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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
COMMISSION FILE NUMBER: 0-26109
_________________
NETTAXI.COM
(Exact name of registrant as specified in its charter)
_________________
NEVADA 82-0486102
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1696 DELL AVENUE, CAMPBELL, CA 95008
(Address of Principal Executive Offices Including Zip Code)
(408) 374-1168
(Registrant's telephone number, including area code)
_________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by a check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
As of February 28, 2001, the approximate aggregate market value of voting stock
held by non-affiliates of the registrant was $6,871,860 (based upon the closing
price for shares of the registrant's common stock as reported by the O-T-C
Bulletin Board on that date). Shares of common stock held by each officer,
director, and holder of 5% or more of the outstanding common stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.
As of February 28, 2001, the registrant had 43,049,486 shares of common stock,
$.001 par value per share, outstanding.
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NETTAXI.COM
FORM 10-K
TABLE OF CONTENTS
PART I
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ITEM 1. Description of Business 4
ITEM 1A. Risk Factors 22
ITEM 2. Properties 34
ITEM 3. Legal Proceedings 34
ITEM 4 . Submission Of Matters To A Vote Of Security Holders 36
PART II
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ITEM 5. Market For The Registrant's Common Stock
And Related Stockholder Matters 37
ITEM 6. Selected Consolidated Financial Data 40
ITEM 7. Management's Discussion And Analysis Of
Financial Condition And Results Of Operations 41
ITEM 7A. Quantitative And Qualitative Disclosures
About Market Risk 52
ITEM 8. Financial Statements And Supplementary Data 52
ITEM 9. Changes In And Disagreements With Accountants
On Accounting And Financial Disclosure 52
PART III
- --------
ITEM 10. Directors And Executive Officers Of The Registrant 53
ITEM 11. Executive Compensation 58
ITEM 12. Security Ownership Of Certain Beneficial Owners
And Management 65
ITEM 13. Certain Relationships And Related Transactions 67
PART IV
- --------
ITEM 14. Exhibits, Financial Statement Schedules,
And Reports On Form 8-K 71
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PART I
This Form 10-K contains forward-looking statements. These forward-looking
statements are subject to significant risks and uncertainties, including
information included under Items 1 and 1A of this Form 10-K, which may cause
actual results to differ materially from those discussed in such forward-looking
statements. The forward-looking statements within this Form 10-K are identified
by words such as "believes," "anticipates," "expects," "intends," "may," "will"
and other similar expressions regarding our intent, belief and current
expectations. However, these words are not the exclusive means of identifying
such statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances and
statements made in the future tense are forward-looking statements. Readers are
cautioned that actual results may differ materially from those projected in the
forward-looking statements as a result of various factors, many of which are
beyond our control. We undertake no obligation to publicly release the results
of any revisions to these forward-looking statements which may be made to
reflect events or circumstances occurring subsequent to the filing of this Form
10-K with the Securities and Exchange Commission. Readers are urged to carefully
review and consider the various disclosures made by us in this Form 10-K,
including those set forth under "Risk Factors" in Item 1A.
ITEM 1. DESCRIPTION OF BUSINESS
OUR BUSINESS
Nettaxi.com is an Internet marketing portal that provides a range of
content and Internet based services for consumers and businesses. Our web site
at www.nettaxi.com serves as a gathering place for people with shared topics of
interest, as well as an entry point, referred to as a portal, to the Internet.
Through our web site, we provide content addressing a large number of targeted
categories. The content is organized into affinity categories such as news,
sports, entertainment, health, politics, finances, lifestyle, and other areas of
interest. Visitors to our web site are provided with comprehensive information
and content. Subscribers to our web site, which we call citizens, are also
provided with access to enhanced content such as broadband video clips, email
accounts and personal web pages. We have developed a diversified revenue model
under which we provide our citizens with access to web site hosting services and
a broad range of content, and we provide affiliated businesses with access to a
large population of Internet users for advertising and promotional purposes.
In 2000, we focused our efforts on improving the quality of content
available on our web site, implementing our web site hosting services and
reducing our operating costs by eliminating many of the services which were not
profitable.
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We have devoted significant resources to developing our content and our
services, including developing an infrastructure and building a management team.
We have also focused on developing consumer loyalty and subsequently increasing
our overall level of traffic and citizenship. While we have incurred losses of
approximately $27,687,800 since our site was launched in October 1997, traffic
to our site has increased consistently. In December 1998, we had 60,000
registered citizens. As of December 31, 2000, there were over 800,000 registered
citizens in our community and we had a membership base of 1.8 million.
We have also enjoyed increases in traffic on our web site which is
documented by PC Data Online and their measurements of unique visitors to our
web site comparing all Internet properties. PC Data Online is an independent
research firm which produces comprehensive lists of the top web sites on the
Internet on a monthly and weekly basis. Our site had over 1,760,000 unique
visitors during the month of December 1999, causing PC Data Online to rank us as
281st among all Internet properties for the month. As a result of an aggressive
marketing campaign we conducted during the month of December 2000, PC Data
Online ranked nettaxi.com as the 94th most visited site on the Internet. We had
6,800,000 unique visitors to our web site in December 2000. In the two months
that followed, we curtailed much of our marketing efforts due to changes in the
Internet industry and, as a result, our ranking by PC Data Online fell to 636
for the month of February 2001. In March 2001, we again launched a redesigned
marketing program. By March 24, 2001 PC Data Online had ranked us as the 213th
most visited site on the Internet with 1,176,000 unique visitors for the week.
INDUSTRY BACKGROUND
The Internet is a significant medium for global communications. Millions
of people around the world use the Internet to send and receive information, for
entertainment, current events and to purchase products and services. The
emergence of portals, such as ours, has been an important development on the
Internet. These web sites provide an online location where users of the Internet
can gain access to a wide variety of information quickly. Traditionally, portal
sites have offered free services to users of the Internet including access to
e-mail accounts, message boards, news and entertainment. Through these services,
portals have attempted to develop consumer loyalty with users of the Internet,
while increasing the level of traffic on their web sites.
PORTALS. Portals provide a single online location where users can interact
and find and share pertinent information, products and services related to their
particular interests or needs. Portal sites generally offer free services
including access to e-mail accounts, chat rooms, message boards, news and
entertainment. These features tend to increase user loyalty towards particular
portal web sites. Users with an email account with a particular web site are
likely to repeat visits to the web site on a regular basis to check email and
gather other information. As a result, we believe that users tend to be loyal to
and spend more time online at portal sites.
Booze Allen & Hamilton, in a study titled "The Great Portal Payoff:
Matching Internet Marketing to Consumer Behavior" shows that portals are a
mainstream destination site for Internet users. This study shows that sixty
percent (60%) of all Internet user sessions include a visit to a portal. As the
Internet grows, users seek sources of aggregated and user defined information
and services that portals have historically provided.
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As a result, portals provide advertisers an attractive means of promoting
their products and services and allow businesses to reach the growing number of
users who will be purchasing goods or services over the Internet in the future.
Portals also offer content providers with an attractive means of disseminating
their content to users with particular interests.
ADVERTISING. The Internet is an attractive medium for advertisers. The
Internet has often allowed advertisers to demographically target their messages
to groups of Internet users with particular interests, in a manner not available
through the means of traditional media. The Internet also allows advertisers a
unique level of interactivity and measurability. Advertisers can use the
Internet to display messages on certain web pages. These messages are referred
to as impressions. Consumers wishing for more information on the advertised
topic can use their computers to click, or click-through, on those impressions
and move through to other web pages which provide the information sought. Using
the Internet, advertisers can change their advertisements frequently in response
to market factors, current events and consumer feedback. Advertisers can also
track the effectiveness of their advertising messages by receiving reports of
the number of advertising impressions delivered to consumers and the
corresponding number of times that consumers click on those impressions and move
through to the advertised web page.
To date, Internet advertising has primarily taken the form of banner
advertisements, which are comprised of advertising messages displayed on a
portion of a web page viewed by visitors to the site. Like traditional media
advertising banners are typically priced by advertisers who pay for exposures to
potential consumers. However, this approach, which is called impression-based
advertising, does not take full advantage of the Internet's direct marketing
potential, resulting in low consumer click-through rates, the rate at which
consumers click on advertisements to move to the advertised web sites.
Advertisers, therefore are paying for exposure to many viewers who are not
interested in the product or service advertised. According to the Internet
Advertising Bureau (IAD), banner ads accounted for half of all Internet
advertising in the second quarter of 2000, while click through rates (CTR's) for
banner ads fell more than 40 percent between October 1999 and October 2000. We
believe advertiser's are considering alternatives to banner advertising. We also
believe that advertisers will focus on more targeted marketing opportunities as
they recognize they can offer a level of targetability, interactivity and
measurability not generally available in other media.
CONTENT. The Internet offers content providers significant and attractive
economic mechanisms that combine cost advantages with practices that are
conducive to revenue generation or premiums. Significantly, the Internet
provides information dissemination at a materially lower cost than do other
forms of media, notably, both printed paper and private networks. The Internet
also offers the potential for easier access to content, which can expand market
coverage. We believe that by using the capabilities of the Internet to enrich
the convenience, utility, time, or entertainment value of content, Internet
content providers can garner significant and even premium revenues.
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CURRENT MARKETING PLANS & PROGRAMS
We have focused our efforts on marketing, improving the quality of content
and hosting services available on our web site, and reducing our operating costs
by eliminating many of the services which were not profitable. In this regard,
we have developed a number of new promotions designed to generate new sources of
revenue and build customer loyalty. Some of the powerful business tools and
resources that are part of our solution include:
BROADBAND CONTENT. We are continually seeking to develop relationships
with content publishers to assist in generating revenue through distribution,
branding, awareness, and promotions. In 2000 we added sources of new content
that allow users to view videos covering music, sports and other subjects.
Users are required to register as citizens of our web site prior to viewing the
content. Advertisements are also displayed to users while progressing through
the registration process.
DIRECT MARKETING. Jupiter Communications forecasts email marketing will be
a $7.3 billion business by 2005, a boost from $164 million in 1999. The volume
of messages will swell to 268 billion promotional email messages by 2005.
