
preemptive rights and is not subject to redemption or assessment. Upon
liquidation, dissolution or winding up of Nettaxi, any assets legally available
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for distribution to stockholders as such are to be distributed ratably among the
holders of the common stock at that time outstanding. The common stock
presently outstanding is fully paid and nonassessable. As described below, the
board of directors is authorized, without further stockholder approval, to issue
preferred stock. Such an issuance could potentially effect the rights and
preferences of holders of common stock. Other than by the issuance of preferred
stock by the board of directors, the rights of security holders may not be
modified otherwise than by a vote of a majority or more of the shares
outstanding.
Currently, our bylaws provide that stockholder action may be taken at a
meeting of stockholders and may be effected by a consent in writing if such
consent is signed by the holders of the majority of outstanding shares, unless
Nevada law requires a greater percentage. Our articles of incorporation provide
that they may be amended by the affirmative vote of a majority of the shares
entitled to vote on such an amendment. These are the only provisions of our
bylaws or articles of incorporation that specify the vote required by security
holders to take action.
PREFERRED STOCK
The board of directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 1,000,000 shares of preferred
stock. The preferred stock may be issued in one or more series and the board of
directors may fix the rights, preferences and designations thereof. No shares
of preferred stock are currently outstanding and we have no present plans to
issue any shares of preferred stock. The issuance of preferred stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
WARRANTS AND DEBENTURES
RGC INTERNATIONAL INVESTORS DEBENTURES AND WARRANTS. On March 31, 1999,
we entered into a securities purchase agreement with RGC International Investors
under which we agreed to issue convertible debentures in the amount of
$5,000,000 and warrants to purchase 150,000 shares of our common stock. As
of March 15, 2000, $2,400,000 principal amount of the debentures, plus
accrued interest thereon, was outstanding. The debentures bear interest at
a rate of 5% per annum commencing on the date of issuance and mature on March
1, 2004. The debentures are convertible at the option of the holder into that
number of shares of our common stock equal to the principal amount of the
debentures to be converted including all accrued interested, divided by the
conversion price, which is equal to the "applicable percentage" multiplied by
the lesser of (i) the average of the lowest closing bid prices for our common
stock on any three trading days, which need not be consecutive, during the 22
consecutive trading date period ending one trading day prior to the conversion
of the debentures or (ii) $11.88, subject to adjustment for stock splits,
stock dividends, and similar events. Initially, the applicable percentage was
100%; however, it was reduced to 80% when we did not secure the listing or
quotation of our common stock on the Nasdaq National Market by September 27,
1999. In addition, at the time that a holder converts all or any portion of
the debentures, such holder has an "investment option"
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which gives the holder a right to purchase one additional share of common stock
for every share of common stock issuable as a result of such conversion at an
exercise price equal to the applicable conversion price.
In August 1999, we entered into an agreement with RGC International
Investors, LDC pursuant to which it exercised 150,000 warrants that were issued
to it on March 31, 1999 in connection with the issuance of convertible
debentures. In consideration for the early exercise of its warrants, the
exercise price for the warrants was decreased from $12.375 to $7.857 and we
issued RGC warrants to purchase an additional 150,000 shares of common stock
with an exercise price of $7.857. We are registering the shares underlying
these warrants pursuant to this registration statement.
As of March 15, 2000 the $2,400,000 principal amount of the convertible
debentures, plus an amount equal to 5% of such principal amount accrued since
March 31, 1999, could be converted into common stock at a conversion price of
$1.1416 per share. Accordingly, as of March 15, 2000, conversion of the
entire principal amount of the convertible debentures and accrued interest
thereon, would yield 2,207,428 shares of common stock. In addition, as of
March 15, 2000, RGC International Investors' election to fully exercise its
option to purchase additional shares of common stock would yield an additional
2,207,428 shares of common stock, resulting in the issuance of an aggregate of
4,414,856 shares to RGC International Investors as of that date. Based upon the
interest rate and the conversion price of $1.1416, which is subject to
adjustment as described above, the number of shares of common stock issuable
upon conversion of the debentures will increase by approximately 292 shares
daily until conversion, as will the number of shares subject to the purchase
option.
If the debentures have not been converted or redeemed on March 31, 2004,
they will automatically convert into shares of common stock as of that date.
Upon the occurrence of events specified in the securities purchase agreement,
the holders of 50% of the debentures may elect to have us redeem the debentures
at a premium to their purchase price. These events include, but are not limited
to:
- Failure by us to issue shares of our common stock upon conversion of
the debentures;
- Failure by us to transfer to the converting debenture holders
stock certificates for shares of our common stock upon conversion of
the debentures; and
- Failure by us to keep the specified number of shares of our common
stock reserved for issuance upon conversion of the debentures.
The occurrence of other specified events results in a mandatory redemption
by us of the debentures at a premium even without the election of the holders of
the debentures. These mandatory redemption events include, but are not limited
to, our making an assignment for the benefit of our creditors or our bankruptcy,
insolvency, reorganization or liquidation.
The premium amount payable by us upon any required redemption of the
debentures is the "parity value" of the debentures to be redeemed, where the
parity value means the product of (i) the highest number of shares of our common
stock issuable upon conversion of or otherwise with respect to the debentures,
including shares issuable upon exercise of the purchase option, immediately
preceding the redemption date, multiplied by (ii) the highest closing bid price
of our common stock during the period beginning on the date of the event
triggering mandatory redemption and ending one day prior to the redemption date;
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provided, however, that in no event would the redemption price be less than 120%
of the sum of the then-outstanding principal amount of the debentures and all
accrued and unpaid interest thereon at the time of the redemption.
On March 31, 2000 we tendered payment of the outstanding principal and
interest owing under our debentures in full satisfaction of our obligations
under the debentures. We believe that we have the right to prepay the
outstanding balance of the debentures and have filed a Complaint in the
Superior Court of the State of California for the Count of Santa Clara (Case No.
CV788836) against RGC International Investors LDC and certain RGC affiliates
seeking, among other thins, declaratory relief in this regard. Shortly after
filing the Complaint, we received from RGC a mandatory redemption notice
demanding immediate redemption by us of RGC's outstanding convertible
debentures. For a more detailed description of this matter, please see the
section of thisn prospectus entitled "Legal Proceedings".
The warrants issued to RGC International Investors may be exercised at
any time during the five-year period following their issuance. The exercise
price for the warrants is subject to adjustment for stock dividends, stock
splits, recapitalizations, reclassifications, combinations, and dilutive
issuances of securities. The debentures and warrants contain provisions
which limit the number of shares of common stock into which the debentures
are convertible and the warrants are exercisable. Under these provisions, the
number of shares of common stock into which the debentures are convertible
and the warrants are exercisable on any given date, together with any
additional shares of common stock held by RGC International Investors, will
not exceed 4.99% of our then outstanding common stock.
The foregoing has been a brief description of some of the terms of the
debentures and warrants. For a more detailed description of the rights of the
holders of the debentures and warrants, prospective investors are directed to
the actual form of debenture that has been filed as an exhibit to the
registration statement of which this prospectus is a part.
As described below, we have agreed to register under the Securities Act of
1933, the resale of the common stock to be issued upon conversion of the
debentures or exercise of the warrants held by RGC International Investors.
REGISTRATION RIGHTS
RGC INTERNATIONAL INVESTORS. Under a registration rights agreement with
RGC International Investors entered into on March 31, 1999, we agreed to
register the shares of common stock issuable to RGC International Investors
upon conversion of their debentures and exercise of their warrants. This
prospectus is part of the registration statement intended to satisfy this
obligation. The registration rights agreement requires us to file a
registration statement with respect to the shares within a specified period of
time and to have the registration statement be declared effective within a
specific period of time. We must also keep the registration statement effective
until all of the securities offered have been sold. We are responsible for the
payment of all fees and costs associated with the registration of the
securities, except that we are not responsible for fees generated by RGC
International's counsel in excess of $30,000. We are required to indemnify and
hold harmless each investor and its representatives and RGC International
Investors and its agents or representatives against:
- - any untrue statement of a material fact in a registration statement;
- - any untrue statement or alleged untrue statement contained in any
preliminary prospectus if used prior to the effective date of the
registration statement; or
- - any violation or alleged violation of the Securities Act of 1933 or the
Securities Exchange Act of 1934. Specific procedures for carrying out
such indemnification are set forth in the Agreement.
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Under the registration rights agreement, RGC International Investors also has
the right to include all or a part of its common stock in a registration filed
by us for purposes of a public offering in the event that we fail to satisfy
our other obligations as to the registration of the common stock acquired by RGC
International Investors.
2000 PRIVATE PLACEMENT. As previously described, we issued 15,766,667
shares of our common stock and warrants to purchase an equal number of shares of
our common stock to investors in connection with a private placement in which we
raised approximately $23.6 million. The investors received registration rights
in connection with this private placement. Accordingly, we intend to shortly
file a registration statement on form S-1 covering the shares issued, and the
shares underlying warrants issued, in connection with the private placement.
SINCLAIR DAVIS TRADING CORP. We have previously issued 525,000 shares of
common stock to Sinclair Davis Trading Corp. in exchange for financial
consulting services to be provided by Sinclair Davis pursuant to our agreement
with Sinclair Davis. Sinclair Davis was granted registration rights in
connection with these shares. Accordingly, we intend to shortly file a
registration statement on form S-1 covering these shares.
BAYTREE CAPITAL. On September 3, 1998, Nettaxi Online Communities, Inc.
engaged Baytree Capital Associates to provide financial and business consulting
in connection with the reorganization with Swan Valley Snowmobiles, Inc. In
consideration of such services, Baytree was issued 200,000 shares of our common
stock in October 1998 and granted registration rights with respect to such
shares. Specifically, we must register the shares held by Baytree upon
receipt of a registration request after April 1, 1999. Baytree also has
piggyback registration rights for their shares, but has waived the right to
have such shares included in this prospectus.
WALL STREET TRADING GROUP. Wall Street Trading Group is entitled to
registration rights with respect to the 125,000 shares of our common stock that
Wall Street Trading Group may receive upon exercise of warrants previously
issued to Wall Street Trading Group. Subject to various and customary
exceptions, if we propose to register shares of our common stock, Wall Street
Trading Group is entitled to notice of the registration and are entitled to
include their shares of common stock in the registration at our expense. This
prospectus is part of the registration statement intended to satisfy our
obligations to Wall Street Trading Group with respect to the registration.
PLUS NET. Under the terms of the merger between us and Plus Net,
shareholders of Plus Net were granted piggyback registration rights with respect
to the shares of our common stock which they received in the merger. Generally,
they receive registration rights on a pro rata basis with our other
shareholders. The registration rights do not have any impact or effect with
respect to the registration statement of which this prospectus is a part.
EXECUTIVE OFFICERS. Pursuant to their executive employment agreements,
Robert A. Rositano, Jr. and Dean Rositano were granted registration rights
with respect to the registration of their shares of common stock. Each of them
have waived any registration rights they may have with respect to the
registration statement of which this prospectus is a part.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF NEVADA LAW AND NETTAXI'S
ARTICLES OF INCORPORATION AND BYLAWS
We are incorporated under the laws of the State of Nevada and are therefore
subject to various provisions of the Nevada corporation laws which may have the
effect of delaying or deterring a change in the control or management of
Nettaxi.
Nevada's "Combination with Interested Stockholders Statute," Nevada
Revised Statutes 78.411-78.444, which applies to Nevada corporations like us
having at least 200 stockholders, prohibits an "interested stockholder" from
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entering into a "combination" with the corporation, unless specific
conditions are met. A "combination" includes:
- - any merger with an "interested stockholder," or any other corporation
which is or after the merger would be, an affiliate or associate of
the interested stockholder;
- - any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of transactions,
to an "interested stockholder," having:
- an aggregate market value equal to 5% or more of the aggregate
market value of the corporation's assets,
- an aggregate market value equal to 5% or more of the aggregate
market value of all outstanding shares of the corporation, or
- representing 10% or more of the earning power or net income
of the corporation;
- - any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate market
value equal to 5% or more of the aggregate market value of all the
outstanding shares of the corporation,
- - the adoption of any plan or proposal for the liquidation or dissolution
of the corporation proposed by the "interested stockholder,"
- - transactions which would have the effect of increasing the proportionate
share of outstanding shares of the corporation owned by the
"interested stockholder," or
- - the receipt of benefits, except proportionately as a stockholder, of
any loans, advances or other financial benefits by an " interested
stockholder."
An "interested stockholder" is a person who
- - directly or indirectly owns 10% or more of the voting power of the
outstanding voting shares of the corporation;
- - an affiliate or associate of the corporation which at any time within
three years before the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the board of directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the articles of incorporation are met and either:
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- - the board of directors of the corporation approves, prior to such person
becoming an "interested stockholder," the combination or the
purchase of shares by the "interested stockholder" or the combination
is approved by the affirmative vote of holders of a majority of voting
power not beneficially owned by the "interested stockholder" at a meeting
called no earlier than three years after the date the "interested
stockholder" became such; or
- - the aggregate amount of cash and the market value of consideration other
than cash to be received by holders of common shares and holders of any
other class or series of shares meets the minimum requirements set forth
in Sections 78.411 through 78.443, inclusive, and prior to the
consummation of the combination, except in limited circumstances, the
"interested stockholder" will not have become the beneficial owner of
additional voting shares of the corporation.
