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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number: 0-26109
NETTAXI.COM
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(Exact name of registrant as specified in its charter)
Nevada 82-0486102
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1696 Dell Avenue, Campbell, CA 95008
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(Address of Principal Executive Offices Including Zip Code)
Registrant's telephone number, including area code: (408) 879-9880
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.001 par value O-T-C Bulletin Board
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
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Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 28, 2000 the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $51,632,835 (based upon the closing
price for shares of the registrant's common stock as reported by O-T-C Bulletin
Board on that date). Shares of common stock held by each officer, director, and
holder of 5% or more of the outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of February 28, 2000, the registrant had 24,129,390 shares of common stock,
$.001 par value per share, outstanding.
Certain exhibits and appendices filed with the Registrant's Registration
Statement on Form S-1 ( File No. 33-78129), as amended, the Registrant's
Quarterly Report on Form 10-Q for the period ending September 30, 1999,
the Registrant's Registration Statement on Form S-1 (File No. 333-30074),
as amended, and the Registrant's Registration Statement on Form S-8 (File
No. 333-32678) are incorporated by reference into Part IV of this Form 10-K
where indicated.
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NETTAXI.COM
FORM 10-K
TABLE OF CONTENTS
PART I.
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ITEM 1. Business 4
ITEM 1A. Risk Factors 30
ITEM 2. Properties 43
ITEM 3. Legal Proceedings 44
ITEM 4.. Submission Of Matters To A Vote Of Security Holders 45
PART II.
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ITEM 5. Market For The Registrant's Common Stock
And Related Stockholder Matters 46
ITEM 6. Selected Consolidated Financial Data 50
ITEM 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 50
ITEM 7A. Quantitative And Qualitative Disclosures
About Market Risk 61
ITEM 8. Financial Statements And Supplementary Data 61
ITEM 9. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure 62
PART III.
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ITEM 10. Directors And Executive Officers Of The Registrant 63
ITEM 11. Executive Compensation 70
ITEM 12. Security Ownership Of Certain Beneficial Owners
And Management 76
ITEM 13. Certain Relationships And Related Transactions 78
PART IV.
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ITEM 14. Exhibits, Financial Statement Schedules,
And Reports On Form 8-K 82
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PART I
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This Form 10-K contains forward-looking statements. These forward-looking
statements are subject to significant risks and uncertainties, including
information included under Items 1 and 1A of this Form 10-K, which may cause
actual results to differ materially from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-K are identified
by words such as "believes," "anticipates," "expects," "intends," "may," "will"
and other similar expressions regarding our intent, belief and current
expectations. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances and
statements made in the future tense are forward-looking statements. Readers are
cautioned that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors, many of which are
beyond our control. We undertake no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of this Form
10-K with the Securities and Exchange Commission. Readers are urged to
carefully review and consider the various disclosures made by us in this Form
10-K, including those set forth under "Risk Factors" in Item 1A.
ITEM 1. DESCRIPTION OF BUSINESS
OUR BUSINESS
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.
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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,
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
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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
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.
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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
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,
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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.
Since launching our web site in October 1997, we have been engaged primarily in
continued development and enhancement of our online web site community, and
building traffic to the web site. 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:
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USER PROFILE DATABASE. A substantial database of user profiles, according
to their interests, which enables us to offer large, highly targeted
audiencesto 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
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
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- an aggressive subscriber acquisition program.
Nettaxi.com's Community Service Model
[GRAPHIC OMITTED]
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:
- - 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 Premium service account monthly subscription fees;
FEES
- - CD ROM Co-branding and licensing of our CD-ROM product to select
DISTRIBUTION third parties;
ROYALTIES
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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
Form 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
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processing of these transactions with banking institutions. The Plus Net
e-commerce capabilities also support one-click 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
web site, 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
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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 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
nonexclusive 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
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.
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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., me@you.com,
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
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.
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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.
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.
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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
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.
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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;
- Web Statistics - for analyzing who is coming to their site and when;
- E-mail service for one personal e-mail account with a
userID@nettaxi.com 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.
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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;
- 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.
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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 twelve months ended December 31, 1999, web hosting revenues
accounted for 19% of total revenues.
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
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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.
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 web site. The banners will be of the same high quality as
those sold at premium prices to outside advertisers. Placement of the banner
ads will
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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 web site.
We intend to implement special software on our web site in the
immediate future. The software allows us to track a user surfing through
the overall web site, follow the user's patterns of activity, present ads that
are targeted and relevant to the user's interests, and recommend
particular products or services, based on the user's activity profile.
In addition, the software will be able to track the particular banner and
other advertising to which the user has been exposed while visiting our site.
This will provide us with a record of the number and type of advertisement views
accessed by users over a specified period of time, useful for determining rates
for outside advertisers wishing to have a presence on our 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 web site 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 web site. 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 web site.
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
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"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
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 web site.
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.
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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
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.
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COMPETITION
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially-available software. We
currently or potentially compete with a number of other companies for users,
advertisers and electronic commerce marketers, including a number of large
online communities and services that have expertise in developing online
commerce, and a number of other small services, including those that serve
specialty markets.
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, 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.
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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;
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 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
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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.
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.
EMPLOYEES
As of December 31, 1999, we had 29 employees, including:
- 3 in customer support;
- 9 in product development;
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- 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
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future. From time to time, we also engage independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
ITEM 1A. RISK FACTORS
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
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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
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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 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 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.
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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, approximately
$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.
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.
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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
COMMON STOCK FOR SUCH CONVERSIONS
As of February 23, 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 February 23, 2000, the
debentures and investment option would be convertible into an aggregate of
4,396,170 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. 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 February 23, 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. 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 are in the process of being registered; 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
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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.
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.
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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.
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 continue to 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. Some key members of our management have
only recently been hired, including our chief financial officer and controller.
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.
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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.
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.
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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.
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.
39
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
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
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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 a
three-year period. We have not determined if an ownership change has occurred.
If it has, we may not be able to take full advantage of potential tax
benefits from our net operating loss carry forwards.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if Web
usage and e-commerce does not continue to grow. Web usage may be inhibited for a
number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service;
- unavailability of cost-effective, high-speed service;
- imposition of transactional taxes; or
- limitation of third party service provider's ability and
willingness to invest in new or updated equipment to handle traffic
volume.
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
41
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
- 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