We have been collecting registrations for all our citizens since 1998 and
maintaining a large, accurate, opt-in database that allows targeted
communications based upon gender, age, income, interest and many other
demographic variables. We have a consulting services agreement with Annuncio
Software, Inc. under which they are to provide us with access to their direct
email marketing system. We believe, the campaign management system, Annuncio, is
one of the most sophisticated direct email marketing systems available today.
We will incorporate our direct email marketing capability into promotional
offers from companies that we affiliate with, daily emails to registered players
of our Internet games, and communications to generate additional activity and
transactions with our customer base.
TARGETED AFFINITY CATEGORIES. We have organized information on our web site
into an extensive network of communities with a wide variety of themes,
including entertainment, government, home living, sports, finance, society and
culture. Users interested in particular themes can access those themes quickly
and easily. This creates marketing opportunities for media companies, Internet
service providers, and Internet content companies.
IMPROVED SEARCH METHODOLOGY. We had developed a metasearch engine that
enabled users to search multiple sites simultaneously and return the results to
one web page. This feature drove users to our web site, but did not generate
sufficient revenue. We have revised our search methodology to enhance the
revenue generated from our search services. Our current search methodology uses
context driven searches where advertisers purchase their placement in the search
engine. For example, a user of our web site may choose the subject "music" to
search. After the choice is made, the results of the search are presented in a
list on a new web page. Advertisers pay for premium placement at the top of the
list. This allows advertisers to bid for product placement on our web site and
increases revenue generated from our search services.
SEASONAL PROMOTIONS. During 2000, we successfully implemented seasonal
promotions designed to drive Internet users to our e-commerce affiliates. For
example, in December 2000 we launched a promotion for Storerunner Network, Inc.
Storerunner.com placed advertisements for products it was selling as part of a
holiday sale on our web site. Users of our web site could click on the
Storerunner advertisements and move to the Storerunner.com web site and purchase
the products. Our agreement provided that we receive revenue for each user that
accessed the Storerunner.com site from our web site. Although this promotion
successfully increased the amount of traffic on our site, we discontinued
further services with Storerunner.com after they filed for protection under
Chapter 11 of the United States Bankruptcy Code in February 2001.
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CITIZEN SERVICES. During 2000, we revised the scope of services offered to
users of our web site to eliminate many of the free services which were
available. Currently, users are offered access to free services such as email
accounts and a limited variety of content such as video clips or sweepstakes
offerings. Nevertheless, we have expanded the range of services available to
users that subscribe to our web site. Such subscribers are provided with web
site hosting services, personal home pages, access to an expanded variety of
video clips, and permission based promotional offers. These services are
provided in exchange for a monthly subscription fee. The minimum subscription
fee is currently $19.95.
NETTAXI'S 3D WORLD. In March 2000 we launched a new area within our web
site pursuant to an agreement with ActiveWorlds. Users that visit our web site,
download the appropriate software and pay a monthly fee can access a series of
web pages complete with three dimensional graphics. The graphics are designed so
that the area has the look and feel of an urban environment. Users are offered
the opportunity to design a personalized Avatar. An Avatar is a three
dimensional figure that represents the identity of the user. This Avatar can
then walk through the urban environment and engage in online chat with other
Avatars. Businesses can set up storefronts within the urban environment and
advertise products on billboards within the urban environment. We believe this
experience will change the way people chat online.
OUR STRATEGY
We are now poised to build on our early success and implement a growth
strategy that leverages our infrastructure, marketing expertise, traffic and
brand. In 2001, we intend to focus our marketing efforts on generating multiple
sources of revenue while enhancing our advertising products and services. Key
elements of our strategic growth plan are listed below.
EXPAND SUBSCRIBER ACQUISITION PROGRAM
We intend to embark on aggressive programs to expand our citizen base,
which we believe will increase our advertising revenues. We also plan to design
programs tailored to increasing the number of paying subscribers to our web
site. To this end, we may offer discounted subscription rates to new subscribers
and offer new subscribers access to music, video, and other entertainment
content unavailable to users that do not subscribe to our web site. We believe
these efforts will increase our revenues from subscription fees for our premium
account services. The program will include a concerted effort to refine our
offering of products and services to expand demand and an aggressive marketing
campaign to create real excitement about our site. We hope to raise additional
capital for brand development and expansion of our operations.
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DEVELOP OUR INFRASTRUCTURE; BUILD PREMIUM CONTENT
Over the next 12 months, we are looking to further develop our managerial
and technical infrastructure, enhance the quality and depth of our content by
developing new relationships with premium content providers and improve the
quantity and quality of our broadband content. We expect these improvements will
create several distinct revenues streams for us from the following sources:
- Subscription fees paid by end users for access to broadband and enhanced
content; and
- Advertising revenues paid by advertisers seeking exposure to Internet
users accessing our broadband and enhanced content.
INCREASE ADVERTISING REVENUES
To date, our revenues have been derived principally from the sale of
advertisements. We intend to increase our advertising revenue by focusing on a
number of key strategies, including:
- expanding the quantity and quality of content available on our web site
in order to increase interest in and traffic on our web site and increase the
number of searches conducted on our web site;
- expanding our advertising customer base;
- increasing the cost of advertising placement charged to our advertising
customers through enhanced targeting and rich media programs;
- further improving the sophistication of our search methodology;
- increasing the average size and length of our advertising contracts;
- increasing the number of our direct sales representatives; and
- continuing to invest in improving advertising serving and advertising
targeting technology.
GAIN SIGNIFICANT MARKET SHARE AND CONSOLIDATE COMPETITORS
We hope to gain significant market share and consolidate our competitive
position by acquiring strategic online community companies and continue an
aggressive plan of infrastructure expansion. In May 1999 we acquired Plus Net,
Inc., a California corporation which operated a portal site with a range of
Internet related tools, including a robust search engine and e-commerce
capabilities which supported consumer buying opportunities and programs designed
to prevent credit card fraud. The Plus Net merger also provided us with access
to a pool of approximately 1,000,000 potential subscribers and provided us with
an opportunity to substantially increase the citizenship base within our portal.
We are currently in the process of acquiring the assets of LookUpGuide.com, a
California corporation, and broadband portal design and development company. In
March 2001, we entered into an Asset Purchase Agreement with LookupGuide.com
pursuant to which we will issue 2,200,000 shares of common stock in exchange for
the assets of LookupGuide.com upon completion of the transaction. We have not
completed this transaction and there can be no assurance that we will complete
this transaction. We believe these acquisitions will accelerate our research and
development efforts, and will enrich the Internet experience of our subscribers.
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BUSINESS SERVICES
OUR WEB SITE
Our web site at www.nettaxi.com is designed to appear as a virtual urban
environment. Information on our web site is divided into topic areas which we
refer to as affinity groups. We refer the registered users of our web site as
citizens. Our web site provides access to information on news, sports,
entertainment and other areas of interest. Citizens also have access to Internet
related services such as personal home pages, chat services and free e-mail
accounts.
When users first arrive at www.nettaxi.com, they view the broad urban
environment, where they find hyperlinks to the information categories we
provide, such as:
- Member services, registration, and web hosting;
- Community information links such as message boards;
- Information sorted by topical areas of interest; and
- Content such as movies, sports clips and other broadband content.
Upon selecting one of the links, for example entertainment, a web page
containing articles and information about entertainment appears along with an
extensive list of categories, or more specific search topics, such as music and
television. Choosing the more specific search topic will further focus your
search to uncover more specific information.
APPLICATIONS AND FEATURES
We offer a wide range of applications and features to our citizens through
our web site, including the following:
OUR SEARCH ENGINE. Users of our web site can access our specially
configured search engine, which we refer to as our taxi, located in all areas
and levels of our web site. Users may use the search engine by typing in a
search topic such as sports, and they are quickly presented with a list of
hyperlinks to web pages carrying sports related information. Advertisers on our
site compete for placement in the search results by paying fees to us. The
advertisers that pay the highest fees are brought to the top of the list of
search results. We believe our search engine provides greater value to our
users since it presents small, manageable groups of choices in response to a
search, as opposed to an overwhelming volume of listings turned up by many other
search engines.
E-MAIL SERVICES. Our e-mail services allow users to access their accounts,
through both Post Office Protocol, POP, and the Internet, IMAP. POP e-mail is
the type most commonly used by Internet service providers. Its primary advantage
for users is that messages are sent and received quickly and with more privacy,
because they do not stay resident on a server for any length of time. Its
greatest disadvantage is that e-mail messages, once delivered to a user, are
generally no longer available for download again, so that a user who downloads
e-mail to a home computer, for example, will generally not be able to download
the same mail at a later time to another computer, such as one at work. IMAP, or
web-based e-mail, most commonly used by portal services, allows users to
retrieve e-mail messages from any location that offers access to the Internet
and a specific web site. Sending and receiving messages may be a bit slower than
POP services, but messages are stored on a server, can be retrieved multiple
times, and remain available until they are either specifically deleted by the
user, or a set amount of time has passed.
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Our e-mail service also allows subscribers to our premium services to offer
a free web-based email service with a unique domain name, such as me@you.com,
giving the domain name free promotion with every email sent. There is no
software for the user to download and we provide all mail and maintenance with
no added inconvenience to the webmaster. The look and feel can be customized to
look like the subscriber's home page.
CONTENT
A key component of our current and future plans is the continued
development of relationships with providers of premium content in a variety of
categories. The purpose of these relationships is not to directly generate
revenue, but rather to enhance the quantity and quality of information and
content on our web site. We believe that enhanced information and content may
lead to increased visitors to our site as well as increased subscriptions to our
services. During 2000, we had formal relationships with the five premium content
providers described below. The companies listed below provide substantially all
of the content on our web site that is currently provided by outside parties.
The providers are listed in order by the amount of content they provide to us.