Nevada's "Control Share Acquisition Statute," Nevada Revised Statute
Sections 78.378-78.379, prohibits an acquiror, under some circumstances,
from voting shares of a target corporation's stock after crossing threshold
ownership percentages, unless the acquiror obtains the approval of the target
corporation's stockholders. The Control Share Acquisition Statute only applies
to Nevada corporations with at least 200 stockholders, including at least 100
record stockholders who are Nevada residents, and which do business directly or
indirectly in Nevada. While we do not currently exceed these thresholds, we may
well do so in the near future. In addition, although we do not presently "do
business" in Nevada within the meaning of the Control Share Acquisition Statute,
we may do so in the future. Therefore, it is likely that the Control Share
Acquisition Statute will apply to us in the future. The statute specifies three
thresholds: at least one-fifth but less than one-third, at least one-third but
less than a majority, and a majority or more, of all the outstanding voting
power. Once an acquiror crosses one of the above thresholds, shares which it
acquired in the transaction taking it over the threshold or within ninety days
become "Control Shares" which are deprived of the right to vote until a majority
of the disinterested stockholders restore that right. A special stockholders'
meeting may be called at the request of the acquiror to consider the voting
rights of the acquiror's shares no more than 50 days, unless the acquiror agrees
to a later date, after the delivery by the acquiror to the corporation of an
information statement which sets forth the range of voting power that the
acquiror has acquired or proposes to acquire and other information concerning
the acquiror and the proposed control share acquisition. If no such request for
a stockholders' meeting is made, consideration of the voting rights of the
acquiror's shares must be taken at the next special or annual stockholders'
meeting. If the stockholders fail to restore voting rights to the acquiror or
if the acquiror fails to timely deliver an information statement to the
corporation, then the corporation may, if so provided in its articles of
incorporation or bylaws, call some of the acquiror's shares for redemption. Our
articles of incorporation and bylaws do not currently permit us to call an
acquiror's shares for redemption under these circumstances. The Control Share
Acquisition Statute also provides that the stockholders who do not vote in favor
of restoring voting rights to the Control Shares may demand payment for the
"fair value" of their shares. This amount is generally equal to the highest
price paid in the transaction subjecting the stockholder to the statute.
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Provisions of our bylaws which are summarized below may affect potential
changes in control of Nettaxi. The board of directors believes that these
provisions are in the best interests of stockholders because they will encourage
a potential acquiror to negotiate with the board of directors, which will be
able to consider the interests of all stockholders in a change in control
situation. However, the cumulative effect of these terms maybe to make it more
difficult to acquire and exercise control of Nettaxi and to make changes in
management more difficult.
The bylaws provide the number of directors of Nettaxi shall be established
by the board of directors, but shall be no less than one. Between stockholder
meetings, the board of directors may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office by the
affirmative vote of 66-2/3% of the combined voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors.
As discussed above, our bylaws further provide that stockholder action
may be taken at a meeting of stockholders and may be effected by a consent in
writing if such consent is signed by the holders of the majority of outstanding
shares, unless Nevada law requires a greater percentage.
We are not aware of any proposed takeover attempt or any proposed attempt
to acquire a large block of our common stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of Nettaxi.
APPLICATION OF CALIFORNIA GENERAL CORPORATION LAW
Although we are incorporated in Nevada, our headquarters is in the State of
California. Section 2115 of the California General Corporation Law provides
that provisions of the California General Corporation Law shall be applicable to
a corporation organized under the laws of another state to the exclusion of
the law of the state in which it is incorporated, if the corporation meets
tests regarding the business done in California and the number of its
California stockholders.
An entity such as us can be subject to Section 2115 if the average of the
property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations
with outstanding securities listed on the New York or American Stock Exchange,
or with outstanding securities designated as qualified for trading as a national
market security on NASDAQ, if such corporation has at least 800 beneficial
holders of its equity securities. Since the average of our property factor,
payroll factor and sales factor deemed to be in California during our latest
fiscal year was almost 100%, and over 60% of our outstanding voting securities
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are held of record by persons having addresses in California, and our securities
do not currently qualify as a national market security on NASDAQ, we are subject
to Section 2115.
During the period that we are subject to Section 2115, the provisions of
the California General Corporation Law regarding the following matters are made
applicable to the exclusion of the law of the State of Nevada:
- - general provisions and definitions;
- - annual election of directors;
- - removal of directors without cause;
- - removal of directors by court proceedings;
- - filling of director vacancies where less than a majority in office were
elected by the stockholders
- - directors' standard of care;
- - liability of directors for unlawful distributions;
- - indemnification of directors, officers and others;
- - limitations on corporate distributions of cash or property;
- - liability of a stockholder who receives an unlawful distribution;
- - requirements for annual stockholders meetings;
- - stockholders' right to cumulate votes at any election of directors;
- - supermajority vote requirements;
- - limitations on sales of assets;
- - limitations on mergers;
- - reorganizations;
- - dissenters' rights in connection with reorganizations
- - required records and papers;
- - actions by the California Attorney General; and
- - rights of inspection.
Pursuant to our agreements with RGC International Investors, we intend to
take appropriate action to qualify our common stock as a national market
security on NASDAQ. If such qualification becomes effective, and the other
conditions for exemption from Section 2115 can be satisfied, we would no
longer be subject to Section 2115. There can be no assurance that all the
conditions from exemption, including successful completion of the
qualification of our common stock as a national market security on NASDAQ, will
be satisfied.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
We believe that provisions of our articles of incorporation and bylaws will
be useful to attract and retain qualified persons as directors and officers.
Our articles of incorporation limit the liability of directors and officers to
the fullest extent permitted by Nevada law. This is intended to allow our
directors and officers the benefit of Nevada's corporation law which provides
that directors and officers of Nevada corporations may be relieved of monetary
liabilities for breach of their fiduciary duties as directors, except under
circumstances which involve acts or omissions which involve intentional
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misconduct, fraud or a knowing violation of law, or the payment of unlawful
distributions.
We have obtained officer and director liability insurance with respect to
liabilities arising out of certain matters, including matters arising under the
Securities Act of 1933.
TRANSFER AGENT AND REGISTRAR
Interwest Transfer Co., Inc. is the transfer agent and registrar for our
capital stock.
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SHARES ELIGIBLE FOR FUTURE SALE
On March 31, 2000, 39,896,057 shares of our common stock were
outstanding, and 2,580,166 shares of common stock were subject to options
granted under our 1998 stock option plan and 3,293,333 shares were subject to
options granted under our 1999 stock option plan. In addition, approximately
4,414,856 shares of common stock were issuable upon conversion or exercise of
the convertible debentures and warrants held by the selling stockholders, and
15,816,667 shares of common stock were issuable upon exercise of outstanding
warrants held by parties other than the selling stockholders. Of the outstanding
shares, 5,689,219 shares of common stock are immediately eligible for sale in
the public market without restriction or further registration under the
Securities Act of 1933, unless purchased by or issued to any "affiliate" of
ours, as that term is defined in Rule 144 promulgated under the Securities Act
of 1933, described below. All other outstanding shares of our common stock are
"restricted securities" as such term is defined under Rule 144, in that such
shares were issued in private transactions not involving a public offering and
may not be sold in the absence of registration other than in accordance with
Rule 144, 144(k) or 701 promulgated under the Securities Act of 1933 or another
exemption from registration.
In general, under Rule 144, as currently in effect, a person, including an
affiliate, who has beneficially owned shares for at least one year is entitled
to sell, within any three-month period commencing 90 days after the date of this
prospectus, a number of shares that does not exceed the greater of 1% of the
then outstanding shares of our common stock, subject to various restrictions. In
addition, a person who is not deemed to have been an affiliate of ours at any
time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
those shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate, such person's
holding period for the purpose of effecting a sale under Rule 144 commences on
the date of transfer from the affiliate. As of February 28, 2000 approximately
14,000,000 shares of common stock were eligible for sale under Rule 144.
The shares of common stock issuable upon conversion or exercise of the
convertible debentures and warrants held by the selling stockholders are being
registered on the registration statement of which this prospectus is a part.
Upon effectiveness of that registration statement, such shares will also be
immediately eligible for sale in the public market subject to restrictions
included in our agreements with the selling stockholders. We also filed
a registration statement to register for resale the 6,300,000 shares of common
stock reserved for issuance under our stock option plans. That registration
statement became effective immediately upon filing. Accordingly, shares
covered by that registration statement are eligible for sale in the
public market subject to vesting restrictions. As of January 31, 2000
1,194,144 of these options were exercisable. We also intend to file a
registration statement to register shares of stock issued to, and shares
underlying warrants, held by investors in connection with our recent private
placement. Finally, some of our stockholders have demand registration rights
with to their shares of common stock.
102
<PAGE>
Sales of substantial amounts of our common stock under Rule 144, this
Prospectus or otherwise could adversely affect the prevailing market price of
our common stock and could impair our ability to raise capital through the
future sale of our securities.
103
<PAGE>
PLAN OF DISTRIBUTION
We previously issued our convertible debentures and warrants to purchase
common stock to the selling stockholders in a private offering and other
transactions. This prospectus relates to the offer and sale of the shares of
our common stock to be received by the selling stockholders when and if they
convert their debentures and/or exercise their warrants. We are registering
the shares of common stock to fulfill our obligations under various
registration rights agreements with the selling stockholders. The registration
of the shares of common stock does not necessarily mean that any of the shares
will be offered or sold by the selling stockholders under this prospectus.
The selling stockholders and their pledgees, donees, transferees or other
successors in interest may offer their shares at various times in one or more of
the following transactions:
- a block trade on the O-T-C Market Bulletin Board or other market on
which the common stock may be traded in which the broker-dealer
so engaged will attempt to sell the shares as agent but may
position and resell a portion of the block as principal to
facilitate the transaction;
- purchases by a broker or dealer as principal and resale by such
broker or dealer for its account pursuant to this prospectus;
- ordinary brokerage transactions and transactions in which the
broker solicits purchasers;
- privately negotiated, face-to-face transactions between the
selling stockholders and purchasers without a broker-dealer;
- through the writing of options or short sales; and
- any combination of the above.
The sale price to the public may be the market price prevailing at the time
of sale, a price relating to such prevailing market price or such other price as
the selling stockholders determine from time to time.
The selling stockholders may also sell the shares directly to market makers
acting as principals or broker-dealers acting as agents for themselves or their
customers. Brokers acting as agents for the selling stockholders will receive
usual and customary commissions for brokerage transactions, and market makers
and block purchasers purchasing the shares will do so for their own account and
at their own risk. It is possible that the selling stockholders will attempt to
sell shares of our common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. There
can be no assurance that all or any of the shares offered hereby will be issued
to or sold by the selling stockholders. The selling stockholders and any
brokers, dealers or agents effecting the sale of any of the shares may be deemed
104
<PAGE>
to be "underwriters" under the Securities Act of 1933. In addition, any
securities covered by this prospectus may also be sold under Rule 144
promulgated under the Securities Act of 1933 rather than pursuant to this
prospectus. The selling stockholders have the sole discretion not to accept any
offer to purchase shares or make any sale of shares if they conclude the
purchase price is inadequate.
The selling stockholders, alternatively, may sell the shares offered under
this prospectus through an underwriter. The selling stockholders have not
entered into any agreement with a prospective underwriter. We can not guarantee
that this type of agreement will not be entered into. If the selling
stockholders enter into this type of agreement, we will supplement or revise
this prospectus.
Upon being notified by the selling stockholders that any material
arrangement has been entered into with a broker or dealer for the sale of shares
through a block trade, special offering, exchange distribution or secondary
distribution or a purchase by a broker or dealer, we will file a supplemented
prospectus, if required, pursuant to Rule 424(c) under the Securities Act
of 1933, disclosing:
- - the name of each broker or dealer;
- - the number of shares involved;
- - the price at which the shares were sold;
- - the commissions paid or discounts or concessions allowed to the
broker(s) or dealer(s), where applicable;
- - that the broker(s) or dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in this prospectus,
as supplemented; and
- - other facts material to the transaction.
To comply with the securities laws of various jurisdictions, the shares
offered by this prospectus may need to be offered or sold in such jurisdictions
only through registered or licensed brokers or dealers.
The selling stockholders and any other persons participating in the sale or
distribution of the shares of common stock will be subject to the relevant
provisions of the Securities Exchange Act of 1934 and the rules and
regulations thereunder, which provisions may limit the timing of purchases and
sales of any of the shares by the selling stockholders or any other person.
The foregoing may affect the marketability of such shares.
105
<PAGE>
We will indemnify the selling stockholders, or their transferees or
assignees, against some liabilities, including liabilities under the Securities
Act of 1933, or to contribute to payments the selling stockholders or their
respective pledgees, donees, transferees or other successors in interest, may
be required to make in respect thereof.
We are bearing all costs relating to the registration of the shares. The
selling stockholders will pay any commissions, discounts or other fees payable
to broker-dealers in connection with any sale of the shares.
The selling stockholders have agreed to suspend sales for limited periods
upon notification that actions, such as amending or supplementing this
prospectus, are required in order to comply with federal or state securities
laws.
106
<PAGE>
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby has been
passed upon for us by Silicon Valley Law Group, San Jose, California.
EXPERTS
The financial statements included in this propectus and in the registration
statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their report
appearing elsewhere herein and in the registration statement, and are
included in reliance upon such report given upon the authority of said firm as
experts in auditing and accounting.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-l. This prospectus, which is a part of the
registration statement, does not contain all of the information included in
the registration statement. Some information is omitted and you should refer to
the registration statement and its exhibits. With respect to references made in
this prospectus to any contract, agreement or other document of Nettaxi, such
references are not necessarily complete and you should refer to the exhibits
attached to the registration statement for copies of the actual contract,
agreement or other document. You may review a copy of the registration
statement, including exhibits, at the Securities and Exchange Commission's
public reference room at Judiciary Plaza, 450 Fifth Street, N.W., Washington,
D.C. 20549 or Seven World Trade Center, 13th Floor, New York, New York 10048 or
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The public may obtain information on the operation of the public reference
room by calling the Securities and Exchange Commission at 1-800-SEC-0330.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may
read and copy any reports, statements or other information on file at the
public reference rooms. You can also request copies of these documents, for
a copying fee, by writing to the Securities and Exchange Commission.