- SCREAMINGMEDIA. In April 2000 we entered into a license agreement with
ScreamingMedia, an aggregator of a broad range of content such as current
events, daily horoscopes, world news, travel, medicine and health for
syndication to Internet portals and destination sites. The term of the agreement
is one year and automatically renews for successive one year periods unless
terminated. We pay a monthly license fee of $5,000 for use of ScreamingMedia's
content. ScreamingMedia currently provides the majority of our outside party
content.
- ACTIVEWORLDS. In March 2001 we launched a new area within our web site
pursuant to an agreement we entered into in August 2000 with ActiveWorlds.com,
Inc., a Delaware corporation. Users that visit our web site, download the
appropriate software and pay a monthly fee can access a series of web pages
complete with three dimensional graphics. The graphics are designed so that the
area has the look and feel of an urban environment. Users are offered the
opportunity to design a personalized Avatar. An Avatar is a three dimensional
figure that represents the identity of the user. This Avatar can they walk
through the urban environment and engage in online chat with other Avatars.
Businesses can set up storefronts within the urban environment and advertise
products on billboards within the urban environment. We believe this experience
will change the way people chat online. We are to receive a portion of the fees
collected by ActiveWorlds from users of our site that subscribe to the service.
The agreement has term of one year and automatically renews for successive
periods of one year unless terminated prior to the extension.
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- NETOPIA, INC. In March 1999, we entered into a nonexclusive agreement
with Netopia, a provider of next generation products including web site services
and high-speed connectivity to the Internet, under which Netopia provides us
with technology that enhances our ability to provide services to our
subscribers. The term of the agreement is two years. This agreement is an
expense sharing agreement and generates less than one percent of our revenues.
- SOLUTIONS MEDIA, INC. In November 1999, we entered into a non-exclusive
agreement with Solutions Media, Inc., the operator of the web site,
SpinRecords.com to co-brand its content, which includes digital audio/video
music files in the MP3 format, which SpinRecords.com has licensed from
independent artists. This audio and video content was downloadable by our
subscribers from SpinRecords.com. The term of this agreement was one year with
an option to renew the agreement for successive periods of one year. We received
50% ad revenue for banner advertisements shown on these co-branded content pages
from Solutions Media, Inc. We also received 5% of gross sales from our citizens
who purchase licensed content or merchandise from these co-branded web pages.
This agreement had a term of one year, and accounted for approximately 13% of
our revenue in 2000. We do not expect this relationship to continue in 2001
because Solutions Media, Inc. is no longer in business.
- STORERUNNER.COM. In September 2000, we entered into an agreement with
StoreRunner Network, Inc. under which we placed Storerunner advertisements on
our web site and were to be compensated based on the number of visitors to our
site that visited the Storerunner site. This agreement resulted in increased
traffic on our web site and was part of the reason PC Data Online ranked
nettaxi.com as the 94th most visited site on the Internet in December 2000.
Although, this promotion was very successful, we have discontinued further
services with Storerunner.com after they filed for protection under Chapter 11
of the United States Bankruptcy Code in February 2001.
Under our agreements, we provide co-branding services to the content
providers listed above. The content included on our web site is branded with
the logo and similar brand features of the relevant providers. We also increase
the traffic to their own web sites by linking our sites so that end users can
easily move from our web site to theirs. We are also working to identify and
develop a selection of relationships with providers of proprietary information
content, particularly individuals and organizations with archives and databases
that could be easily rendered into digital format. We believe that a carefully
developed selection of such databases, would act as a powerful attraction to the
type and volume of subscribers that our advertisers find desirable.
WEB SITE HOSTING SERVICES
One of the key features that we offer our registered users is our web site
hosting services. Using these services, we currently host the web sites of over
300 individuals or businesses. These services generally fall into two
categories. First, we host web pages for subscribers to our web site for a
monthly fee. The minimum fee for these services is currently $19.95 per month.
Subscribers to these services are provided with storage space and bandwidth to
support their web sites. The fee increases depending on the amount of bandwidth
and storage space used by the subscriber.
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Second, we provide Internet hosting and connectivity for larger corporate
customers. These services involve our maintenance of the servers which host the
web sites of these customers. For example, we have an agreement with White Sand
Communications, Inc. pursuant to which we host its web site servers and provide
support for the overall operation of the servers. Our services are delivered
through Alchemy Communications at its Internet data center located in Los
Angeles, California. Customers pay monthly fees for the professional services
utilized, one-time installation fees, and monthly connectivity charges. These
hosting revenues are recognized in the period the services were provided.
In conjunction with these services, our customers are able to purchase
advertising packages within their communities to help market web sites, as well
as email tools that will provide them the capability to direct market to their
customer base. Our subscribers also provide personal or entrepreneurial and
commercial content that is available on our web site. We offer paying
subscribers 25 megabytes of server space to use for a home page and e-mail. In
addition, subscribers have access to free, easy-to-use web site design software
to build their web home page, and they can designate the community and street
where they would like to have their home page located. We are currently
developing technologies that we believe will improve the quality of the hosting
services we provide.
SUBSCRIBER SERVICE PLANS AND ASSISTANCE
In order to provide subscribers with choices that suit their individual
needs, we offer both free and premium accounts, on a tiered basis similar to the
way that cable systems do. Premium accounts are configured from a large menu of
options, to attract subscribers and address the needs and desires of particular
segments of online users. In each case, subscribers are provided with free,
easy-to-use software for designing and building their web page, tips and
techniques for making their web sites attractive and exciting to visit, and our
search engine to drive traffic to their web site.
We also adhere to the principle that providing excellent customer service
is integral to attracting and, more importantly, retaining subscribers. To that
end, we have focused on development of a customer service organization keenly
focused on satisfying demand and creating customer loyalty.
BASIC FREE CITIZEN ACCOUNT. Like most portals, we offer a free basic
service package, which we call the free citizen account, to attract a large
number of subscribers. This account offers the following package of features
and services:
- E-mail service for one personal e-mail account; and
- Access to chat sessions, message boards, and shopping, as well as premium
content such as broadband video clips, news information and other information.
PREMIUM ACCOUNTS. Our premium accounts are especially attractive. Citizens
can build premium accounts from a menu of options, allowing them the ability to
pick and choose which items they are interested in. Options can be added for
additional fees. In addition to the services which are provided to free service
account subscribers, premium account holders are provided with the following
options:
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- E-mail service for unlimited e-mail accounts, each with a distinct
@nettaxi.com address or a unique domain and customized look and feel;
- Disk space for web page hosting; and
- Access to advertising and banner ads, and other cross-promotional
opportunities.
One of the key features that we offer premium account subscribers is our
web site hosting services. Using these services, we currently host the web
sites of over 300 individuals or businesses. We host web pages for subscribers
to our web site for a monthly fee. The minimum fee for these services is
currently $19.95 per month. The fee increases depending on the amount of
bandwidth and memory used by the subscriber.
Premium subscribers are provided with professional web site services to
assist with the design and launch of a web site as well as easy-to-use software
for updating the site at any time. In addition, subscribers are provided with
special tips and techniques for making their web sites attractive and exciting
to visit, as well as mechanisms to drive traffic to their web site, including
our search engine and strategically placed, highly visible links to the site
from other desirable web sites on the Internet. Subscribers wishing to have
their own domain are charged a one-time fee to register the domain for a
two-year period.
CUSTOMER ASSISTANCE. In order to maintain nettaxi.com as a portal that
truly serves its subscribers and reflects their interests and needs, we invite
and encourage subscribers and visitors to send in their comments and
suggestions. We track visitor and subscriber activities, and carefully monitor
the nature and content of their comments, as part of our strategy for continuing
product refinement and development.
Regardless of the type of account selected, subscribers have access to free
online help at any time by simply clicking on our Help icon and by visiting the
message boards, where they can review information posted by other subscribers,
or post a query of their own. Subscribers can also find information on billing
matters, special promotions, upcoming events, etc., quickly and easily on the
Nettaxi.com home page.
If they are unable to find what they are looking for, or if the information
they find is confusing, subscribers can submit queries, to which we will
actively and promptly respond with appropriate information or guidance. We are
also establishing and deploying subscriber-to-subscriber support services, which
are provided by online volunteers in exchange for free account upgrades or other
premiums.
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INTERNET TRAINING CD-ROM
We had developed a CD-ROM product, called "Nettaxi.com; The Experience",
which was a comprehensive, interactive training tool that enabled new and
intermediate users of computers to learn about and begin using the many powerful
capabilities and features of the Internet. The CD-ROM product was also designed
to direct people to our web site once they began using the Internet. During
2000 we ceased distribution of our the CD-ROM product due to the substantial
costs associated with its maintenance, development and distribution.
CUSTOMERS
ADVERTISING CUSTOMERS. In 2000 we attracted both mass market consumer
product companies as well as technology-related businesses advertising on the
Internet. Due to our advantages as an Internet marketing portal, we believe that
we are well positioned to capture a portion of the growing number of consumer
product and service companies seeking to advertise on the Internet.
Currently, advertisers and advertising agencies enter into short-term
agreements, on average one to two months, pursuant to which they receive a
guaranteed number of impressions for a fixed fee. If the guaranteed number of
impressions is not delivered, the term of the agreements are extended until the
impressions can be delivered. Advertising on our site currently consists of
banner-style advertisements that are prominently displayed at the top of pages
on a rotating basis throughout the web pages in our web site. From each banner
advertisement, viewers can hyperlink directly to the advertiser's own web site,
thus providing the advertiser an opportunity to directly interact with an
interested customer. Our standard cost per thousand impressions depends upon a
number of factors including the location of the advertisement, its size and the
extent to which it is targeted for a particular audience. Discounts from
standard cost per thousand impressions rates may be provided for higher volume,
longer-term advertising contracts.
We have also implemented a search methodology to enhance the advertising
revenue generated from our search services. Our current search methodology uses
context driven searches where advertisers purchase their placement in the search
engine. For example, a user of our web site may choose the subject "music" to
search. After the choice is made, the results of the search are presented in a
list on a new web page. Advertisers pay for premium placement at the top of the
list. This allows advertisers to bid for product placement on our web site and
increases revenue generated from our search services.
We have entered into an agreement with GoTo.com, under which we use its
search services to provide recommended web sites based upon a listing of the top
search categories and user defined keywords. We are to receive a percentage of
the revenue generated from users of our site using the search services. The
agreement has a one year term commencing in September 2000 and automatically
renews for periods of one year unless terminated.
In April 2000 we placed the advertising of Hearme.com on our web site
pursuant to an Online Advertising Insertion Order. Under the agreement, we
received between $18.00 and $25.00 per million impressions delivered. A portion
of the revenue received from this agreement was reciprocal revenue. This
agreement accounted for 10% of our revenue in 2000. The agreement had a term of
three months.
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In July 1999, we entered into an Advertising Impression Network Contract
with White Sand Communications, Inc. White Sand Communications engaged us to
deliver banner advertising, sponsorship advertising and exit traffic
advertising. The term of the agreement was initially six months and thereafter
continued on a month-to-month basis. White Sand Communications pays us a minimum
monthly guaranteed payment for exclusive use of banner advertising impressions.
This agreement accounted for 6% of our revenue in 1999.
WEB SITE HOSTING CUSTOMERS. In 2000, we focused on the development of our
web site hosting services. We currently host the web sites of over 300
individuals and businesses. These services generally fall into two categories.
First, we host web pages for subscribers to our web site for a monthly fee. The
minimum fee for these services is currently $19.95 per month. Subscribers to
these services are provided with storage space and bandwidth to support their
web sites. The fee increases depending on the amount of bandwidth and memory
used by the subscriber. We also provide Internet hosting and connectivity for
larger corporate customers. These services involve our maintenance of the
servers which host the web sites of these customers. For the twelve months
ended December 31, 2000, web hosting revenues accounted for 40% of total
revenues.
In August 1999, we entered into a Data Center Service Agreement with White
Sand Communications, Inc. We provide White Sand Communications with space in
our Data Center and provide support for the overall operation of the their web
servers. The fee for this agreement is a monthly recurring fee which includes
charges for use and occupancy of the Data Center, connectively fee, power
charges, and where applicable, technical support and system administration fees.
The term of this agreement is one year. This agreement accounted for 11% of
our revenue in 2000 and 4% of our revenue in 1999.
In July 1999, we entered into a Data Center Service Agreement with Babenet,
Ltd, a California corporation. We provide Babenet with space in our Data Center
for their web servers and provide support for the overall operation of the their
web servers. The fee for this agreement is a monthly recurring fee which
includes charges for use and occupancy of the Data Center, connectively fee,
power charges, and where applicable, technical support and system administration
fees. The term of this agreement is one year and continues on a monthly basis
thereafter. This agreement accounted for 20% of our revenue in 2000.
ADVERTISING SALES AND DESIGN
We seek to distinguish ourselves from our competition through the creation
of advertising and sponsorship opportunities that are designed to build brand
loyalty for our corporate sponsors by seamlessly integrating their advertising
messages into our content. Sponsorship programs involve other business
advertising particular programs on web pages within our web site which are
branded with both our brand features and the brand features of the advertiser.
We have used sponsorship programs to advertise holiday sales of particular types
of merchandise. This is distinguished from advertising opportunities in which
business display general messages about their products or services on our web
site.
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Through our close relationship with our subscribers, we have the ability to
deliver advertising to specific targets within our site's theme content areas,
allowing advertisers to single out and effectively deliver their messages to
their respective target audiences. For example, an advertiser can target its
message solely to women with an interest in recreation and sports. We believe
that such sophisticated targeting is a critical element for capturing worldwide
advertising budgets for the Internet. In the next twelve months, we intend to
expand the amount and type of demographic information our site collects from our
members, which will allow us to offer specific data to our advertising clients.
In 2001 we intend to enter into arrangements with a number of third-party
advertising sales representatives pursuant to short-term agreements that in
general may be terminated by either party, without notice or penalty. The sales
organization would consult regularly with advertisers and agencies on design and
placement of their web-based advertising, provide customers with advertising
measurement analysis and focus on providing a high level of customer service and
satisfaction.
During 2001, we also intend to implement special software on our web site
in the immediate future. The software allows us to track a user surfing through
the overall web site, follow the user's patterns of activity, present ads that
are targeted and relevant to the user's interests, and recommend particular
products or services, based on the user's activity profile. In addition, the
software will be able to track the particular banner and other advertising to
which the user has been exposed while visiting our site. This will provide us
with a record of the number and type of advertisement views accessed by users
over a specified period of time, useful for determining rates for outside
advertisers wishing to have a presence on our web site. It will also provide us
with the opportunity to rotate the particular ads it presents to a user to keep
the ads fresh and appropriate in context. Eventually, we hope to expand our
activity tracking functions to include serving content to users based on their
preferences. The result will be content that is customized for a user,
automatically and seamlessly.
We have also licensed advertisement management software from Accipiter
Technology, and written some custom code to extend the software's capabilities.
The software tracks how many ads are served on the web site, which areas and
which pages to which they were served, and how many people have clicked on them.
The software allows us to manage advertisement selection and placement by
providing an accurate advertisement count on both a real-time and a
compiled-over-a-specified-time basis, information crucial to billing an
advertiser. The software also provides advertisers with the ability to audit
their advertisement performance on our web site on a real-time basis. We provide
a user identification and password to the advertiser, who can then come onto the
web site and track their ads at any time.
SALES AND MARKETING
In 2000, we committed approximately $5.9 million to sales and marketing
activities, including offline and online media advertising. Our sales and
marketing efforts are focused on:
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- Generating additional traffic to our site;
- Building and defining a desirable online destination for consumers and
businesses; and
- Creating and enhancing our brand within the Internet and online
industries.
Among the key elements of our sales and marketing strategy are the following:
ADVERTISING PROGRAMS. We plan to invest in online advertising to drive
traffic to our site by placing advertisements on selected high volume sites, as
well as purchasing targeted keywords on several popular search engines such as
Yahoo!, Excite, Lycos, and others. We also plan to advertise in traditional
media such as print, radio and broadcast, on a selective, highly targeted basis,
to increase the awareness of our site.
PUBLIC RELATIONS SUPPORT. By virtue of its broad appeal and focus, we
anticipate that a targeted public relations campaign will yield material results
in building both national and targeted local and regional awareness for Nettaxi.
We do not currently have an agreement with a national public relations
professional, but are seeking to enter into an arrangement with a suitable
public relations company in 2001.
OPERATING INFRASTRUCTURE
At this time, the basic components of our technology infrastructure are in
place and operational. Our UNIX-based electronic network for Nettaxi.com
operates on a one terabyte Ethernet backbone, with two Cisco Systems Ethernet
switches that prevent collisions on the network. Traffic direction for the web
servers is handled by Arrowpoint's CS-100, which tracks server load conditions
in real time and sends traffic to the most appropriate server to spread around
and balance the load. The network is comprised primarily of Sun Microsystems
high-capacity servers, and include a mix of Enterprise 450s, Ultra 1, and Ultra
5 models, all running the newest version of Sun's Solaris operating environment
for network systems. These servers collectively provide approximately 1.6
terabytes of hard drive space for subscriber capacities.
In addition, the network currently includes NT servers to handle
registration and selected other database functions, using Microsoft's SQL
database software.
Our electronic network is located at Alchemy Communications in Los Angeles,
California. We have a Gigabit Data Services Agreement with Alchemy
Communications pursuant to which they provide a secure location for our network
servers, multiple high-speed Internet connections, and access to 24-hour-a-day,
7-day-a-week technical support personnel and services. Alchemy Communications
also provides critically important routing, redundancy, streaming media and
maintenance services for the network and its Internet connections, as well as a
back-up power supply capable of continuing network operations for up to a week
in the event of a power failure. We pay monthly fees for the services and the
agreement has a term of 1 year.
COMPETITION
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially-available software. We
currently or potentially compete with a number of other companies for users,
advertisers and electronic commerce marketers, including a number of large
online communities and services that have expertise in developing online
commerce, and a number of other small services, including those that serve
specialty markets.
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Other companies that offer web site hosting, email, and content services
include MegaGo.com, theglobe.com, Yahoo!, Xoom, Homestead.com, WBS.net,
Angelfire, Fortune City, Lycos and Talk City and, in the future, Internet
communities may be developed or acquired by companies currently operating
Internet directories, search engines, shareware archives, content sites,
Internet Service Providers and other entities, which may have more resources
than ours.
In addition, we currently and in the future face competition from
traditional media companies, a number of which, including CBS, Fox and NBC, have
recently made significant acquisitions or investments in Internet companies.
Furthermore, we compete for users and advertisers with other content
providers and with thousands of web sites operated by individuals, the
government and educational institutions. Such providers and sites include AOL,
Angelfire, CNET, CNN/Time Warner, Excite, Hotmail, Infoseek, Lycos, Microsoft,
Netscape, Switchboard, Xoom, ESPN.com, ZDNet.com and Yahoo!
We believe that the following are the principal competitive factors for
companies seeking to create online communities on the Internet:
- community cohesion and interaction;
- customer service;
- brand recognition;
- web site convenience and accessibility;
- price;
- quality of search tools; and
- system reliability.
We also compete with companies in the online commerce market. This market
is new, rapidly evolving and intensely competitive. Current and new competitors
can launch new web sites at relatively low cost. The products and services that
might be offered through our site will compete with other retailers and direct
marketers, some of which may specifically target our potential customers. We
anticipate that we will compete with various mail-order and web-based retailers;
various traditional retailers, either in their physical or online stores;
various online service providers that offers products of interest to our
potential customers, including AOL, Microsoft, and other providers mentioned
above;.
We believe that the following are the principal competitive factors in the
online commerce market:
- brand recognition;
- quality of site content;
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- merchandise selection;
- convenience;
- price;
- customer service; and
- reliability and speed of fulfillment.
Many of our current and potential competitors have longer operating
histories, larger customer bases, greater brand recognition in other business
and Internet markets and significantly greater financial, marketing, technical
and other resources than us. In addition, other online services may be acquired
by, receive investments from or enter into other commercial relationships with
larger, well-established and well-financed companies as use of the Internet and
other online services increases. Therefore, our competitors with other revenue
sources may be able to devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to web site and systems development than us or may try to attract
traffic by offering services for free. Increased competition may result in
reduced operating margins, loss of market share and diminished value of our
brand.