Our Securities and Exchange Commission filings and the registration
statement can also be reviewed by accessing the Securities and Exchange
Commission's Internet site at http://www.sec.gov, which contains reports, proxy
and information statements and other information regarding registrants that
file electronically with the Securities and Exchange Commission.
107
<PAGE>
NETTAXI.COM
CONTENTS
<TABLE>
<CAPTION>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS . . . . . . F-3
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets. . . . . . . . . . . . . . . . . F-4 - F-5
Consolidated statements of operations. . . . . . . . . . . . F-6
Consolidated statements of shareholders' (deficiency) equity F-7
Consolidated statements of cash flows. . . . . . . . . . . . F-8
Notes to consolidated financial statements . . . . . . . . . F-9 - F-30
</TABLE>
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
Nettaxi.com
We have audited the accompanying consolidated balance sheets of Nettaxi.com as
of December 31, 1999 and 1998, and the related consolidated statements of
operations, shareholders' (deficiency) equity and cash flows for each of the two
years in the period ended December 31, 1999 and for the period from October 23,
1997 (Date of Inception) 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 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 our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nettaxi.com as of
December 31, 1999 and 1998, and the results of its operations and its cash flows
for each of the two years in the period ended December 31, 1999 and for the
period from October 23, 1997 (Date of Inception) to December 31, 1997 in
conformity with generally accepted accounting principles.
San Jose, California
February 15, 2000, except for matters discussed in Note 13 for which the date
is March 9, 2000.
F-3
<PAGE>
<TABLE>
<CAPTION>
NETTAXI.COM
CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998
- -------------------------------------------------------------- ---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 9) . . . . . . . . . . . . . $ 987,700 $ 465,800
Accounts receivable, net of allowance for doubtful accounts
of $83,600 and $31,200, respectively (Note 9). . . . . . . 1,181,600 133,700
Prepaid expenses and other assets (Note 7) . . . . . . . . . 609,200 16,100
- -------------------------------------------------------------- ---------- ----------
TOTAL CURRENT ASSETS . . . . . . . . . . . . . . . . . . . . . 2,778,500 615,600
- -------------------------------------------------------------- ---------- ----------
PROPERTY AND EQUIPMENT, net (Note 2) . . . . . . . . . . . . . 1,968,600 255,100
PURCHASED TECHNOLOGY, net (Note 3) . . . . . . . . . . . . . . 493,000 667,000
OTHER INTANGIBLES, net (Note 3). . . . . . . . . . . . . . . . 85,000 115,000
DEFERRED EXPENSES (Note 7) . . . . . . . . . . . . . . . . . . 655,200 -
DEPOSITS . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,900 -
- -------------------------------------------------------------- ---------- ----------
$6,031,200 $1,652,700
============================================================== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
NETTAXI.COM
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------------------------------------------ ------------- ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . $ 4,041,400 $ 186,900
Accrued expenses (Note 4). . . . . . . . . . . . . . . . . . . . 659,100 74,000
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . - 47,000
Income taxes payable (Note 8). . . . . . . . . . . . . . . . . . 125,600 -
Current portion of capital lease obligations (Note 5). . . . . . 5,400 7,300
- ------------------------------------------------------------------ ------------- ------------
TOTAL CURRENT LIABILITIES. . . . . . . . . . . . . . . . . . . . . 4,831,500 315,200
- ------------------------------------------------------------------ ------------- ------------
LONG-TERM LIABILITIES:
Capital lease obligations, less current portion. . . . . . . . . - 5,400
Convertible notes payable, related party (Note 6). . . . . . . . 3,200,000 -
- ------------------------------------------------------------------ ------------- ------------
TOTAL LONG-TERM LIABILITIES. . . . . . . . . . . . . . . . . . . . 3,200,000 5,400
- ------------------------------------------------------------------ ------------- ------------
TOTAL LIABILITIES. . . . . . . . . . . . . . . . . . . . . . . . . 8,031,500 320,600
- ------------------------------------------------------------------ ------------- ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9 and 12)
SHAREHOLDERS' (DEFICIENCY) EQUITY (Notes 6, 7 and 13)
Preferred stock, $0.001 par value; 1,000,000 shares authorized;
no shares issued and outstanding.. . . . . . . . . . . . . . . - -
Common stock subscribed. . . . . . . . . . . . . . . . . . . . . (95,000) (95,000)
Common stock, $0.001 par value; 50,000,000 shares
authorized; 23,214,446 and 21,110,000 shares issued
and outstanding, respectively. . . . . . . . . . . . . . . . . 20,000 10,800
Additional paid-in capital . . . . . . . . . . . . . . . . . . . 11,902,500 4,872,100
Deferred Compensation. . . . . . . . . . . . . . . . . . . . . . (491,400) -
Accumulated deficit. . . . . . . . . . . . . . . . . . . . . . . (13,336,400) (3,455,800)
- ------------------------------------------------------------------ ------------- ------------
TOTAL SHAREHOLDERS' (DEFICIENCY) EQUITY. . . . . . . . . . . . . . (2,000,300) 1,332,100
- ------------------------------------------------------------------ ------------- ------------
$ 6,031,200 $ 1,652,700
================================================================== ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
<TABLE>
<CAPTION>
NETTAXI.COM
-----------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
For the
period
October 23,
(Date of
Inception) to
Year Ended December 31, December 31,
------------ ------------ -----------
1999 1998 1997
------------ ------------ -----------
<S> <C> <C> <C>
NET REVENUES (Notes 9 and 10) . . . . . . . $ 5,032,800 $ 258,000 $ 144,900
COST OF REVENUES. . . . . . . . . . . . . . 4,003,800 239,800 87,400
- ------------------------------------------- ------------ ------------ -----------
GROSS PROFIT. . . . . . . . . . . . . . . . 1,029,000 18,200 57,500
OPERATING EXPENSES:
Sales and marketing . . . . . . . . . . . 4,788,800 745,600 3,100
Research and development. . . . . . . . . 2,186,700 634,700 36,500
General and administrative. . . . . . . . 3,456,000 1,053,200 160,000
Asset impairment (Note 3) . . . . . . . . - 667,000 -
- ------------------------------------------- ------------ ------------ -----------
TOTAL OPERATING EXPENSES. . . . . . . . . . 10,431,500 3,100,500 199,600
- ------------------------------------------- ------------ ------------ -----------
LOSS FROM OPERATIONS. . . . . . . . . . . . (9,402,500) (3,082,300) (142,100)
- ------------------------------------------- ------------ ------------ -----------
OTHER INCOME (EXPENSE):
Interest income . . . . . . . . . . . . . 75,100 9,800 -
Interest expense (Notes 6 and 7). . . . . (426,200) (68,800) (17,000)
Other income. . . . . . . . . . . . . . . - 28,500 -
- ------------------------------------------- ------------ ------------ -----------
LOSS BEFORE INCOME TAXES. . . . . . . . . . (9,753,600) (3,112,800) (159,100)
INCOME TAXES (Note 8) . . . . . . . . . . . (126,800) (800) (600)
- ------------------------------------------- ------------ ------------ -----------
NET LOSS. . . . . . . . . . . . . . . . . . $(9,880,400) $(3,113,600) $ (159,700)
- ------------------------------------------- ------------ ------------ -----------
PREFERRED STOCK DIVIDEND. . . . . . . . . . - (14,300) (167,500)
- ------------------------------------------- ------------ ------------ -----------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS . $(9,880,400) $(3,127,900) $ (327,200)
=========================================== ============ ============ ===========
BASIC AND DILUTED LOSS PER COMMON SHARE . . $ (0.46) $ (0.32) $ (0.06)
=========================================== ============ ============ ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING. 21,274,203 9,724,781 5,483,500
=========================================== ============ ============ ===========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
<TABLE>
<CAPTION>
------
NETTAXI.COM
-----------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' (DEFICIENCY) EQUITY
------------------------------------------------------------
Preferred Stock Common Stock Common Additional
------------------- ------------------- Stock Paid-in Deferred Accumulated
Shares Amount Shares Amount Subscribed Capital Compensation Deficit Total
- -------------------- --------- -------- ---------- ------- ---------- ----------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES,
October 23, 1997 . - $ - 2,576,088 $ 100 $ - $ - $ - $ - $ 100
Issuance of
common
stock for
services
and salaries . . . - - 187,837 - - 52,500 - - 52,500
Issuance of common
stock for
property,
equipment and
technology
(Note 3) . . . . . - - 2,475,066 2,500 - 977,500 - - 980,000
Proceeds from
sale of
preferred stock. . 134,000 100 - - - 267,900 - - 268,000
Net loss available
to common
shareholders . . . - - - - - - - (327,200) (327,200)
- -------------------- --------- -------- ---------- ------- ---------- ----------- ------------ ------------- ------------
BALANCES,
December 31, 1997. 134,000 100 5,238,991 2,600 - 1,297,900 - (327,200) 973,400
Net proceeds
from sale of
preferred stock. . 11,400 - - - - 22,900 - - 22,900
Net proceeds from
sale of common
stock. . . . . . . - - 1,756,378 1,800 - 1,198,300 - - 1,200,100
Issuance of common
stock for
services
and salaries . . . - - 328,132 300 - 142,500 - - 142,800
Exchange of
convertible notes
payable and
accrued interest
(Note 6) . . . . . - - 2,792,763 2,800 - 1,103,000 - - 1,105,800
Exchange of
preferred stock
for common
stock. . . . . . . (145,400) (100) 734,438 - - 100 - - -
Compensation
expense related
to warrants
granted (Note 7) . - - - - - 855,000 - - 855,000
Warrants exchanged
for common stock . - - 2,399,298 2,400 (95,000) 92,600 - - -
Issuance of
common stock
to Placement
Agent. . . . . . . - - 200,000 200 - 159,800 - - 160,000
Common stock
issued in
connection with
Reorganization . . - - 660,000 700 - - - (700) -
Net loss available
to common
shareholders . . . - - - - - - - (3,127,900) (3,127,900)
- -------------------- --------- -------- ---------- ------- ---------- ----------- ------------ ------------- ------------
BALANCES,
December 31, 1998. - - 14,110,000 10,800 (95,000) $ 4,872,100 - (3,455,800) 1,332,100
Issuance of
common
stock in
connection
with pooling
(Note 1) . . . . . - - 7,000,000 7,000 - - - (200) 6,800
Deferred
compensation
related to stock
options (Note 7) . - - - - - 702,700 (702,700) - -
Amortization of
deferred
compensation
(Note 7) . . . . . - - - - - - 211,300 - 211,300
Interest related
to issuance
of warrants. . . . - - - - - 361,200 - - 361,200
Warrants exercised
for common
stock. . . . . . . - - 150,000 200 - 1,181,100 - - 1,181,300
Exchange of
convertible notes
payable and
accrued interest
(Note 6) . . . . . - - 802,223 800 - 1,862,500 - - 1,863,300
Proceeds from the
issuance of
common stock . . . - - 802,223 800 - 1,862,500 - - 1,863,300
Issuance of
common stock
for services . . . - - 350,000 400 - 1,060,400 - - 1,060,800
Net loss available
to common
shareholders . . . - - - - - - - (9,880,400) (9,880,400)
- -------------------- --------- -------- ---------- ------- ---------- ----------- ------------ ------------- ------------
BALANCES,
December 31, 1999. - $ - 23,214,446 $20,000 $ (95,000) $11,902,500 $ (491,400) $(13,336,400) $(2,000,300)
==================== ========= ======== ========== ======= ========== =========== ============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
------
NETTAXI.COM
-----------
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(NOTE 11)
---------
<TABLE>
<CAPTION>
For the period
October 23, to
Year Ended December 31, December 31,
1999 1998 1997
- ----------------------------------------------------------------- ------------ ------------ ----------
<S> <C> <C> <C>
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(9,880,400) $(3,113,600) $(159,700)
Adjustments to reconcile net loss to net cash used
in operating activities:
Gain on disposal of equipment . . . . . . . . . . . . . . . - (28,500) -
Depreciation and amortization . . . . . . . . . . . . . . . 595,900 433,500 70,200
Allowance for doubtful accounts . . . . . . . . . . . . . . 52,400 31,200 -
Issuance of common stock for interest on convertible notes. 63,300 68,800 -
Issuance of common stock for services (Note 7). . . . . . . 34,200 302,800 52,500
Asset impairment (Note 3) . . . . . . . . . . . . . . . . . - 667,000 -
Compensation expense related to options granted . . . . . . 211,300 855,000 -
Interest expense related to issuance of warrants. . . . . . 202,200 - -
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . (1,100,300) (104,800) (60,000)
Prepaid expenses and other assets . . . . . . . . . . . . (62,700) (13,200) (2,900)
Accounts payable. . . . . . . . . . . . . . . . . . . . . 3,854,500 175,900 11,000
Accrued expenses. . . . . . . . . . . . . . . . . . . . . 585,100 13,700 37,300
Deferred revenue. . . . . . . . . . . . . . . . . . . . . (47,000) 47,000 -
Income taxes payable. . . . . . . . . . . . . . . . . . . 125,600 (600) 600
- ----------------------------------------------------------------- ------------ ------------ ----------
NET CASH USED IN OPERATING ACTIVITIES . . . . . . . . . . . . . . (5,365,900) (665,800) (51,000)
- ----------------------------------------------------------------- ------------ ------------ ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of equipment . . . . . . . . . . . . . . - 34,600 -
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . . . (50,900) - -
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (2,105,400) (159,200) -
- ----------------------------------------------------------------- ------------ ------------ ----------
NET CASH USED IN INVESTING ACTIVITIES . . . . . . . . . . . . . . (2,156,300) (124,600) -
- ----------------------------------------------------------------- ------------ ------------ ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital lease. . . . . . . . . . . (7,300) (2,000) -
Proceeds from convertible notes payable . . . . . . . . . . . . 5,000,000 - -
Net proceeds from issuance of preferred stock . . . . . . . . . - 8,600 100,500
Net proceeds from issuance of common stock. . . . . . . . . . . 3,051,400 1,200,100 -
- ----------------------------------------------------------------- ------------ ------------ ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES . . . . . . . . . . . . 8,044,100 1,206,700 100,500
- ----------------------------------------------------------------- ------------ ------------ ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . 521,900 416,300 49,500
CASH AND CASH EQUIVALENTS, beginning of period. . . . . . . . . . 465,800 49,500 -
- ----------------------------------------------------------------- ------------ ------------ ----------
CASH AND CASH EQUIVALENTS, end of period. . . . . . . . . . . . . $ 987,700 $ 465,800 $ 49,500
================================================================= ============ ============ ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF ACCOUNTING POLICIES
The Company
Nettaxi.com (formerly Nettaxi, Inc and formerly Swan Valley
Snowmobiles, Inc.), the Company, is a Nevada Corporation, which was
incorporated on October 26, 1995.