INTELLECTUAL PROPERTY
We currently have pending applications before the United States Patent and
Trademark Office for trademark and service mark protection for "Nettaxi" and
"NetroNews". If these applications are approved, protection will be available
for the periods prescribed by law.
We regard the protection of our copyrights, service marks, trademarks,
trade dress and trade secrets as critical to our future success and rely on a
combination of copyright, trademark, service mark and trade secret laws and
contractual restrictions to establish and protect our proprietary rights in
products and services. We have entered into confidentiality and invention
assignment agreements with our employees and contractors, and nondisclosure
agreements with our suppliers in order to limit access to and disclosure of our
proprietary information. There can be no assurance that these contractual
arrangements or the other steps taken by us to protect our intellectual property
will prove sufficient to prevent misappropriation of our technology or to deter
independent third-party development of similar technologies. While we intend to
pursue registration of our trademarks and service marks in the U.S. and
internationally, effective trademark, service mark, copyright and trade secret
protection may not be available in every country in which our services are made
available online.
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We also rely on technologies that we license from third parties, such as
the suppliers of key database technology, the operating system and specific
hardware components for our products and services. These licenses extend for
terms ranging from one year to perpetuity and are subject to satisfaction of
conditions laid out in the specific licensing agreements. There can be no
assurance that these third-party technology licenses will continue to be
available to us on commercially reasonable terms. The loss of such technology
could require us to obtain substitute technology of lower quality or performance
standards or at greater cost, which could materially adversely affect our
business, results of operations and financial condition.
Although we do not believe that we infringe the proprietary rights of third
parties, there can be no assurance that third parties will not claim
infringement by us with respect to past, current or future technologies. We
expect that participants in our markets will be increasingly subject to
infringement claims as the number of services and competitors in our industry
segment grows. Any such claim, whether meritorious or not, could be
time-consuming, result in costly litigation, cause service upgrade delays or
require us to enter into royalty or licensing agreements. Such royalty or
licensing agreements might not be available on terms acceptable to us or at all.
As a result, any such claim could have a material adverse effect upon our
business, results of operations and financial condition.
GOVERNMENT REGULATION
Our company, operations and products and services are all subject to
regulations set forth by various federal, state and local regulatory agencies.
We take measures to ensure our compliance with all such regulations as
promulgated by these agencies from time to time. The Federal Communications
Commission sets standards and regulations regarding communications and related
equipment.
There are currently few laws and regulations directly applicable to the
Internet. It is possible that a number of laws and regulations may be adopted
with respect to the Internet covering issues such as user privacy, pricing,
content, copyrights, distribution, antitrust and characteristics and quality of
products and services. The growth of the market for online commerce may prompt
calls for more stringent consumer protection laws that may impose additional
burdens on those companies conducting business online. Tax authorities in a
number of states are currently reviewing the appropriate tax treatment of
companies engaged in online commerce, and new state tax regulations may subject
us to additional state sales and income taxes.
Several states have also proposed legislation that would limit the uses of
personal user information gathered online or require online services to
establish privacy policies. The Federal Trade Commission has also initiated
action against at least one online service regarding the manner in which
personal information is collected from users and provided to third parties.
Changes to existing laws or the passage of new laws intended to address these
issues, including some recently proposed changes, could create uncertainty in
the marketplace that could reduce demand for our products and services or
increase the cost of doing business as a result of litigation costs or increased
service delivery costs, or could in some other manner have a material adverse
effect on our business, results of operations and financial condition. In
addition, because our services are accessible worldwide and we facilitate sales
of goods to users worldwide, other jurisdictions may claim that we are required
to qualify to do business as a foreign corporation in a particular state or
foreign country. Our failure to qualify as a foreign corporation in a
jurisdiction where it is required to do so could subject us to taxes and
penalties for the failure to qualify and could result in our inability to
enforce contracts in such jurisdictions. Any such new legislation or
regulation, or the application of laws or regulations from jurisdictions whose
laws do not currently apply to our business, could have a material adverse
effect on our business, results of operations and financial condition.
21
EMPLOYEES
As of December 31, 2000, we had 19 employees, including:
- 1 in customer support;
- 3 in product development;
- 10 in sales, marketing and business development; and
- 5 in administration.
We believe that our future success will depend in part on our continued
ability to attract, integrate, retain and motivate highly qualified technical
and managerial personnel, and upon the continued service of our senior
management and key technical personnel. The competition for qualified personnel
in our industry and geographical location is intense, and there can be no
assurance that we will be successful in attracting, integrating, retaining and
motivating a sufficient number of qualified personnel to conduct our business in
the future. From time to time, we also engage independent contractors to support
our research and development, marketing, sales and support and administrative
organizations. We have never had a work stoppage, and no employees are
represented under collective bargaining agreements. We consider our relations
with our employees to be good.
ITEM 1A. RISK FACTORS
Our business, financial condition or results of operations could be
materially and adversely affected by any of the following risks.
WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND
EXPECT LOSSES FOR THE FORESEEABLE FUTURE.
We were incorporated in October 1997. Accordingly, we have only a limited
operating history upon which you can evaluate our business and prospects. Since
our inception, we have incurred net losses, resulting primarily from costs
related to developing our web site, attracting users to our web site and
establishing the Nettaxi.com brand. At December 31, 2000, we had an accumulated
deficit of $27,687,800. Losses have continued to grow faster than our revenues
during our limited operating history. This trend is reflective of our continued
investments in technology and sales and marketing efforts to grow the business.
Because of our plans to continue to invest heavily in marketing and promotion,
to hire additional employees, and to enhance our web site and operating
infrastructure, we expect to incur significant net losses for the foreseeable
future. We believe these expenditures are necessary to strengthen our brand
recognition, attract more users to our web site and generate greater online
revenues. If our revenue growth is slower than we anticipate or our operating
expenses exceed our expectations, our losses will be significantly greater. We
may never achieve profitability.
22
WE REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES.
We currently believe that we have sufficient cash to fund our current
operations through December 2002. However, to fully execute our business plan,
we will be required to seek additional capital. We expect to generate a portion
of the necessary cash flow through advertising and hosting revenues, but will
also need to obtain capital through other sources such as equity or debt
financing. We cannot assure you that we will be able to achieve and sustain
positive cash flow or profitability or that we will have other sources available
to provide the financial resources necessary to continue our operations. No
assurances can be given that we will be able to obtain such additional
resources. If we are unsuccessful in generating anticipated resources from one
or more of the anticipated sources, and unable to replace the shortfall with
resources from another source, we may be able to extend the period for which
available resources would be adequate by deferring the creation or satisfaction
of various commitments, deferring the introduction of various services or entry
into various markets, and otherwise scaling back operations. If we are unable
to generate the required resources, our ability to meet our obligations and to
continue our operations would be adversely affected.
SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT
OUR STOCK PRICE.
As of February 28, 2001, 18,091,516 shares of our common stock were
immediately eligible for sale in the public market without restriction or
further restriction under the Securities Act of 1933, unless purchased by or
issued to any "affiliate" of ours, as that term is defined in Rule 144
promulgated under that Act. Additionally, we have filed a registration statement
on Form S-8 (File No. 333-32678) to register 6,300,000 shares of common stock
issuable upon exercise of options granted or to be granted under our 1998 and
1999 stock option plans. As a result, shares issued upon exercise of stock
options are eligible for resale in the public market without restriction. We
also intend to file a registration statement on Form S-8 to register the
additional 5,600,000 shares of common stock under our 1999 Stock Option Plan, as
amended. We have also filed a registration statement on Form S-1 (File No.
333-36826), declared effective by the Securities and Exchange Commission on June
12, 2000 registering 32,730,849 shares issued and issuable pursuant to recent
private placement transactions. Additionally, we have filed a registration
statement on Form S-1 (File No. 333-38538), declared effective by the Securities
and Exchange Commission on September 21, 2000, registering 4,219,692 shares of
common stock issued and issuable pursuant to recent private placement
transactions. As of February 28, 2001 approximately 7 million additional shares
of common stock were eligible for sale under Rule 144. If our stockholders sell
substantial amounts of our common stock under Rule 144 or pursuant to the
aforementioned registration statements, the market price of our common stock
could be adversely affected and our ability to raise additional capital at that
time through the sale of our securities could be impaired.
FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS.
There are currently warrants to purchase 18,650,816 shares of our common
stock outstanding and exercisable over the next four to five years having
exercise prices ranging from $1.50 to $12.38, subject to adjustment. The shares
underlying all of these warrants have been registered pursuant to our
registration statements on Form S-1 filed with the Securities and Exchange
Commission. There are also warrants to purchase 350,000 shares of our common
stock outstanding having an exercise price of $0.35 per share. If the holders of
our outstanding warrants and other convertible securities were to exercise their
rights, purchasers of our common stock could experience substantial dilution of
their investment.
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It is likely that we will need to raise additional funds in the future in
order to execute our business plan. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
our stockholders will be reduced, stockholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common stock. This may make an investment in our common stock
less attractive to other investors, thereby weakening the trading market for our
common stock.
WE ARE SUBJECT TO THE RISKS AND UNCERTAINTIES FREQUENTLY ENCOUNTERED BY EARLY
STAGE COMPANIES IN NEW AND RAPIDLY EVOLVING MARKETS.
Due to our limited operating history, we are subject to many of the risks
and uncertainties frequently encountered by early stage companies in new and
rapidly evolving markets, such as e-commerce. Among other things, we are faced
with the need to establish our credibility with customers, advertising, content
providers, and companies offering e-commerce products and services, and such
parties are often understandably reluctant to do business with companies that
have not had an opportunity to establish a track record of performance and
accountability. For example, our ability to enter into exclusive relationships
to provide content over the Internet will be dependent on our ability to
demonstrate that we can handle high volumes of traffic through our site.
Similarly, early stage companies must devote substantial time and resources to
recruiting qualified senior management and employees at all levels, and must
also make significant investments to establish brand recognition. If we are
unable to overcome some of these obstacles, we may be unable to achieve our
business goals and raise sufficient capital to expand our business.
OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE
CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES.
We had revenues of approximately $9,418,400, $5,032,800 and $258,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. While our
growth rate has been strong, it is unlikely that revenue will continue to grow
at this rate in the future and our performance during these periods should not
be taken as being indicative of future trends. In addition, approximately
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$1,285,000 of the revenues for the year ended December 31, 1999 were derived
from credit card transaction processing fees, a revenue stream that has declined
significantly and that we do not believe will be material in future periods. In
the year 2000, we generated approximately $2,200,000 in revenue from reciprocal
advertising transactions. We anticipate that these arrangements will not be
significant in the future. Accurate predictions regarding our revenues in the
future are difficult and should be considered in light of our limited operating
history and rapid changes in the ever evolving Internet market. For example, our
ability to generate revenues in the future is dependent in part on the success
of our capital-raising efforts and the investments that we intend to make in
sales and marketing, infrastructure, and content development. Our revenues for
the foreseeable future will remain primarily dependent on the number of
customers that we are able to attract to our web site, and secondarily on web
hosting, sponsorship and advertising revenues. We cannot forecast with any
degree of certainty the number of visitors to our web site, the number of
visitors who will become customers, or the amount of sponsorship and advertising
revenues. Similarly, we cannot provide any guarantees regarding the revenues
that will be generated from e-commerce products and services that we intend to
make available on our site.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING
THE VOLATILITY OF OUR STOCK PRICE
We anticipate that our operating results will fluctuate significantly from
quarter to quarter. These fluctuations may be due to seasonal and cyclical
patterns that have emerged in Internet related spending. For example, the use of
our web site is somewhat lower during periods of the year during the first and
third calendar quarters because of the summer vacation period and post winter
holiday season slowdown. This results in lower revenues for us during periods of
the year. Quarterly results may also vary because it is difficult to predict the
long-term revenue growth of our business. If investments in marketing and
content development are delayed, we may experience corresponding delays in
anticipated revenues from such investments, thereby leading to uneven quarterly
results. Because of these factors, we believe that quarter-to-quarter
comparisons of our results of operations are not good indicators of our future
performance. If our operating results fall below the expectations of investors
in future periods, then our stock price may decline.
OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT
SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE.
We plan to pursue aggressive marketing campaigns online and in traditional
media to promote the Nettaxi.com brand and attract an increasing number of
visitors to our web site. We believe that maintaining and strengthening the
Nettaxi.com brand will be critical to the success of our business. This
investment in increased marketing carries with it significant risks, including
the following:
- Our advertisements may not properly convey the Nettaxi.com brand
image, or may even detract from our image. Advertising in print and broadcast
media is expensive and is often typically difficult to modify quickly in order
to take into account feedback that may indicate that we have failed to convey
the optimal message. If our advertisements fail to positively promote our brand
and image, the damage to our business may be long-lasting and costly to repair.
25
- Even if we succeed in creating the right messages for our promotional
campaigns, these advertisements may fail to attract new visitors to our web site
at levels commensurate with their costs. We may fail to choose the optimal mix
of television, radio, print and other media to cost effectively deliver our
message. Moreover, if these efforts are unsuccessful, we will face difficult
and costly choices in deciding whether and how to redirect our marketing
dollars.
WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT
SPONSORSHIP AND ADVERTISING REVENUES.
To date, we have relied principally on outside advertising agencies to
develop sponsorship and advertising opportunities. We believe that the growth of
sponsorship and advertising revenues will depend on our ability to establish an
aggressive and effective internal sales organization. Our internal sales team
currently has ten members. We will need to substantially increase this sales
force in the coming year in order to execute our business plan. Our ability to
increase our sales force involves a number of risks and uncertainties, including
competition and the length of time for new sales employees to become productive.
If we do not develop an effective internal sales force, our business will be
materially and adversely affected by our inability to attract sponsorship and
advertising revenues.
OUR PROJECTED BROADBAND SERVICES AND ENHANCED CONTENT MAY NOT BE LAUNCHED ON A
TIMELY BASIS AND MAY NOT GENERATE THE ANTICIPATED LEVEL OF REVENUES
Our strategic growth plan calls for development and implementation of
broadband services and enhanced content for our subscribers. The availability
of many of these tools is dependent on our ability to enter into satisfactory
contractual relationships with parties offering related content and services
which can be made available to our subscribers, as well as relationships with
parties seeking to make online sales to our subscribers and other visitors to
our web site. To date, our revenues from broadband services and enhanced
content have not been material, and we have yet to launch a number of the
services that we hope to provide to our subscribers. We may not be able to
commence those services on a timely basis, and there can be no assurance that
the services will generate the anticipated amount of revenues.
OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE BROADBAND SERVICES
MARKET, WHICH IS UNCERTAIN
Our future revenues and profits substantially depend upon the widespread
acceptance and use of the Internet as an effective medium for the distribution
and viewing of broadband content. The use of the Internet for these services is
a recent phenomenon. Demand for recently introduced services and products over
the Internet and online services is subject to a high level of uncertainty. For
example, the distribution and viewing of broadband content over the Internet is
at an early stage and buyers may be unwilling to shift their purchasing from
traditional vendors of such content to online vendors. If the demand for
broadband services does not develop or increase rapidly, this could have a
material adverse effect on our results of operations.
26
WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR
ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO
MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES.
We depend on third parties for important aspects of our business,
including:
- Internet access;
- development of software for new web site features;
- content; and
- telecommunications.
We have limited control over these third parties, and we are not their only
client. We may not be able to maintain satisfactory relationships with any of
them on acceptable commercial terms, and there is no guarantee that we will be
able to renew these agreements at all. Further, we cannot be sure that the
quality of products and services that they provide may remain at the levels
needed to enable us to conduct our business effectively.
WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND
ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS.
We maintain substantially all of our computer systems at our Campbell,
California site and the Los Angeles, California site of Alchemy Communications.
We are heavily reliant on the ability of Alchemy Communications to house and
service our web site. This system's continuing and uninterrupted performance is
critical to our success. Growth in the number of users accessing our web site
may strain its capacity, and we rely on Alchemy Communications to upgrade our
system's capacity in the face of this growth. Alchemy Communications also
provides our connection to the Internet. Sustained or repeated system failures
or interruptions of our web site connection services would reduce the
attractiveness of our web site to customers and advertisers, and could therefore
have a material and adverse effect on our business due to loss of membership and
advertising revenues.
In addition, our operations are dependent in part on our ability to protect
our operating systems against physical damage from fire, floods, earthquakes,
power loss, telecommunications failures, break-ins or other similar events.
Furthermore, our servers are vulnerable to computer viruses, break-ins and
similar disruptive problems. The occurrence of any of these events could result
in interruptions, delays or cessations in service to our users and result in a
decrease in the number of visitors to our site.
WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT.
Our business plan contemplates a period of significant expansion. In order
to execute our business plan, we must grow significantly. This growth will
strain our personnel, management systems and resources. To manage our growth,
we must implement operational and financial systems and controls and recruit,
train and manage new employees. We cannot be sure that we will be able to
integrate new executives and other employees into our organization effectively.
In addition, there will be significant administrative burdens placed on our
management team as a result of our status as a public company. If we do not
manage growth effectively, we will not be able to achieve our financial and
business goals.
27
WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE
TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS.
Our performance is substantially dependent on the continued services and on
the performance of our executive officers and other key employees, particularly
Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our
President and Chief Operating Officer. The loss of the services of any of our
executive officers could materially and adversely affect our business due to
their experience with our business plan and the disruption in the conduct of our
day-to-day operations. Additionally, we believe we will need to attract, retain
and motivate talented management and other highly skilled employees to be
successful. Competition for employees that possess knowledge of both the
Internet industry and our target market is intense. We may be unable to retain
our key employees or attract, assimilate and retain other highly qualified
employees in the future.
INTENSE COMPETITION FROM OTHER INTERNET-BASED BUSINESSES MAY REDUCE OUR MARGINS
AND MARKET SHARE AND CAUSE OUR STOCK PRICE TO DECLINE.
The markets in which we are engaged are new, rapidly evolving and intensely
competitive, and we expect competition to intensify further in the future.
Barriers to entry are relatively low, and current and new competitors can launch
new sites at a relatively low cost using commercially available software.
Competition could result in price reductions for our products and services,
reduced margins or loss of market share. Consolidation within the online
commerce industry may also increase competition.
We currently or potentially compete with a number of other companies
including a number of large online communities and services that have expertise
in developing online commerce, and a number of other small services, including
those that serve specialty markets. Many of our potential competitors have
longer operating histories, larger customer bases, greater brand recognition in
other business and Internet markets and significantly greater financial,
marketing, technical and other resources than us.
WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB
SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES.
We intend to establish numerous strategic relationships with popular web
sites to increase the number of visitors to our web site. There is intense
competition for placements on these sites, and we may not be able to enter into
these relationships on commercially reasonable terms or at all. Even if we
enter into relationships with other web sites, they themselves may not attract
significant numbers of users. Therefore, our site may not receive additional
users from these relationships. Moreover, we may have to pay significant fees
to establish these relationships. Our inability to enter into new distribution
relationships and expand our existing ones could have a material and adverse
effect on our business due to our inability to increase the number of users of
our site.
28
OUR ADVERTISERS ARE EMERGING INTERNET COMPANIES THAT REPRESENT CREDIT RISKS.
Some of our advertisers have limited operating histories, are operating at
a loss, have limited cash reserves or have limited access to capital. If any
significant part of our customer base experiences financial difficulties, is not
commercially successful or is unable to pay our advertising fees for any reason,
our business, operating results and financial condition may be materially and
adversely affected.
WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS
CONTINUE TO EVOLVE.