On September 29, 1998 the Company completed the acquisition of 100% of
the outstanding common stock of Nettaxi OnLine Communities, Inc., a
Delaware corporation, and changed its name to Nettaxi, Inc. (now
Nettaxi.com). For accounting purposes, the acquisition has been
treated as the acquisition of the Company by Nettaxi OnLine
Communities, Inc. with Nettaxi OnLine Communities, Inc. as the
acquiror. All shares and per share data prior to the acquisition have
been restated to reflect the stock issuance and related stock split
(Note 7).
As the former shareholders of Nettaxi OnLine Communities, Inc.
received 85% of the shares in the Company immediately after the
acquisition, the financial statements for periods prior to the
reorganization are those of Nettaxi OnLine Communities, Inc.
Effective May 7, 1999, the Company completed a merger in a single
transaction with Plus Net, Inc. by exchanging 7 million shares of its
common stock for all of the common stock of Plus Net, Inc. Each share
of Plus Net was exchanged for 1,000 shares of Nettaxi common stock.
The merger constituted a tax-free reorganization and has been
accounted for as a pooling of interest under Accounting Principles
Board Opinion No. 16.
For periods proceeding the merger, there were no intercompany
transactions that require elimination from the combined consolidated
results of operations and there were no adjustments necessary to
conform the accounting practices of the two companies.
The merger with Plus Net, Inc. allowed the Company to provide its
customers with a web based e-mail program and a robust meta search
engine. Plus Net, Inc. also had an e-commerce processing engine that
enabled the acceptance and processing of online credit card
transactions.
Plus Net, Inc. reported no revenues and a net loss of $200 for the
period ended December 31, 1998. For the period from January 1 to May
7, 1999 Plus Net, Inc. had revenues of approximately $700,000 and net
income of approximately $413,600. Subsequent to the merger the Company
ceased its evaluation and processing of online credit card
transactions business. In 1999, this line of business accounted for
approximately $1,285,000 of the Company's revenues.
F-9
<PAGE>
Nettaxi OnLine Communities, Inc., was incorporated on October 23, 1997
to capitalize on a significant opportunity that exists today through
the convergence of the media and entertainment industries with the
vast communications power of the Internet. The Company's Web site,
http://www.nettaxi.com, is an online community designed to seamlessly
integrate content with e-commerce services for the Company's
subscribers, providing comprehensive information about news, sports,
entertainment, health, politics, finances, lifestyle, and areas of
interest to the growing number of Internet users. The Company's
mission is to establish nettaxi.com as an entry point, or portal, to
the Internet by continuing to develop premium online communities,
which are both content-rich to its subscribers and provide easy-to-use
e-commerce services to businesses which reside in these online
communities.
The Company's principal executive offices are located in Campbell,
California.
Consolidation
The accompanying consolidated financial statements include the
accounts of Nettaxi.com (formerly Nettaxi, Inc. and formerly Swan
Valley Snowmobile, Inc.) and its wholly-owned subsidiary, Nettaxi
OnLine Communities, Inc. All intercompany accounts and transactions
have been eliminated in the consolidated financial statements.
F-10
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Use of Estimates
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-11
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Cash and Cash Equivalents
The Company considers all highly liquid investments having original
maturities of 90 days or less to be cash equivalents.
Accounts Receivable and Allowances For Doubtful Accounts
The Company grants credit to its customers after undertaking an
investigation of credit risk for all significant amounts. An allowance
for doubtful accounts is provided for estimated credit losses at a
level deemed appropriate to adequately provide for known and inherent
risks related to such amounts. The allowance is based on reviews of
losses, adjustment history, current economic conditions and other
factors that deserve recognition in estimating potential losses. While
management uses the best information available in making its
determination, the ultimate recovery of recorded accounts receivable
is also dependent upon future economic and other conditions that may
be beyond management's control.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided
using the straight-line method over the estimated economic useful
lives of the assets, as follows:
<TABLE>
<CAPTION>
Estimated useful lives
----------------------
<S> <C>
Furniture and fixtures. 5 years
Office equipment. . . . 5 years
Computers and equipment 3 years
</TABLE>
Assets held under capital leases are amortized on a straight-line
basis over the shorter of the lease term or the estimated useful lives
of the related assets.
F-12
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Purchased Technology and Other Intangibles
The Company amortizes, on a straight-line basis, the cost of purchased
technology and other intangibles over the shorter of five (5) years or
the useful life of the related technology or underlying asset.
Software Development Costs
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for the Costs of Computer Software to be Sold, Leased, or
otherwise Marketed, software development costs are expensed as
incurred until technological feasibility has been established, at
which time such costs are capitalized until the product is available
for general release to customers. To date, the establishments of
technological feasibility of the Company's products and general
release of such software have substantially coincided. As a result,
software development costs qualifying for capitalization have been
insignificant, and therefore, the Company has not capitalized any
software development costs.
Revenue Recognition and Deferred Revenue
The Company's revenues are derived principally from the sale of
banner advertisements, web hosting services and from products from
its online malls. Advertising revenues are recognized in the period in
which the advertisement is delivered, provided that collection of
the resulting receivable is probable. Advertisers are charged on a
per impression or delivery basis up to a maximum as specified in the
contract. To date, the duration of the Company's advertising
commitments has not exceeded one year. When the Company guarantees a
minimum number of impressions or deliveries, revenue is recognized
ratably in proportion to the number of impressions or deliveries
recorded to the minimum number of impressions and deliveries
guaranteed. Deferred revenue resulting from advertising agreements
aggregated $0 and $47,000 as of December 31, 1999 and 1998, and
is amortized on a straight-line basis over the advertising agreement.
Web hosting revenues are recognized in the period in which the
Services are provided. Product revenue is recognized upon shipment,
provided no significant obligations remain and collectability is
probable.
F-13
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Advertising revenue include barter revenues, which are the exchange by
Nettaxi.com of advertising space on Nettaxi.com's web sites for
reciprocal advertising space on other web sites. Revenues from these
barter transactions are recorded as advertising revenues at the lower
of the estimated fair value of the advertisements received or
delivered and are recognized when the advertisements are run on
Nettaxi.com's web sites. Barter expenses are recorded when
Nettaxi.com's advertisements are run on the reciprocal web sites,
which is typically in the same period as when advertisements are run
on Nettaxi.com's web sites. In 1999, barter revenues represented 7% of
net revenues. There was no barter revenue in the year ended December
31, 1998 and in the period ended December 31, 1997.
In November 1999, the Financial Accounting Standards Board (FASB)
issued Emerging Issues Task Force (EITF) Issue 99-17 "Accounting for
Advertising Barter Transactions". Under EITF 99-17, revenues and
expenses should be recognized from advertising barter transactions at
the fair value of the advertising surrendered or received only when
the company has a historical practice of receiving or paying cash for
such transactions. As of December 31, 1999, the Company was in
compliance with EITF 99-17.
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income
Taxes, which requires an asset and liability approach. This approach
results in the recognition of deferred tax assets (future tax
benefits) and liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and the tax
basis of assets and liabilities. The deferred tax assets and
liabilities represent the future tax return consequences of those
differences, which will either be deductible or taxable when the
assets and liabilities are recovered or settled. Future tax benefits
are subject to a valuation allowance when management believes it is
more likely than not that the deferred tax assets will not be
realized.
F-14
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Advertising Costs
The cost of advertising is expensed as incurred. Advertising costs for
the year ended December 31, 1999, 1998, and for the period ended
December 31, 1997, were approximately $2,831,300, $3,100 and $300,
respectively.
Long-Lived Assets
The Company periodically reviews its long-lived assets for impairment.
When events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable, the Company writes the
asset down to its net realizable value.
Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments:
Cash and cash equivalents:
The carrying amount reported in the consolidated balance sheets for
cash and cash equivalents approximates fair value.
Short-term debt:
The fair value of short-term debt approximates cost because of the
short period of time to maturity.
Long-term debt:
The fair value of long-term debt is estimated based on current
interest rates available to the Company for debt instruments with
similar terms and remaining maturities.
Related party notes receivable and payable:
The fair value of the notes receivable and notes payable to
shareholders is based on arms-length transactions and bear interest at
rates comparable to similar debt obligations.
F-15
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
At December 31, 1999 and 1998, the fair values of the Company's debt
instruments approximate their historical carrying amounts.
Stock-Based Incentive Program
SFAS No. 123, Accounting for Stock-Based Compensation, encourages
entities to recognize compensation costs for stock-based employee
compensation plans using the fair value based method of accounting
defined in SFAS No. 123, but allows for the continued use of the
intrinsic value based method of accounting prescribed by Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company continues to use the accounting prescribed by
APB Opinion No. 25 and as such is required to disclose pro forma net
income (loss) and earnings (loss) per share as if the fair value based
method of accounting had been applied (Note 7).
Basic and Diluted Loss Per Common Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per Share,
which was effective December 28, 1997. Conforming to SFAS No. 128, the
Company changed its method of computing earnings per share and
restated all prior periods included in the consolidated financial
statements. Basic loss per common share is determined by dividing loss
available to common shareholders by the weighted average number of
common shares outstanding. Diluted per-common-share amounts assume the
issuance of common stock for all potentially dilutive equivalent
shares outstanding. Anti-dilution provisions of SFAS 128 require
consistency between diluted per-common-share amounts and basic
per-common-share amounts in loss periods. For the periods reported,
there were no differences between basic and diluted earnings per
share. The number of potential common shares not included in diluted
earnigns per share, due to their being anti-dilutive, are 3,838,679,
280,000 and 0, for the years ended December 31, 1999 and 1998, and for
the period ended December 31, 1997, respectively. All share and per
share information has been adjusted for the shares exchanged for the
common stock of Plus Net, Inc.
F-16
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Adoption of New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board (FASB)
issued SFAS No. 132, Employer's Disclosure about Pensions and Other
Postretirement Benefits, which standardizes the disclosure
requirements for pension and other postretirement benefits. The
adoption of SFAS No. 132 had no impact on the Company's current
disclosures.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 requires companies to
recognize all derivatives contracts as either assets or liabilities in
the balance sheet and to measure them at fair value. If certain
conditions are met, a derivative may be specifically designated as a
hedge, the objective of which is to match the timing of gain or loss
recognition on the hedging derivative with the recognition of (i) the
changes in the fair value of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings effect of the
hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the
period of change. In June 1999, the FASB issued SFAS No. 137,
Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of FASB Statement No. 133, which amends
SFAS No. 133 to be effective for all fiscal quarters of all fiscal
years beginning after June 15, 2000.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of the new standard
to have a material impact on the Company's results from operations,
financial position or cash flows.
F-17
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
2. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
---------- --------
<S> <C> <C>
Furniture and fixtures. . . . $ 196,200 $ 5,000
Office equipment. . . . . . . 59,700 59,700
Computers and equipment . . . 2,134,400 250,200
---------- --------
2,390,300 314,900
Less accumulated depreciation 421,700 59,800
---------- --------
$1,968,600 $255,100
========== ========
</TABLE>
Equipment under capital lease obligations aggregated $14,700 as of
December 31, 1999 and 1998, with related accumulated amortization of
$1,500 and $500, respectively.
3. PURCHASED TECHNOLOGY AND OTHER INTANGIBLES
In November 1997, the Company issued a convertible secured promissory
note in the amount of $1,020,000 (Note 6) and 2,475,066 shares of
common stock, valued at $980,000, to a related party in exchange for
certain fixed assets, liabilities and technology. Core to the
technology acquired was a web to database software application and the
underlying technology to the Company's Internet The City products.