To be successful, we must adapt to rapidly changing Internet technologies
and continually enhance the features and services provided on our web site. We
could incur substantial, unanticipated costs if we need to modify our web site,
software and infrastructure to incorporate new technologies demanded by our
audience. We may use new technologies ineffectively or we may fail to adapt our
web site, transaction-processing systems and network infrastructure to user
requirements or emerging industry standards. If we fail to keep pace with the
technological demands of our web-savvy audience for new services, products and
enhancements, our users may not use our web site and instead use those of our
competitors.
WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND
PROPRIETARY RIGHTS.
Our Nettaxi.com brand and our web address, www.nettaxi.com, are critical to
our success. We have filed a trademark application for "Nettaxi", among other
trademark applications. We cannot guarantee that any of these trademark
applications will be granted. In addition, we may not be able to prevent third
parties from acquiring web addresses that are confusingly similar to our
addresses, which could harm our business. Also, while we have entered into
confidentiality agreements with our employees, contractors and suppliers in
order to safeguard our trade secrets and other proprietary information, there
can be no assurance that technology will not be misappropriated or that others
may lawfully develop similar technologies.
ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS.
We may acquire or make investments in complementary businesses, products,
services or technologies on an opportunistic basis when we believe they will
assist us in carrying out our business strategy. Growth through acquisitions
has been a successful strategy used by other Internet companies. We do not have
any present understanding relating to any such acquisition or investment. If we
were to buy a content, service or technology company, the amount of time and
level of resources required to successfully integrate their business operation
could be substantial. The challenges in assimilating their people and
organizational structure, and in encountering potential unforeseen technical
issues in integrating their content, service or technology into ours, could
cause significant delays in executing other key areas of our business plan.
This could include delays in integrating other content, services or technology
into our communities, or moving forward on other business development
relationships, as management and employees, both of which are time constrained,
may be distracted. In addition, the key personnel of the acquired company may
decide not to work for us, which could result in the loss of key technical or
business knowledge to us. Furthermore, in making an acquisition, we may have to
incur debt or issue equity securities to finance the acquisition, the issuance
of which could be dilutive to our existing shareholders.
29
WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE
COMMERCE TRANSACTIONS.
We do not expect to collect sales or other similar taxes in respect of
transactions engaged in by customers on our web site. However, various states
or foreign countries may seek to impose sales tax obligations on us and other
e-commerce and direct marketing companies. A number of proposals have been made
at the state and local levels that would impose additional taxes on the sale of
goods and services through the Internet. These proposals, if adopted, could
substantially impair the growth of e-commerce and cause purchasing through our
web site to be less attractive to customers as compared to traditional retail
purchasing. Further, states have attempted to impose sales taxes on catalog
sales from businesses such as ours. A successful assertion by one or more
states that we should have collected or be collecting sales taxes on the sale of
products could have a material and adverse effect on our business due to the
imposition of fines or penalties or the requirement that we pay for the
uncollected taxes.
WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET
OPERATING LOSS CARRYFORWARDS.
At December 31, 2000 we had Federal net operating loss carryforwards
available to reduce future Federal taxable income that aggregated approximately
$25,143,000 for Federal income tax purposes. These benefits will begin to
expire in 2017. Pursuant to a "change in ownership" as defined by the
provisions of the Tax Reform Act of 1986, utilization of our net operating loss
carryforwards may be limited, if a cumulative change of ownership of more than
50% occurs within a three-year period. We have not determined if an ownership
change has occurred. If it has, we may not be able to take full advantage of
potential tax benefits from our net operating loss carry forwards.
WE ARE DEPENDENT ON THE CONTINUED DEVELOPMENT OF THE INTERNET INFRASTRUCTURE
Our industry is new and rapidly evolving. Our business is highly dependant
on the growth of the internet industry and would be adversely affected if web
usage and e-commerce does not continue to grow. web usage may be inhibited for
a number of reasons, including:
- inadequate Internet infrastructure;
- security concerns;
- inconsistent quality of service;
- unavailability of cost-effective, high-speed service;
- imposition of transactional taxes; or
- limitation of third party service provider's ability and willingness
to invest in new or updated equipment to handle traffic volume.
30
If Internet usage grows, the Internet infrastructure may not be able to
support the demands placed on it by this growth, or its performance and
reliability may decline. We are highly dependant on third party service
providers. Any interruption experienced by these service providers may have a
material impact on our business due to our inability to serve our advertising
customers or end users. In addition, web sites, including ours, have experienced
a variety of interruptions in their service as a result of outages and other
delays occurring throughout the Internet network infrastructure. If these
outages or delays frequently occur in the future, web usage, including usage of
our web site, could grow slowly or decline. This may have a material impact on
future revenues.
WE RELY ON A CONTINUOUS POWER SUPPLY TO CONDUCT OUR OPERATIONS, AND CALIFORNIA'S
CURRENT ENERGY CRISIS COULD DISRUPT OUR OPERATIONS AND INCREASE OUR EXPENSES.
California is in the midst of an energy crisis that could disrupt our
operations and increase our expenses. In the event of an acute power shortage,
that is, when power reserves for the State of California fall below 1.5%,
California has on some occasions implemented, and may in the future continue to
implement, rolling blackouts throughout California. Our computer systems are
supplied primary power by power companies in California. In addition, the
systems are connected to battery backup systems. This alternative source of
power is provided by our hosting provider and is subject to upkeep and
maintenance. Our current insurance does not provide coverage for any damages our
customers or we may suffer as a result of any interruption in our power supply.
If blackouts interrupt our third party power supply, we would be temporarily
unable to continue operations at our affected facilities. Any such interruption
in our ability to continue operations at our facilities could damage our
reputation and could result in lost revenue, which could have a material adverse
effect on our business, operating results and financial condition.
ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN.
The growth of Internet sponsorships and advertising requires validation of
the Internet as an effective advertising medium. This validation has yet to
fully occur. In order for us to generate sponsorship and advertising revenues,
marketers must direct a significant portion of their budgets to the Internet
and, specifically, to our web site. To date, sales of Internet sponsorships and
advertising represent only a small percentage of total advertising sales. Also,
technological developments could slow the growth of sponsorships and advertising
on the Internet. For example, widespread use of filter software programs that
limit access to advertising on our web site from the Internet user's browser
could reduce advertising on the Internet. Our business, financial condition and
operating results would be adversely affected if the market for Internet
advertising fails to further develop due to the loss of anticipated revenues.
31
BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB
ADVERTISING AND SUBJECT US TO LIABILITY.
The need to securely transmit confidential information, such as credit card
and other personal information, over the Internet has been a significant barrier
to e-commerce and communications over the web. Any well-publicized compromise
of security could deter more people from using the web or from using it to
conduct transactions that involve transmitting confidential information, such as
purchases of goods or services. Furthermore, decreased traffic and e-commerce
sales as a result of general security concerns could cause advertisers to reduce
their amount of online spending. To the extent that our activities or the
activities of third party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, security breaches could
disrupt our business, damage our reputation and expose us to a risk of loss or
litigation and possible liability. We could be liable for claims based on
unauthorized purchases with credit card information, impersonation or other
similar fraud claims. Claims could also be based on other misuses of personal
information, such as for unauthorized marketing purposes. We may need to spend
a great deal of money and use other resources to protect against the threat of
security breaches or to alleviate problems caused by security breaches.
WE COULD FACE LIABILITY FOR INFORMATION DISPLAYED ON AND COMMUNICATIONS THROUGH
OUR WEB SITE.
We may be subjected to claims for defamation, negligence, copyright or
trademark infringement or based on other theories relating to the information we
publish on our web site. These types of claims have been brought, sometimes
successfully, against Internet companies as well as print publications in the
past. Based on links we provide to other web sites, we could also be subjected
to claims based upon online content we do not control that is accessible from
our web site. Claims may also be based on statements made and actions taken as
a result of participation in our chat rooms or as a result of materials posted
by members on bulletin boards at our web site. We also offer e-mail services,
which may subject us to potential risks, such as:
- liabilities or claims resulting from unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
These claims could result in substantial costs and a diversion of our
management's attention and resources.
Efforts to regulate or eliminate the use of mechanisms which automatically
collect information on users of our web site may interfere with our ability to
target our marketing efforts and tailor our web site offerings to the tastes of
our users.
Web sites typically place a tracking program on a user's hard drive without
the user's knowledge or consent. These programs automatically collect data on
anyone visiting a web site. web site operators use these mechanisms for a
variety of purposes, including the collection of data derived from users'
Internet activity. Most currently available web browsers allow users to elect
to remove these mechanisms at any time or to prevent such information from being
stored on their hard drive. In addition, some commentators, privacy advocates
and governmental bodies have suggested limiting or eliminating the use of these
tracking mechanisms. Any reduction or limitation in the use of this software
could limit the effectiveness of our sales and marketing efforts.
32
WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND
LEGAL UNCERTAINTIES SURROUNDING THE INTERNET.
Any new law or regulation pertaining to the Internet, or the application or
interpretation of existing laws, could have a material and adverse effect on our
business, results of operations and financial condition due to increased costs
of doing business. Laws and regulations directly applicable to Internet
communications, commerce and advertising are becoming more prevalent. The law
governing the Internet, however, remains largely unsettled, even in areas where
there has been some legislative action. It may take years to determine whether
and how existing laws governing intellectual property, copyright, privacy,
obscenity, libel and taxation apply to the Internet. In addition, the growth
and development of e-commerce may prompt calls for more stringent consumer
protection laws, both in the United States and abroad. We also may be subject
to future regulation not specifically related to the Internet, including laws
affecting direct marketers.
WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS
ACTIVITIES.
On July 9, 1999, we were named as one of several defendants in a lawsuit
filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit
arises out of a series of events relating to certain assets our operating
company, Nettaxi Online Communities, purchased from SSN Properties in October
1997. The complaint alleges that we owed, and either intentionally or
negligently breached, fiduciary duties to the plaintiffs. The suit also claims
that we either intentionally or negligently interfered with the plaintiffs'
contract or prospective advantage. A Case Management Conference is currently
scheduled for April 13, 2001 at which time the parties must represent to the
court whether or not this matter is ready to be set for trial. While our
officers and directors believe that the suit is without merit, we cannot provide
you with any assurances that we will prevail in this dispute. If the plaintiffs
successfully prosecute any of their claims against us, the resulting monetary
damages and reduction in our working capital could significantly harm our
business.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD MAKE A
THIRD PARTY ACQUISITION OF US DIFFICULT.