Based on the fair market value of the consideration exchanged, as
determined by an independent appraisal service, the aggregate purchase
price was $2,000,000, and was allocated to the following respective
assets and liabilities based on their fair market value at the time of
the transaction:
<TABLE>
<CAPTION>
<S> <C>
Purchased technology . . . . . . . . . $1,740,000
Other intangibles. . . . . . . . . . . 150,000
Computers and equipment. . . . . . . . 100,000
Office equipment . . . . . . . . . . . 45,000
Furniture and fixtures . . . . . . . . 5,000
Contracts payable and accrued expenses (40,000)
- ---------------------------------------- -----------
$2,000,000
======================================== ===========
</TABLE>
F-18
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In 1998, the Company experienced several functional problems with
portions of the purchased technology, namely the web to database
software application, due to those components incompatibility with
subsequent releases of upgraded versions of its operating system.
Following attempts to make these components compatible, the Company
decided, in December 1998, not to spend additional monies on these
components but to replace them. As approximately 50% of the components
of the acquired technology were no longer technically viable with the
upgraded versions of the Company's operating system and provided no
alternative future use, the Company wrote off the unamortized portion
of the impaired technology, resulting in a charge to expense of
$667,000.
Purchased technology and other intangibles consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- ------------------------------- -------- --------
<S> <C> <C>
Purchased technology. . . . . $870,000 $870,000
Less accumulated amortization 377,000 203,000
- ------------------------------- -------- --------
$493,000 $667,000
=============================== ======== ========
December 31,. . . . . . . . . 1999 1998
- ------------------------------- -------- --------
Other intangibles . . . . . . $150,000 $150,000
Less accumulated amortization 65,000 35,000
- ------------------------------- -------- --------
$ 85,000 $115,000
=============================== ======== ========
</TABLE>
F-19
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
4. ACCRUED EXPENSES
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
December 31, 1999 1998
- --------------------------------- -------- -------
<S> <C> <C>
Payroll and related expenses. . $216,200 $10,000
Professional fees . . . . . . . 135,000 52,700
Marketing . . . . . . . . . . . 93,000 52,700
Accrued interest, related party 125,500 -
Other . . . . . . . . . . . . . 89,400 11,300
- --------------------------------- -------- -------
$659,100 $74,000
================================= ======== =======
</TABLE>
5. LEASE COMMITMENTS
The Company leases its facility under an operating lease, which
expires on May 31, 2003. The facility lease requires the Company to
pay certain maintenance and operating expenses, such as taxes,
insurance, and utilities. Rent expense for the years ended December
31, 1999 and 1998, and for the period ended December 31, 1997, was
$178,000, $35,500 and $6,800, respectively.
In 1999, the Company entered into operating leases on certain
vehicles. For the year ended December 31, 1999, rent expense related
to the vehicle leases aggregated $2,600.
A summary of the future minimum lease payments under capitalized
leases together with the present value of such minimum lease payments
and future minimum payments required under non-cancelable operating
leases with terms in excess of one year follows:
F-20
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Years Ending December 31, Operating Lease Capital Leases
- ------------------------------------------ ---------------- ---------------
<S> <C> <C>
2000 . . . . . . . . . . . . . . . . . . . $ 276,080 $ 5,400
2001 . . . . . . . . . . . . . . . . . . . 284,421 -
2002 . . . . . . . . . . . . . . . . . . . 98,373 -
- ------------------------------------------ ---------------- ---------------
$ 658,874 5,400
================
---------------
Less amounts representing interest (8.00%) -
Present value of minimum lease payments 5,400
---------------
Less current maturities 5,400
---------------
$ -
===============
</TABLE>
6. CONVERTIBLE NOTES PAYABLE, RELATED PARTY
On November 1, 1997, the Company issued a 10% five-year convertible
secured promissory note in the amount of $1,020,000. In September
1998, this note, with accrued interest of $85,800, was converted into
2,792,763 shares of common stock. Interest expense on the note
aggregated $68,800 in 1998 and $17,000 in the period ended December
31, 1997.
On March 31, 1999 the Company entered into a $5,000,000 Convertible
Debt Financing Agreement (the Agreement) with RGC International
Investors, LDC (RGC). The convertible debenture bears interest at 5%
and matures on March 31, 2004. The debentures are convertible at the
option of the holder into that number of shares of common stock equal
to the principal amount of the debentures to be converted including
all accrued interest, divided by the conversion price specified in the
debentures. The conversion price is the lesser of a variable or fixed
conversion price. The variable conversion price is based on the
trading price of the Company's common stock over a fixed period to
conversion of the debentures, and the fixed conversion price is
$11.88. The fixed conversion price represents 120% of the average of
the three lowest trades ten days prior to the effective date of the
Agreement.
In November and December 1999, RGC converted $1,800,000 of the
debentures, with accrued interest of $63,300, into 802,223 shares of
common stock. As of December 31, 1999, accrued interest on the
remaining debentures aggregated $125,500.
F-21
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. SHAREHOLDERS' EQUITY
PREFERRED STOCK
In October 1997, the Company offered shares of its preferred stock
through a private placement offering. This offering established a
maximum of 150,000 shares of Series A preferred stock at $0.75 per
share, each share convertible into 5.05 shares of the Company's common
stock at any time.
During the year ended December 31, 1998 and the period ended December
31, 1997, the Company issued 11,400 and 134,000 shares of Series A
preferred stock in this offering for net cash proceeds of $8,600 and
$100,500, respectively. As these shares were issued at a discount from
the then fair market value of the stock the Company recorded deemed
preferred stock dividends of $14,300 and $167,500 in the year ended
December 31, 1998 and for the period ended December 31, 1997,
respectively.
In September 1998, all of the shares of Series A preferred stock were
converted into 734,438 shares of the Company's common stock.
COMMON STOCK
In October 1997, the Company offered shares of its common stock
through a private placement offering. This offering established a
maximum of 1,262,650 shares of common stock at $0.40 per share. During
1998, the Company issued 506,378 shares of common stock in this
offering for net proceeds of $200,500.
During the year ended December 31, 1998 and the period ended December
31, 1997, the Company issued 252,045 and 88,395 shares of common stock
with ascribed values of $120,000 and $35,000 as payments for services,
respectively. The shares issued in connection with payments for
services performed were valued at the then fair market value of the
share issued on the October 1997 private placement offering.
F-22
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During the year ended December 31, 1998 and the period ended December
31, 1997, the Company issued 76,087 and 99,442 shares of common stock
with ascribed values of $22,800 and $17,500 to officers and employees
of the Company in lieu of salaries, respectively.
In September 1998, the Company's Board of Directors declared a 2.53 to
1 stock split, in connection with the Acquisition as discussed in Note
1. All references to number of shares of common stock and per share
data in the consolidated financial statements have been adjusted to
reflect the stock split on a retroactive basis.
In September 1998, in connection with the Acquisition, the Company
offered shares of its common stock through a private placement
offering (the Offering). The Offering established a maximum of
1,250,000 shares of common stock at $0.80 per share. The Placement
Agent received 200,000 shares of common stock with a fair market value
of $160,000. The Company issued 1,250,000 shares of common stock in
the Offering for net proceeds of $999,600.
In May 1999, the Company completed a merger in a single transaction
with Plus Net, Inc. by exchanging 7,000,000 shares of its common stock
for all of the common stock of Plus Net, Inc. Each share of Plus Net
was exchanged for 1,000 shares of Nettaxi common stock.
In accordance with the Convertible Debt Financing Agreement, entered
into between the Company and RGC International Investors, LDC on March
31, 1999, RGC has the option to purchase one additional share of
common stock for every share of common stock issuable as a result of a
conversion of the debenture, at a price equal to the applicable
conversion price. In November and December 1999, RGC exercised this
investment option right and purchased 802,223 shares of the Company's
common stock for proceeds of $1,863,300.
In December 1999, the Company issued 350,000 shares of common stock,
to a consulting group in exchange for a two-year agreement to provide
the Company with consulting services. Based on the then fair market
value of the shares issued the price of these services was determined
to be $1,060,800.
F-23
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Included in prepaid expenses and deferred expenses is, as of December
31, 1999, $1,026,600 representing the unamortized portion of these
consulting services.
WARRANTS
In 1998, prior to the adoption of the Stock Option Plan as discussed
below, the Company granted warrants to officers, employees and
consultants of the Company, to purchase 2,399,298 shares of common
stock at $0.04.
In September 1998, these warrants were exchanged for 2,399,298 shares
of common stock via the issuance of promissory notes for $95,000,
concurrent with the reorganization of the Company. The promissory
notes have been accounted for as common stock subscribed and are an
offset to shareholders' equity until such notes are collected.
In accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, the Company recorded $855,000 of compensation costs
associated with the above warrants.
In conjunction with the Agreement, entered into between the Company
and RGC on March 31, 1999, the Company issued warrants, which vested
immediately, to purchase 150,000 shares of common stock at $12.375.
The Company recognized an additional $115,500 of interest expense
associated with these warrants. In August 1999, the Company entered
into an agreement with RGC pursuant to which it exercised these
warrants.
In consideration for the early exercise of the warrants, the exercise
price for the warrants was decreased from $12.375 to $7.875 and the
Company issued RGC warrants to purchase an additional 150,000 shares
of common stock at $7.875. The Company will recognize an additional
$245,700 of interest expense associated with these warrants. In 1999,
the Company recognized $86,700 of this amount as interest expense.
F-24
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
STOCK OPTION PROGRAM
On September 29, 1998, the Company adopted a Stock Option Plan (the
Plan). The Plan is restricted to employees, officers, and consultants
of the Company. Options granted under the Plan generally vest over
three years and are exercisable over ten years. Non-stautory options
are granted at prices not less than 85% of the estimated fair value of
the stock on the date of grant as determined by the Board of
Directors. Incentive options are granted at prices not less than 100%
of the estimated fair value of the stock on the date of grant.
However, options granted to shareholders who own greater than 10% of
the outstanding stock are established at no less than 110% of the
estimated fair value of the stock on the date of grant.
The Company has reserved three million shares of common stock for
issuance under The Plan.
F-25
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock option plan as of
December 31, 1999 and December 31, 1998, and changes during the years
then ended is presented in the following table:
<TABLE>
<CAPTION>
--------------------------------------------
Options Outstanding
--------------------------------------------
December 31, 1999 December 31, 1998
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Beginning . . . . . . . 280,000 $ 0.80 - $ -
Granted . . . . . . . . 2,614,000 $ 10.40 280,000 $ 0.80
Exercised . . . . . . . - $ - - $ -
Forfeited . . . . . . . 313,834 $ 9.45 - $ -
- ----------------------- --------- ---------
Ending. . . . . . . . . 2,580,166 $ 9.47 280,000 $ 0.80
======================= ========= ========== ========= ==========
Exercisable at year-end 640,499 23,333
======================= ========= =========
Weighted-average fair value of options granted during the period:
$ 5.71 $ 0.71
========== ==========
</TABLE>
The following table summarizes information about stock options
outstanding as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Wtd. Avg.
Range of Number Remaining Wtd. Avg. Number Wtd. Avg.
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/99 Life Price at 12/31/99 Price
- ------------ ----------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
0.80-5.00 . 280,000 8.00 Years $ 0.80 116,667 $ 0.80
5.01-10.00. 1,687,250 9.75 Years $ 8.67 177,583 $ 8.42
10.01-15.00 522,916 9.50 Years $ 12.68 256,249 $ 13.90
15.01-30.00 45,000 9.50 Years $ 25.60 45,000 $ 25.60
30.01-45.00 45,000 9.50 Years $ 40.22 45,000 $ 40.22
----------- -----------
2,580,166 $ 9.47 640,499 $ 12.67
=========== ========== =========== ==========
</TABLE>
F-26
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In connection with the grant of certain stock options in 1999, the
Company recorded deferred compensation of $702,700, representing the
difference between the deemed fair market value and the exercise price
of the options as determined by the Board of Directors on the date of
grant. The deferred compensation is being amortized over the vesting
period of the underlying options. The amount recognized as
compensation expense in 1999 amounted to $211,300.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
Company to provide pro forma information regarding net (loss) income
and (loss) earnings per share as if compensation cost for the
Company's stock option plan had been determined in accordance with the
fair value based method prescribed in SFAS No.123. The Company
estimates the fair value of stock options at the grant date by using
the Black-Scholes option pricing-model with the following weighted
average assumptions used for grants in 1999 and 1998: dividend yield
of 0; expected volatility of 112% and 180%; risk-free interest rate of
6.2% and 5.7%; and expected lives of three years for all plan options.
The Company adopted its Stock Option Plan in September 1998 and
consequently had no stock options granted in 1997.
Under the accounting provisions of SFAS No. 123, the Company's net
loss and the basic and diluted net loss per common share would have
been adjusted to the pro forma amounts below:
<TABLE>
<CAPTION>
1999 1998
------------- ------------
<S> <C> <C>
Net income (loss):
As reported. . . . . . . . $ (9,880,400) $(3,127,900)
Pro forma. . . . . . . . . $(11,516,600) $(3,144,500)
Basic and diluted earnings
(loss) per share:
As reported. . . . . . . . $ (0.46) $ (0.32)
Pro forma. . . . . . . . . $ (0.54) $ (0.32)
</TABLE>
F-27
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES
The provision for income taxes for the year ended December 31, 1999
relates to the earnings of Plus Net, Inc. prior to the merger. The
provision for income taxes for the year ended December 31, 1998 and
the period ended December 31, 1997 consisted of minimum state taxes.
The following summarizes the differences between income tax expense
and the amount computed applying the Federal income tax rate of 34%
for the years ended December 31, 1999 and 1998, and for the period
ended December 31, 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------- ------------ ------------ ---------
<S> <C> <C> <C>
Federal income tax benefit at statutory rate $(3,316,200) $(1,058,400) $(54,100)
State income taxes, net of federal benefit . (566,500) (180,800) (9,800)
Tax benefit not currently recognizable . . . 3,884,100 835,400 64,500
Other. . . . . . . . . . . . . . . . . . . . 125,400 404,600 -
- -------------------------------------------- ------------ ------------ ---------
Provision for income taxes . . . . . . . . . $ 126,800 $ 800 $ 600
============================================ ============ ============ =========
</TABLE>
Deferred income taxes and benefits result from temporary timing
differences in the recognition of certain expenses and income items
for tax and financial reporting purposes, as follows:
<TABLE>
<CAPTION>
December 31, 1999 1998 1997
- --------------------------------- ------------ ---------- ---------
<S> <C> <C> <C>
Net operating loss carryforward . $ 4,558,900 $ 473,900 $ 67,400
Depreciation and amortization . . (216,800) (90,300) (10,100)
Accrued compensation and benefits 562,700 4,000 -
Reserves not currently deductible 33,300 316,200 200
- --------------------------------- ------------ ---------- ---------
Total deferred tax asset. . . . . 4,938,100 703,800 57,500
Valuation allowance . . . . . . . (4,938,100) (783,800) (57,500)
- --------------------------------- ------------ ---------- ---------
Net deferred tax asset. . . . . . $ - $ - $ -
================================= ============ ========== =========
</TABLE>
The Company has net operating loss carryforwards available to reduce
future taxable income, if any, of approximately $11,200,000 for
Federal income tax purposes. The benefits from these carryforwards
expire through 2019. As of December 31, 1999, management cannot
determine that it is more likely than not that these carryforwards and
other deferred tax assets will be realized, and accordingly, fully
reserved for these deferred tax assets.
F-28
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Pursuant to the "change in ownership" provisions of the Tax Reform Act
of 1986, utilization of the Company's net operating loss and research
and development tax credit carryforwards may be limited, if a
cumulative change of ownership of more than 50% occurs within any
three-year period. The Company has not determined if an ownership
change has occurred.
9. CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and cash
equivalents and trade receivables. The Company places its cash and
cash equivalents with high quality financial institutions and, by
policy, limits the amounts of credit exposure to any one financial
institution.
The Company's accounts receivable are derived from many customers in
various industries. The Company believes any risk of accounting loss
is significantly reduced due to the diversity of its end-customers and
geographic sales areas. The Company performs credit evaluation of its
customers' financial condition whenever necessary, and generally does
not require cash collateral or other security to support customer
receivables.
10. MAJOR CUSTOMERS
For the year ended December 31, 1999, one customer accounted for
approximately 17% of revenues, with related account receivable as of
December 31, 1999 of $250,000.
For the year ended December 31, 1998, four customers accounted for
approximately 28%, 21%, 13% and 12% of revenues, respectively with
related accounts receivable as of December 31, 1998 of $52,100,
$38,100, $0 and $23,800, respectively.
For the period ended December 31, 1997, one customer accounted for
approximately 84% of revenues, with related account receivable at
December 31, 1997 of $59,100.
F-29
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following is supplemental disclosure for the statements of cash
flows.
<TABLE>
<CAPTION>
For the
Period
October 23,
to
Year Ended December 31, December 31,
-----------------------
1999 1998 1997
- ----------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Cash Paid:
- -----------------------------------------------------
Income taxes. . . . . . . . . . . . . . . . . . . . . $ 1,600 $ 1,400 $ -
Interest. . . . . . . . . . . . . . . . . . . . . . . $ 3,000 $ 100 $ -
Noncash Investing and Financing Activities
- -----------------------------------------------------
Note payable and common stock issued for
purchased technology and other assets . . . . . . . $ - $ - $2,000,000
Purchase of equipment under capital lease . . . . . . $ - $ 14,700 $ -
Issuance of common stock for convertible
notes payable plus accrued interest . . . . . . . . $1,863,300 $1,020,000 $ -
Issuance of common stock for consulting services. . . $1,060,800 $ - $ -
Warrants issued in conjunction with debt financing. . $ 361,200 $ - $ -
Conversion of preferred stock to common stock . . . . $ - $ 109,100 $ -
Promissory notes received for common stock subscribed $ - $ 95,000 $ -
===================================================== ========== ========== ==========
</TABLE>
12. CONTINGENCIES
The Company is involved in litigation arising in the ordinary course
of business. In the opinion of management, after consulting with legal
counsel, these matters are without merit and will be resolved without
material adverse effect on the Company's financial position, results
of operations or cash flows.
13. SUBSEQUENT EVENTS
In January and February 2000, RGC converted $800,000 of the
debentures, with accrued interest of $35,000, into 631,932 shares of
common stock. In conjunction with the conversions, RGC also exercised
its investment option right and purchased 631,932 shares of the
Company's common stock for proceeds of $835,000.
In January 2000, the Company adopted a new Stock Option Plan, in
addition to the Plan adopted in 1998. The Company has reserved
3,300,000 shares of common stock for issuance under the new plan.
F-30
<PAGE>
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In January 2000, the Company granted options under the new Stock
Option Plan to purchase up to 1,508,800 shares of common stock, at an
exercise price of $2.44 per share, to certain members of its board of
directors and employees of the Company.
In November 1999, the Company retained the services of an investment
banking firm to assist in securing a private placement for additional
capital. As of March 9, 2000, the Company had issued 300,000 shares
for proceeds of $450,000. An additional $6,700,000 was being held by
the escrow agent for release to the company upon the issuance of
common stock, sold at $ 1.50 per share, to other subscribers of the
private placement. For their services, the investment bank is to
receive 350,000 shares of the company's common stock valued at
$525,000.
14, VALUATION AND
QUALIFYING
ACCOUNTS
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGI,NNING COSTS AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
----------- ---------- -------- ---------- -----------
1999:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $31,200 $52,400 $ - $83,600
1998:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $ - $31,200 $ - $31,200
1997:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $ - $ - $ - $ -
F-31
<PAGE>
You should rely only on the information incorporated by reference or
provided in this prospectus or any prospectus supplement. Neither we nor the
selling stockholders have authorized anyone else to provide you with different
information. Neither we nor the selling stockholders are making an offer to
sell, or soliciting an offer to buy, these securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or our affairs have not
changed since the date hereof.
[/R]
<PAGE>
NETTAXI.COM
9,961,387 Shares of
Common Stock
____________________
PROSPECTUS
____________________
_________, 2000
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of various expenses, all of
which we will pay, in connection with the sale and distribution of the
securities being registered. All of the amounts shown are estimates, except the
Securities and Exchange Commission registration fee.
Securities and Exchange Commission Registration Fee $ 8,349.55
Accounting Fees and Expenses $ 15,000.00
Legal Fees and Expenses $ 25,000.00
Miscellaneous $ 1,650.45
Total $ 50,000.00
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Nevada Private Corporation Law provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that such person was an officer or director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to:
- - any action or suit by or in the right of the corporation against
expenses, including amounts paid in settlement and attorneys' fees,
actually and reasonably incurred, in connection with the defense
or settlement believed to be in, or not opposed to, the best interests
of the corporation, except that indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged
by a court of competent jurisdiction to be liable to the corporation
or for amounts paid in settlement to the corporation; and
- - any other action or suit or proceeding against expenses, including
attorneys' fees, judgments, fines and amounts paid in settlement, actually
and reasonably incurred, if he or she acted in good faith and in a manner
which he or she reasonably believed to be in, or not opposed to,
reasonable cause to believe his or her conduct was unlawful.
To the extent that a director, officer, employee or agent has been "successful
on the merits or otherwise" the corporation must indemnify such person. The
articles of incorporation or bylaws may provide that the expenses of officers
and directors incurred in defending any such action must be paid as incurred and
in advance of the final disposition of such action. The Nevada Private
Corporation Law also permits the corporation to purchase and maintain insurance
on behalf of the corporation's directors and officers against any liability
arising out of their status as such, whether or not the corporation would
have the power to indemnify him against such liability. These provisions may be
sufficiently broad to indemnify such persons for liabilities arising under the
Securities Act.
<PAGE>
The Company's articles of incorporation include a provision eliminating the
personal liability of directors for breach of fiduciary duty except that such
provision will not eliminate or limit any liability which may not be so
eliminated or limited under applicable law.
The Company intends to enter into indemnification agreements with its
directors and officers substantially in the form attached to this registration
statement as Exhibit 10.35. These agreements provide, in general, that the
Company will indemnify such directors and officers for, and hold them harmless
from and against, any and all amounts paid in settlement or incurred by, or
assessed against, such directors and officers arising out of or in connection
with the service of such directors and officers as a director or officer of the
Company or its Affiliates to the fullest extent permitted by Nevada law.
The Company maintains liability insurance for its directors and officers
covering, subject to exceptions, any actual or alleged negligent act, error,
omission, misstatement, misleading statement, neglect or breach of duty by such
directors or officers, individually or collectively, in the discharge of their
duties in their capacity as directors or officers of the Company.
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Set forth in chronological order is information regarding shares of common
stock issued and options and warrants and other convertible securities granted
by the Company during the past three years. Also included is the consideration,
if any, received by the Company for such shares and options and information
relating to the section of the Securities Act of 1933, or rule of the
Securities and Exchange Commission under which exemption from registration
was claimed.
Transactions described in Items (1) through (10) below refer to the
securities of Nettaxi Online Communities, Inc., a Delaware corporation which
was the predecessor entity of the filer of this registration statement, and
transactions described in Items (11) through (18) below refer to the
securities of Nettaxi, Inc., a Nevada corporation which is the filer of this
Registration Statement.
(1) In October, 1997, the Company issued each of Robert A. Rositano,
Jr. and Dean Rositano 1,288,044 shares for $51.00 in cash. The issuances
were made in reliance on Section 4(2) of the Securities Act of 1933 and were
made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate the investments, and who represented to the Company that the shares
were being acquired for investment.
(2) In October, 1997, the Company entered into the Asset Purchase
Agreement with SSN Properties, LLC pursuant to which the Company issued the
aggregate amount of 2,475,066 shares of common stock to SSN Properties, LLC
valued at $0.396 per share. SSN Properties made a pro rata distribution of such
shares to its members in April, 1999. The issuance was made in reliance on
Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and was made without general solicitation or
advertising. The purchaser was a sophisticated investor with access to all
relevant information necessary to evaluate the investment, and who represented
to the Company that the shares were being acquired for investment.
(3) In November, 1997 the Company issued 88,395 shares of common stock
to two consultants of the Company in exchange for services performed for the
Company. The issuances were made in reliance on Section 4(2) of the Securities
Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and
were made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
(4) In November, 1997, the Company conducted a private offering of its
common stock. Pursuant to that offering, a total of 506,378 shares of common
stock were issued in exchange for $200,500. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
<PAGE>
(5) In November 1997, the Company conducted a private offering of its
Series A Preferred Stock. Pursuant to that offering, a total of 367,219 shares
of Series A Preferred Stock were issued for total cash consideration of
$109,050. The Series A Preferred Stock was convertible on a one-for-two basis
with Common Stock. In September 1998, the outstanding shares of Series A
Preferred Stock were converted into 734,438 shares of common stock. The
issuances were made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(6) In February, 1998 the Company issued 66,297 shares of common stock
to each of Robert A. Rositano, Jr. and Dean Rositano in lieu of foregone salary
which was earned between October, 1997 and January, 1998. The issuances
were made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(7) In September, 1998 the Company issued 2,792,763 shares of common
stock to SSN Properties, LLC pursuant to the Conversion Agreement providing for
an exchange of convertible notes payable and accrued interest. SSN Properties
made a pro rata distribution of such shares to its members in April, 1999.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchaser was a sophisticated
investor with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(8) In September, 1998, the Company issued 176,790 shares of common
stock to SSN Properties, LLC in debt conversion. SSN Properties made a pro rata
distribution of such shares to its members in April, 1999. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
(9) In August and September, 1998, the Company issued 118,190 shares of
common stock to key employees and consultants in consideration for services
rendered to the Company valued at $67,000. The issuances were made in reliance
on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated
under the Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
<PAGE>
(10) In September, 1998, the Company issued 2,399,298 shares of common
stock to officers, key employees and consultants who exchanged their
warrants for shares of Common Stock via the issuance of promissory notes.
Warrants to purchase the aggregate amount of 631,394 of the shares of common
stock were issued in March, 1998 to six employees, two directors and two
consultants of the Company. The exercise price for the warrants was $0.0396.
Warrants to purchase the aggregate amount of 1,767,904 shares of common stock
were issued in August, 1998, to Robert A. Rositano, Jr. and Dean Rositano
pursuant to their Employment Agreements. The exercise price for the warrants
was $0.0396. The issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
(11) In September 1998, the Company and its stockholders entered into a
Reorganization Agreement with Swan Valley Snowmobiles, IncUnder the terms
of the Reorganization Agreement, the stockholders of the Company received
approximately 2.53 shares of common stock of Swan Valley for each share of the
Company they owned prior to the reorganization and the Company became a
wholly-owned subsidiary of Swan Valley. Swan Valley changed its name to
Nettaxi, Inc. and references to "the Company" hereafter refer to Nettaxi,
Inc. the filer of this registration statement. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(12) In September, 1998, pursuant to the terms of the Reorganization
Agreement, the Company conducted a private offering of its common stock.
Pursuant to that offering, a total of 1,250,000 shares of common stock were sold
for total cash consideration of $1,000,000. The issuance was made in
reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D
promulgated under the Securities Act of 1933 and were made without general
solicitation or advertising. The purchasers were sophisticated investors with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(13) In September, 1998, the Company, pursuant to its 1998 Stock Option
Plan, issued options to purchase 280,000 shares of common stock to officers and
employees of the Company, with an exercise price of $0.88 and $0.80 per share,
respectively. These issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Rule 701 promulgated under the Securities Act of
1933 and were made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to the Company that the
shares were being acquired for investment.