We are a Nevada corporation. Anti-takeover provisions of Nevada law could
make it more difficult for a third party to acquire control of us, even if such
change in control would be beneficial to stockholders. Our articles of
incorporation provide that our board of directors may issue preferred stock
without stockholder approval. The issuance of preferred stock could make it
more difficult for a third party to acquire us. All of the foregoing could
adversely affect prevailing market prices for our common stock.
33
OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET
COMPANIES.
The market price of our common stock has been, and is likely to continue to
be, highly volatile as the stock market in general, and the market for
Internet-related and technology companies in particular, has been highly
volatile. Investors may not be able to resell their shares of our common stock
following periods of volatility because of the market's adverse reaction to
volatility. The trading prices of many technology and Internet-related
companies' stocks have decreased substantially within the last 52 weeks. The
market downturn and adjustment for the high valuations for internet companies
may not return to the levels of late 1999 and early 2000. We cannot assure you
that our stock will trade at the same levels of other Internet stocks or that
Internet stocks in general will regain their prior market prices. The per share
closing price of our common stock in 2000 ranged from a high of $8.09 as of
March 13, 2000 to a low of $0.14 as of December 29, 2001. In addition, an active
public market for our common stock may not continue.
Factors that could cause such volatility may include, among other things:
- actual or anticipated fluctuations in our quarterly operating results;
- announcements of technological innovations;
- conditions or trends in the Internet industry; and
- changes in the market valuations of other Internet companies.
ITEM 2. PROPERTIES
Our headquarters are currently located in a leased facility in Campbell,
California, consisting of approximately 8,600 square feet of office space to
accommodate management, operations, and research and development functions,
which is under a lease that expires at the end of April 2002. We are currently
evaluating our need for the current accommodations and believe that the current
market conditions will allow the Company to either renew the current lease space
or find additional space if needed.
ITEM 3. LEGAL PROCEEDINGS
On July 9, 1999, after our public announcement of the filing of our
registration statement on Form S-1, (Registration No. 333-78129) four
disaffected shareholders in Simply Interactive, Inc., led by Ronald Ventre,
filed an action in the Santa Clara County Superior Court against Warren J.
Kaplan, Frank McGrath, Bruno Henry, Alan K. Fetzer, Robert Divenere, Robert A.
Rositano, Sr., Robert A. Rositano, Jr., Dean Rositano, Glenn Goelz, Nettaxi.com,
Nettaxi Online Communities, Inc., SSN Properties, LLC and others. In August
1999 this claim was consolidated with another claim filed by Carlo Bruno, et
al., on September 17, 1998. The case number is CV 783127.
Mr. Kaplan was formerly the chief executive officer and a director of
Simply Interactive. He also became a member of SSN Properties and is currently
the chief operating officer of AboveNet Communications, Inc. Mr. McGrath was a
director of Simply Interactive. He also became a member of SSN Properties and
is currently a vice president of MCI WorldCom. Messrs. Henry, Fetzer, and
DiVenere were all former officers of Simply Interactive, and Mr. Henry also
served as a director of Simply Interactive. Robert A. Rositano, Sr. was a
director of Simply Interactive and became the managing member of SSN Properties.
He currently owns more than 5% of the outstanding shares of our common stock
following a distribution by SSN Properties to its members in March 1999. Robert
A. Rositano, Jr. was formerly an executive vice president of Simply Interactive
and served as a director until May 1996. He is currently chief executive
officer, secretary and a director of Nettaxi. Dean Rositano was formerly an
executive vice president of Simply Interactive and served as a director until
May 1996. He is currently president, chief operating officer and a director of
Nettaxi. Mr. Goelz was the chief financial officer of Simply Interactive from
August 1996 to July 1997 and was our chief financial officer from April 1999 to
April 2000. All individual defendants held shares, or options to purchase
shares, of Simply Interactive.
34
Distinctions can be made between the claims that the Ventre group is
pursuing against us and the other defendants. As to us, the suit claims that we
owed, and either intentionally or negligently breached, fiduciary duties to the
Ventre group. The suit also claims that we either intentionally or negligently
interfered with the Ventre group's contract or prospective advantage. The
Ventre group is seeking the following relief against us:
- an unstated amount of compensatory and special damages in the sum of
their investments in Simply Interactive, plus prejudgment interest;
- an accounting of profits;
- punitive damages; and
- costs of suit, including attorney fees as permitted by law.
The Ventre group's claims against the other defendants, while not clear,
include all of the claims described above with respect to us as well as other
claims of ineffective management, waste of assets and similar claims. In
addition to the relief described above with respect to us, the Ventre group
seeks the following from the other defendants:
- declaratory relief concerning the validity of the election of the
board of directors of Simply Interactive; and
- orders for the inspection of corporate records in, and the holding of
shareholder meetings for, Simply Interactive.
The factual basis for the proceedings as alleged by the Ventre group can be
summarized as follows. The Ventre group alleges that between February and April
1996, they made a series of investments in Simply Interactive and thereby became
minority shareholders. Thereafter, according to the complaint, the board of
directors of Simply Interactive, without due diligence and disclosure to the
minority shareholders, increased the debts and expenses of Simply Interactive.
The Ventre group then alleges that the defendants raised capital through the
sale of $5.5 million principal amount of convertible notes, secured by all the
assets and properties of Simply Interactive, to three of the defendants, that
the minority shareholders were not given notice of the proposed financing and an
opportunity to participate, and that the entire transaction is void or voidable
because the board of directors of Simply Interactive was improperly constituted
at the time. The Ventre group goes on to allege that SSN Properties, which
acquired the notes from the original purchaser, foreclosed on the assets of
Simply Interactive without reason in August 1997. Finally, the complaint
alleges that the assets formerly used by Simply Interactive were transferred to
us through a series of transactions in violation of fiduciary obligations owed
by the defendants to the minority shareholders of Simply Interactive.
35
Our officers and directors believe that the Ventre group's claims are
without merit and that significant issues of proof exist with regard to the
relevant facts as alleged in the complaint. For example, the individual
defendants have advised that the issuance of the notes followed numerous failed
attempts to raise additional funds from outside sources, and that foreclosure
occurred only after Simply Interactive's default in its obligations to make
required interest payments. Moreover, while the complaint does include us as
defendants with respect to the allegations arising out of the events described
above, our current operating company, Nettaxi Online Communities, was not
launched until September 1997.
In fact, Nettaxi Online Communities did purchase certain assets from SSN
Properties in October 1997, including the original Internet the City CD-ROM
product; a domain name; furniture, fixtures, and equipment; plus other assets
which have since been abandoned. However, the assets acquired by Nettaxi Online
Communities from SSN Properties at that time represented less than 50% of the
value of the foreclosed assets. As described in the notes to our financial
statements, the aggregate value of the assets acquired by Nettaxi Online
Communities from SSN Properties was $2,000,000, which amount was verified by an
independent appraiser.
In 1998, we experienced several significant functional problems with
portions of a purchased technology program, namely the web to database software
application, due to those components incompatability with subsequent releases of
upgraded versions of its operating system. Following attempts to make these
components of the acquired technology compatible, we decided, in December 1998,
not to spend additional monies on these components but to replace them. We wrote
off the unamortized portion of this impaired technology that reduced the value
of the assets by approximately $700,000. As of December 31, 2000, the
unamortized cost of the remaining assets purchased from SSN Properties as a
percentage of our total assets was less than 5%. Moreover, the role of these
assets, which were intended to be revenue-generating products in Simply
Interactive's business model, is substantially different for us in that we view
them primarily as a tool to drive traffic to our site and not necessarily as an
independent revenue source. It should also be noted that our business model for
an online community is substantially different than Simply Interactive's
objective of licensing, distribution, and sale of the CD-ROM product and
marketing and sales of the impaired software application described above.
A Case Management Conference is currently scheduled for April 13, 2001 at
which time the parties must represent to the court whether or not this matter is
ready to be set for trial.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
36
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Our common stock has been traded on the NASD O-T-C Market Bulletin Board
under the trading symbol "NTXY" since October 12, 1998. Prior to that date, our
common stock was not actively traded in the public market. The following table
sets forth, for the periods indicated, the high and low bid prices for our
common stock as reported by various Bulletin Board market makers. The
quotations do not reflect adjustments for retail mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
Period Low Bid High Bid
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FISCAL YEAR ENDED DECEMBER 31, 1998:
Fourth Quarter (October 12 - December 31, 1998) $ 4.375 $ 8.875
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter (January 1 - March 31, 1999) $ 6.187 $18.750
Second Quarter (April 1 - June 30, 1999) $11.500 $34.500
Third Quarter (July 1 - September 30, 1999) $ 7.375 $16.500
Fourth Quarter (October 1 - December 31, 1999) $ 1.843 $ 7.875
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter (January 1 - March 31, 2000) $ 1.406 $ 9.062
Second Quarter (April 1 - June 30, 2000) $ 0.940 $ 5.968
Third Quarter (July 1 - September 30, 2000) $ 0.420 $ 1.420
Fourth Quarter (October 1 - December 31, 2000) $ 0.125 $ 0.520
FISCAL YEAR ENDING DECEMBER 31, 2001
First Quarter (January 1 - March 16, 2001) $ 0.130 $ 0.240
On March 16, 2001, the high and low bid prices per share for our common
stock on the Bulletin Board were $0.240 and $0.180, respectively. As of
February 28, 2001, there were 434 stockholders of record who held shares of our
common stock
DIVIDEND POLICY
To date, no dividends have been declared or paid on any of our capital
stock. We currently intend to retain earnings, if any, to fund the development
and growth of our business and do not anticipate paying cash dividends in the
foreseeable future. Payment of future dividends, if any, will be at the
discretion of our board of directors after taking into account various factors,
including our financial condition, operating results, current and anticipated
cash needs and plans for expansio