<PAGE>
(14) In October, 1998, the Company issued 200,000 shares of common
stock to Baytree Capital Associates pursuant to the terms of a Letter Agreement
with Baytree Capital Associates for financial business consulting services.
The issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(15) From January, 1999 to December, 1999, the Company pursuant to its
1998 Stock Option Plan, issued options to purchase 2,614,000 shares of common
stock to its key employees, with exercise prices ranging from $7.437 to $44.00
per share. These issuances were made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Rule 701 promulgated under the Securities Act of
1933 and were made without general solicitation or advertising. The purchasers
were sophisticated investors with access to all relevant information necessary
to evaluate these investments, and who represented to the Company that the
shares were being acquired for investment.
(16) In March, 1999 the Company issued an option to purchase an
aggregate of 125,000 shares of Common Stock to Wall Street Trading Group
pursuant to the Common Stock Purchase Option to Purchase Common Shares of
Nettaxi. The exercise price for the Option is $8.00 per share. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and were made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
(17) On March 31, 1999, the Company issued convertible debentures in
the amount of $5,000,000 and warrants to purchase 150,000 shares of common stock
of the Company. The issuance was made in reliance on Section 4(2) of the
Securities Act of 1933 and/or Regulation D promulgated under the Securities Act
of 1933 and were made without general solicitation or advertising. The
purchasers were sophisticated investors with access to all relevant information
necessary to evaluate these investments, and who represented to the Company that
the shares were being acquired for investment.
(18) In May, 1999 the Company issued an aggregate amount of 7,000,000
shares of common stock to the former shareholders of Plus Net, Inc. pursuant to
the Merger Agreement and Plan of Reorganization between the Company and Plus
Net. The issuance was made in reliance on Section 4(2) of the Securities Act of
1933 and/or Regulation D promulgated under the Securities Act of 1933 and were
made without general solicitation or advertising. The purchasers were
sophisticated investors with access to all relevant information necessary to
evaluate these investments, and who represented to the Company that the shares
were being acquired for investment.
<PAGE>
(19) In May, 1999 the Company issued options to purchase up to 150,000
shares of common stock to Fontenelle LLC. The options vest upon the completion
of financial consulting services to be provided to the Company by Fontenelle
LLC. The exercise price for the options is $14.875 per share. This issuance was
made in reliance on Section 4(2) of the Securities Act of 1933 and/or Rule 701
promulgated under the Securities Act of 1933 and was made without general
solicitation or advertising. The purchaser was a sophisticated investor with
access to all relevant information necessary to evaluate these investments, and
who represented to the Company that the shares were being acquired for
investment.
(20) In December, 1999 the Company issued 350,000 shares of Common
Stock to Sinclair Davis Trading Corp. in exchange for consulting servicesThe
issuance was made in reliance on Section 4(2) of the Securities Act of 1933
and/or Regulation D promulgated under the Securities Act of 1933 and were made
without general solicitation or advertising. The purchasers were sophisticated
investors with access to all relevant information necessary to evaluate these
investments, and who represented to the Company that the shares were being
acquired for investment.
(21) From January to March, 2000, the Company under its 1999 stock
option plan issued options to purchase up to 3,293,333 shares of common stock
to members of its board of directors who were not employees of the Company, 3
officers, and 33 employees and 1 consultant with exercise prices ranging from
$1.44 to $2.44 per share, which was not less than the fair market value of the
shares on the date of grant. The issuances were made in reliance on Section
4(2) of the Securities Act of 1933 and was made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate the investments, and who represented
to the Company that the shares were being acquired for investment.
(22) In February 2000 we issued 175,000 shares of Common Stock to
Sinclair Davis Trading Corp. in exchange for consulting services. The issuance
was made in reliance on Section 4(2) of the Securities Act of 1933 and/or
Regulation D promulgated under the Securities Act of 1933 and was made without
general solicitation or advertising. The purchaser was a sophisticated investor
with access to all relevant information necessary to evaluate these investments,
and who represented to the Company that the shares were being acquired for
investment.
(23) In February 2000 we issued 15,766,667 shares of Common Stock and
warrants to purchase up to 15,766,667 shares of common stock in exchange for
approximately $23.6 million. The issuances were made in reliance on Section 4(2)
of the Securities Act of 1933 and/or Regulation D promulgated under the
Securities Act of 1933 and were made without general solicitation or
advertising. The purchasers were sophisticated investors with access to all
relevant information necessary to evaluate these investments, and who
represented to the Company that the shares were being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
The following Exhibits are attached hereto and incorporated herein by
reference:
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
The following Exhibits are attached hereto and incorporated herein by reference:
Exhibit
Number Description of Exhibit
- ------- -----------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Reorganization dated
September 24, 1998 by and among Nettaxi
Online Communities, Inc., the owners of all
the outstanding shares of common stock of
Nettaxi Online Communities, Inc. and the
Company.
*2.2 Merger Agreement and Plan of Reorganization
dated April 1, 1999 by and between Plus Net,
Inc. and the Company
*3.1 Articles of Incorporation of the Company
*3.2 Certificate of Amendment to the Articles of
Incorporation of the Company
*3.3 By-Laws of the Company
*4.1 Specimen Common Stock Certificate of the
Company
*4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of
the Articles of Incorporation and By-Laws of
the Company defining the rights of holders of
Common Stock of the Company.
*4.3 Convertible Debenture dated March 31, 1999
in favor of RGC International Investors, LDC
****4.4 1999 Stock Option Plan of the Company
****4.5 Form of Stock Option Agreement for options issued pursuant to
1999 Stock Option Plan of the Company
5.1 Opinion of Silicon Valley Law Group with
respect to the legality of securities being
registered
*10.1 Asset Purchase and Sale Agreement dated
October 1, 1997 by and between SSN
Properties, LLC and the Company
*10.2 Sub Lease dated September 3, 1997 by and
between Execustaff and the Company
10.3 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.42]
10.4 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.43]
*10.5 Stock Option Agreement dated March 20, 1998
by and between Robert A. Rositano, Jr. and the
Company
*10.6 Stock Option Agreement dated March 20, 1998
by and between Dean Rositano and the
Company
10.7 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.44]
10.8 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.45]
<PAGE>
*10.9 Employment Agreement dated August 1, 1998
between Dean Rositano and the Company
*10.10 Employment Agreement dated August 1, 1998
between Robert A. Rositano, Jr. and the
Company
*10.11 Stock Option Agreement dated August 1, 1998
by and between Robert A. Rositano, Jr. and the
Company
*10.12 Stock Option Agreement dated August 1, 1998
by and between Dean Rositano and the
Company
10.13 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.46]
*10.14 Letter Agreement dated September 3, 1998
between Bay Tree Capital Associates, LLC and
the Company
10.15 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.47]
10.16 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.48]
*10.17 1998 Stock Option Plan of the Company
*10.18 Form of Stock Option Agreement for options
issued pursuant to 1998 Stock Option Plan of
the Company
*10.19 Stock Option Agreement under the 1998 Stock
Option Plan by and between Dean Rositano
and the Company
*10.20 Stock Option Agreement under the 1998 Stock
Option Plan by and between Robert A.
Rositano, Jr. and the Company
10.21 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.49]
*10.22 Technology Licensing Agreement dated
February 3, 1999 by and between Go Hip, Inc.
and the Company
*10.23 First Amendment to Technology Licensing
Agreement dated as of
April 1, 1999 by and between Go Hip, Inc. and
the Company
10.24 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.50]
10.25 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.40]
10.26 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.51]
10.27 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.52]
<PAGE>
*10.28 Settlement Agreement dated March 2, 1999 by
and among Michael Gardner, Bay Tree Capital
Associates, LLP, Wall Street Trading Group,
Bruce K. Dorfman, Robert A. Rositano, Jr.,
Dean Rositano and the Company
*10.29 Common Stock Purchase Option to Purchase
Common Shares of Nettaxi, Inc. dated March
4, 1999 between Wall Street Trading Group
and the Company
*10.30 Securities Purchase Agreement dated March
31, 1999 by and among RGC International
Investors, LDC and the Company
*10.31 Stock Purchase Warrant dated March 31, 1999
by and among RGC
International Investors, LDC and the Company
*10.32 Registration Rights Agreement dated March
31, 1999 by and among RGC International
Investors, LDC and the Company
*10.33 Oppenheimer Funds 401K Plan
*10.34 Standard Office Lease- Gross dated March
1999 by and between South Bay Construction
and Development Co. III & South Bay
Construction and Development Co. VII and the
Company
*10.35 Form of Indemnification Agreement between
the Company and each of its Directors and
Executive Officers
10.36 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.53]
*10.37 Employment Agreement dated April 1, 1999
by and between Mr. Glenn Goelz and the
Company
*10.38 Consulting Agreement dated May 10, 1999 by
and between Fontenelle LLC and the Company
10.39 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.54]
10.40 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.55]
*10.41 Lease Agreement dated as of May 27, 1999 by
and between H&L Realty and Management
Company, Agent for owners Flamingo
Fountains and the Registrant
*10.42 Master Software License Bundling and
Distribution Agreement dated November 13,
1997 between Apple Computer, Inc. and the
Company
<PAGE>
*10.43 Master Software License, Bundling and
Distribution Agreement dated March 14, 1997
between Fountain Technologies, Inc. and the
Company
*10.44 Web Advertising Services Agreement dated
June 3, 1998 between Fly Cast
Communications Corporation and the
Company
*10.45 Sales and Representation Contract dated July
7, 1998 between Michael Weiner dba Unique
Media Services and the Company
*10.46 Merchant Services Agreement dated August 3,
1998 by and between eCharge Corporation and
the Company
*10.47 Conversion Agreement dated September 4,
1998 by and between SSN Properties, LLC and
the Company
*10.48 Internet Infospace Content (World Wide Web
Site) Distribution Agreement dated October 8,
1998 by and between InfoSpace.com, Inc., a
Delaware corporation and the Company
*10.49 Agreement for Terminal Facility Co-Location
Space dated January 18, 1999 between
Alchemy Communications, Inc. and the
Company
*10.50 Letter Agreement dated January 15, 1999
between Babenet, Ltd. and the Company
*10.51 License and Distribution Agreement dated
March 30, 1999 by and between Netopia, Inc.
and the Company
*10.52 Website Linking and Promotion Agreement
dated March 5, 1999 between PI Graphix, Inc.
and the Company
*10.53 Development Agreement dated as of December
16, 1998 between the Big Network Inc. and the
Company
*10.54 Development and License Agreement dated
May, 1999 by and between eBay, Inc. and the
Company
*10.55 Internet Services Suite Agreement dated May
5, 1999 by and between Wired Digital, Inc.,
Lycos, Inc. and the Company
*10.56 Financial Consulting Agreement dated June
29, 1999 by and between The Phoenix Group
International, LLC and the Company
**10.57 Master Services Agreement dated September 15, 1997 by and
between Exodus Communications, Inc. and the Company.
**10.58 Gigabit Data Center Services Agreement dated July 1, 1999 by
between Alchemy Communications, Inc. and the Company.
**10.59 Advertising Impression Network Contract dated July 1, 1999 by
and between White Sand Communications, Inc. and the Company.
**10.60 Advertising Impression Network Contract dated July 1, 1999 by
and between Multinet Communications Worldwide Limited and the Company.
**10.61 Data Center Service Agreement dated July 15, 1999 by and between
Babenet, LTD and the Company.
**10.62 Data Center Service Agreement dated July 15, 1999 by and between
Whitehorn Ventures Limited and the Company.
**10.63 Data Center Service Agreement dated August 15, 1999 by and between
White Sand Communications, Inc. and the Company.
<PAGE>
*10.64 Co-Branded Free ISP Agreement dated
November 30, 1999 by and between Spin
Media Network, Inc. and the Company
*10.65 Internet Content Distribution Agreement dated
December 30, 1999 by and between InfoSpace.com
and the Company
*****10.66 Sinclair Davis Trading Group Agreement dated as of December 8, 1999 by
and between Sinclair Davis Trading Corp. and the Company.
*****10.67 Form of Subscription Agreement of the Company
*21.1 Subsidiaries of the Company
*23.1 [Intentionally Blank/ Updated as Exhibit 23.3]
23.2 Consent of Silicon Valley Law Group
(included in Exhibit 5.1)
*23.3 [Intentionally Blank/ Updated as Exhibit 23.4]
23.4 [Intentionally Blank/ Updated as Exhibit 23.5]
23.5 Consent of BDO Seidman, LLP
*24.1 Powers of Attorney (included on signature
pages to this Registration Statement)
*27.1 Financial Data Schedule
* Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129) which was
declared effective on August 13, 1999.
** Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ending September 30,
1999.
*** Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No.333-30074) which was filed
On February 10, 2000.
**** Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-32678) which was filed
On March 17, 2000.
***** Incorporated by reference to the exhibits filed with the Registrant's
Registration Report on Form 10-K for the period ending December 31,
1999.
</TABLE>
(B) FINANCIAL STATEMENT SCHEDULES
Financial Statement Schedules omitted because the information is included
in the Financial Statements or notes thereto.
<PAGE>
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions described under Item 14
above, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act of 1933 and will be governed by the
final adjudication of such issue.
(b) The undersigned registrant hereby undertakes that:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective amendment
thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set
forth in the registration statement; notwithstanding the
foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered
would not exceed that which was registered) and any
deviation from the low or high end of the estimated
maximum Offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule
424(b) (230.424(b) of this Chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20%
change in the maximum aggregate Offering price set forth in
the "Calculation of Registration Fee" table in the
effective Registration Statement; and
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the Registration Statement.
Provided, however, that paragraphs (b)(1)(i) and (b)(1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
<PAGE>
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities and Exchange of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment shall be
deemed to be a new Registration Statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the Offering.
(c) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amemdment Number 1 to Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of San Jose, State of California, on April 3, 2000.
NETTAXI.COM
By: /S/ Robert A. Rositano, Jr.
- -----------------------------------
Robert A. Rositano, Jr.
Chief Executive Officer
<PAGE>
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Robert A. Rositano, Jr. Chief Executive Officer, April 3, 2000
- --------------------------- Secretary and Director
Robert A. Rositano, Jr. (principal executive officer)
/S/ Dean Rositano President and Director April 3, 2000
- ---------------------------
Dean Rositano.
/S/ Glenn Goelz Vice President Chief April 3, 2000
- --------------------------- Financial Officer (principal
Glenn Goelz accounting officer)
/S/ Andrew Garroni Director April 3, 2000
- ---------------------------
Andrew Garroni
/S/ Ronald Goldie Director April 3, 2000
- ---------------------------
Ronald Goldie
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
The following Exhibits are attached hereto and incorporated herein by reference:
Exhibit
Number Description of Exhibit
- ------- -----------------------------------------------------------------------
<C> <S>
*2.1 Agreement and Plan of Reorganization dated
September 24, 1998 by and among Nettaxi
Online Communities, Inc., the owners of all
the outstanding shares of common stock of
Nettaxi Online Communities, Inc. and the
Company.
*2.2 Merger Agreement and Plan of Reorganization
dated April 1, 1999 by and between Plus Net,
Inc. and the Company
*3.1 Articles of Incorporation of the Company
*3.2 Certificate of Amendment to the Articles of
Incorporation of the Company
*3.3 By-Laws of the Company
*4.1 Specimen Common Stock Certificate of the
Company
*4.2 See Exhibits 3.1, 3.2 and 3.3 for provisions of
the Articles of Incorporation and By-Laws of
the Company defining the rights of holders of
Common Stock of the Company.
*4.3 Convertible Debenture dated March 31, 1999
in favor of RGC International Investors, LDC
****4.4 1999 Stock Option Plan of the Company
****4.5 Form of Stock Option Agreement for options issued payment to
1999 Stock Option Plan of the Company.
5.1 Opinion of Silicon Valley Law Group with
respect to the legality of securities being
registered
*10.1 Asset Purchase and Sale Agreement dated
October 1, 1997 by and between SSN
Properties, LLC and the Company
*10.2 Sub Lease dated September 3, 1997 by and
between Execustaff and the Company
10.3 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.42]
10.4 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.43]
*10.5 Stock Option Agreement dated March 20, 1998
by and between Robert A. Rositano, Jr. and the
Company
*10.6 Stock Option Agreement dated March 20, 1998
by and between Dean Rositano and the
Company
10.7 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.44]
10.8 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.45]
<PAGE>
*10.9 Employment Agreement dated August 1, 1998
between Dean Rositano and the Company
*10.10 Employment Agreement dated August 1, 1998
between Robert A. Rositano, Jr. and the
Company
*10.11 Stock Option Agreement dated August 1, 1998
by and between Robert A. Rositano, Jr. and the
Company
*10.12 Stock Option Agreement dated August 1, 1998
by and between Dean Rositano and the
Company
10.13 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.46]
*10.14 Letter Agreement dated September 3, 1998
between Bay Tree Capital Associates, LLC and
the Company
10.15 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.47]
10.16 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.48]
*10.17 1998 Stock Option Plan of the Company
*10.18 Form of Stock Option Agreement for options
issued pursuant to 1998 Stock Option Plan of
the Company
*10.19 Stock Option Agreement under the 1998 Stock
Option Plan by and between Dean Rositano
and the Company
*10.20 Stock Option Agreement under the 1998 Stock
Option Plan by and between Robert A.
Rositano, Jr. and the Company
10.21 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.49]
*10.22 Technology Licensing Agreement dated
February 3, 1999 by and between Go Hip, Inc.
and the Company
*10.23 First Amendment to Technology Licensing
Agreement dated as of
April 1, 1999 by and between Go Hip, Inc. and
the Company
10.24 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.50]
10.25 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.40]
10.26 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.51]
10.27 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.52]
<PAGE>
*10.28 Settlement Agreement dated March 2, 1999 by
and among Michael Gardner, Bay Tree Capital
Associates, LLP, Wall Street Trading Group,
Bruce K. Dorfman, Robert A. Rositano, Jr.,
Dean Rositano and the Company
*10.29 Common Stock Purchase Option to Purchase
Common Shares of Nettaxi, Inc. dated March
4, 1999 between Wall Street Trading Group
and the Company
*10.30 Securities Purchase Agreement dated March
31, 1999 by and among RGC International
Investors, LDC and the Company
*10.31 Stock Purchase Warrant dated March 31, 1999
by and among RGC
International Investors, LDC and the Company
*10.32 Registration Rights Agreement dated March
31, 1999 by and among RGC International
Investors, LDC and the Company
*10.33 Oppenheimer Funds 401K Plan
*10.34 Standard Office Lease- Gross dated March
1999 by and between South Bay Construction
and Development Co. III & South Bay
Construction and Development Co. VII and the
Company
*10.35 Form of Indemnification Agreement between
the Company and each of its Directors and
Executive Officers
10.36 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.53]
*10.37 Employment Agreement dated April 1, 1999
by and between Mr. Glenn Goelz and the
Company
*10.38 Consulting Agreement dated May 10, 1999 by
and between Fontenelle LLC and the Company
10.39 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.54]
10.40 [Intentionally Blank/Updated form of
agreement filed as Exhibit 10.55]
*10.41 Lease Agreement dated as of May 27, 1999 by
and between H&L Realty and Management
Company, Agent for owners Flamingo
Fountains and the Registrant
*10.42 Master Software License Bundling and
Distribution Agreement dated November 13,
1997 between Apple Computer, Inc. and the
Company
<PAGE>
*10.43 Master Software License, Bundling and
Distribution Agreement dated March 14, 1997
between Fountain Technologies, Inc. and the
Company
*10.44 Web Advertising Services Agreement dated
June 3, 1998 between Fly Cast
Communications Corporation and the
Company
*10.45 Sales and Representation Contract dated July
7, 1998 between Michael Weiner dba Unique
Media Services and the Company
*10.46 Merchant Services Agreement dated August 3,
1998 by and between eCharge Corporation and
the Company
*10.47 Conversion Agreement dated September 4,
1998 by and between SSN Properties, LLC and
the Company
*10.48 Internet Infospace Content (World Wide Web
Site) Distribution Agreement dated October 8,
1998 by and between InfoSpace.com, Inc., a
Delaware corporation and the Company
*10.49 Agreement for Terminal Facility Co-Location
Space dated January 18, 1999 between
Alchemy Communications, Inc. and the
Company
*10.50 Letter Agreement dated January 15, 1999
between Babenet, Ltd. and the Company
*10.51 License and Distribution Agreement dated
March 30, 1999 by and between Netopia, Inc.
and the Company
*10.52 Website Linking and Promotion Agreement
dated March 5, 1999 between PI Graphix, Inc.
and the Company
*10.53 Development Agreement dated as of December
16, 1998 between the Big Network Inc. and the
Company
*10.54 Development and License Agreement dated
May, 1999 by and between eBay, Inc. and the
Company
*10.55 Internet Services Suite Agreement dated May
5, 1999 by and between Wired Digital, Inc.,
Lycos, Inc. and the Company
*10.56 Financial Consulting Agreement dated June
29, 1999 by and between The Phoenix Group
International, LLC and the Company
**10.57 Master Services Agreement dated September 15, 1997 by and
between Exodus Communications, Inc. and the Company.
**10.58 Gigabit Data Center Services Agreement dated July 1, 1999 by
between Alchemy Communications, Inc. and the Company.
**10.59 Advertising Impression Network Contract dated July 1, 1999 by
and between White Sand Communications, Inc. and the Company.
**10.60 Advertising Impression Network Contract dated July 1, 1999 by
and between Multinet Communications Worldwide Limited and the Company.
**10.61 Data Center Service Agreement dated July 15, 1999 by and between
Babenet, LTD and the Company.
**10.62 Data Center Service Agreement dated July 15, 1999 by and between
Whitehorn Ventures Limited and the Company.
**10.63 Data Center Service Agreement dated August 15, 1999 by and between
White Sand Communications, Inc. and the Company.
<PAGE>
*10.64 Co-Branded Free ISP Agreement dated
November 30, 1999 by and between Spin
Media Network, Inc. and the Company
*10.65 Internet Content Distribution Agreement dated
December 30, 1999 by and between InfoSpace.com
and the Company
*****10.66 Sinclair Davis Trading Group Agreement dated as of December 8, 1999 by
and between Sinclair Davis Trading Corp. and the Company.
*****10.67 Form of Subscription Agreement of the Company
**21.1 Subsidiaries of the Company
**23.1 [Intentionally Blank/ Updated as Exhibit 23.3]
23.2 Consent of Silicon Valley Law Group
(included in Exhibit 5.1)
**23.3 [Intentionally Blank/ Updated as Exhibit 23.4]
23.4 [Intentionally Blank/ Updated as Exhibit 23.5]
23.5 Consent of BDO Seidman, LLP
***24.1 Powers of Attorney (included on signature
pages to this Registration Statement)
27.1 Financial Data Schedule
</TABLE>
* Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No. 333-78129) which was
declared effective on August 13, 1999.
** Incorporated by reference to the exhibits filed with the Registrant's
Quarterly Report on Form 10-Q for the period ending September 30,
1999.
*** Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-1 (File No.333-30074) which was
filed on February 10, 2000.
**** Incorporated by reference to the exhibits filed with the Registrant's
Registration Statement on Form S-8 (File No. 333-32678) which was
filed on March 17, 2000.
***** Incorporated by reference to the exhibits filed with the Registrant's
Registration Report on Form 10-K for the period ending December 31,
1999.
Exhibit 5.1
OPINION OF SILICON VALLEY LAW GROUP
[Letterhead of Silicon Valley Law Group]
April 3, 2000
Nettaxi.com
1696 Dell Avenue
Campbell, CA 95008
Re: Form S-1 Registration Statement
Ladies and Gentlemen:
We are rendering this opinion in connection with the Registration Statement
on Form S-1 originally filed by Nettaxi.com (the "Company") with the Securities
and Exchange Commission under the Securities Act of 1933, as amended, on
February 10, 2000 (such Registration Statement as amended from time to time is
referred to herein as the "Registration Statement"). The Registration Statement
relates to the registration of shares of the Company's Common Stock, $0.0001 par
value per share, which may be offered for resale by certain parties listed
therein. The number of shares covered by the Registration Statement is to be
determined under the terms of the convertible debentures and warrants described
in the Registration Statement, and all such shares are referred to herein as the
"Shares." The Shares are issuable upon conversion and/or exercise of the
Company's convertible debentures and warrants held by the parties listed in the
Registration Statement. We understand that the Shares are to be offered and
sold in the manner described in the Registration Statement.
We have acted as your counsel in connection with the preparation of
the Registration Statement and are familiar with the proceedings taken by the
Company in connection with the authorization and preparation for issuance of the
Shares. We have examined all such documents as we consider necessary to enable
us to render this opinion.
Based upon the foregoing, we are of the opinion that the Shares have
been duly authorized and when issued and delivered by the Company, following a
conversion of the convertible debentures and/or exercise of the warrants in
accordance with the terms of such convertible debentures and warrants, will be
legally issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under "Legal Matters" in
the Registration Statement.
Very truly yours,
/s/ Silicon Valley Law Group
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Nettaxi.com
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated February 15, 2000, except for
matters discussed in Note 13 for which the date is March 9, 2000, relating to
the consolidated financial statements of Nettaxi.com, which is contained in
that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO SEIDMAN, LLP
San Jose, California
April 3, 2000
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT 27.1
<CAPTION>
FINANCIAL DATA SCHEDULE
This schedule contains summary financial information extracted from
Nettaxi.com's consolidated statements of operations and consolidated balance
Sheets and is qualified in its entirety by reference to such financial
Statements.
<CURRENCY> U.S. DOLLARS U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 987,700 465,800
<SECURITIES> 0 0
<RECEIVABLES> 1,265,200 164,900
<ALLOWANCES> 83,600 31,200
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,778,500 615,600
<PP&E> 3,410,300 1,334,900
<DEPRECIATION> 863,700 297,800
<TOTAL-ASSETS> 6,031,200 1,652,700
<CURRENT-LIABILITIES> 4,831,500 315,200
<BONDS> 3,200,000 0
0 0
0 0
<COMMON> 20,000 10,800
<OTHER-SE> (2,020,300) 1,321,300
<TOTAL-LIABILITY-AND-EQUITY> 6,031,200 1,652,700
<SALES> 5,032,800 258,000
<TOTAL-REVENUES> 5,032,800 258,000
<CGS> 4,003,800 239,800
<TOTAL-COSTS> 10,431,500 3,100,500
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 426,200 68,800
<INCOME-PRETAX> (9,753,600) (3,112,800)
<INCOME-TAX> 126,800 800
<INCOME-CONTINUING> (9,880,400) (3,127,900)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (9,880,400) (3,127,900)
<EPS-BASIC> (0.46) (0.32)
<EPS-DILUTED> (0.46) (0.32)
</TABLE>
