-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PlzanZzNIgaTSdo6Nw4dkJDzUmshTtu8XnkbJhp3RahQzRI0Chb77/4HpC71baoJ 3yofVf26fB2ikVILNZjaWA== /in/edgar/work/0001015402-00-003227/0001015402-00-003227.txt : 20001115 0001015402-00-003227.hdr.sgml : 20001115 ACCESSION NUMBER: 0001015402-00-003227 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NETTAXI INC CENTRAL INDEX KEY: 0001084876 STANDARD INDUSTRIAL CLASSIFICATION: [7389 ] IRS NUMBER: 820486102 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-26109 FILM NUMBER: 766712 BUSINESS ADDRESS: STREET 1: 1696 DELL AVE CITY: CAMPBELL STATE: CA ZIP: 95008 BUSINESS PHONE: 4088799880 10-Q 1 0001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 Identification No.) of incorporation or organization) 1696 Dell Avenue, Campbell, CA 95008 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (408) 879-9880 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 [ ] Applicable Only To Corporate Issuers: As of October 31, 2000, the registrant had 43,049,586 shares of common stock, $.001 par value per share, outstanding.
NETTAXI.COM CONTENTS Page No. -------- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets, as of September 30, 2000 (unaudited) and December 31, 1999 3 Condensed Consolidated Statements of Operations, Three and Nine Months Ended September 30, 2000 and 1999 (unaudited) 4 Condensed Consolidated Statements of Shareholders' Equity (Deficiency), September 30, 2000 (unaudited) 5 Condensed Consolidated Statements of Cash Flows, Nine Months Ended September 30, 2000 and 1999 (unaudited) 6 Notes to Condensed Consolidated Financial Statements (unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk 30 PART II OTHER INFORMATION Item 1. Legal Proceedings 31 Item 2. Changes in Securities and Use of Proceeds 31 Item 3. Defaults Upon Senior Securities 32 Item 4. Submission of Matters to a Vote of Security Holders 32 Item 5. Other Information 32 Item 6. Exhibits and Reports on Form 8-K 32 SIGNATURES 33 EXHIBIT INDEX 34
2
PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS NETTAXI.COM CONDENSED CONSOLIDATED BALANCE SHEETS September 30, December 31, 1999 2000 (unaudited) ----------------- --------------- ASSETS Current assets: Cash and cash equivalents $ 987,700 $ 15,487,400 Accounts receivable, net of allowance for doubtful accounts of $83,600 and 1,181,600 1,823,900 $245,900, respectively Prepaid expenses and other assets 609,200 1,077,700 ----------------- --------------- TOTAL CURRENT ASSETS 2,778,500 18,389,000 Property and equipment, net 1,968,600 1,780,500 Intangibles, net 578,000 425,000 Deferred expenses 706,100 436,000 ----------------- --------------- TOTAL ASSETS $ 6,031,200 $ 21,030,500 ================= =============== LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY CURRENT LIABILITIES Accounts payable $ 4,041,400 $ 1,623,500 Accrued expenses 664,500 579,900 Income taxes payable 125,600 - ----------------- --------------- TOTAL CURRENT LIABILITIES 4,831,500 2,203,400 LONG-TERM LIABILITIES Convertible notes payable 3,200,000 - ----------------- --------------- TOTAL LIABILITIES 8,031,500 2,203,400 Commitments and contingencies SHAREHOLDERS' (DEFICIENCY) EQUITY Preferred stock, $.001 par value; 1,000,000 shares authorized; no shares issued and outstanding Common stock, $.001 par value; 50,000,000 and 200,000,000 shares authorized; 23,214,446 and 43,049,586 shares issued and outstanding, respectively 23,200 43,000 Additional paid-in capital 11,804,300 44,060,800 Deferred Compensation (491,400) (577,500) Accumulated Deficit (13,336,400) (24,699,200) ----------------- --------------- TOTAL SHAREHOLDERS' (DEFICIENCY) EQUITY (2,000,300) 18,827,100 ----------------- --------------- TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIENCY) EQUITY $ 6,031,200 $ 21,030,500 ================= =============== **The accompanying notes are an integral part of these financial statements
3
NETTAXI.COM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months ended Three Months ended Nine Months ended Nine Months ended 9/30/99 9/30/00 9/30/99 9/30/00 (unaudited) (unaudited) (unaudited) (unaudited) -------------------- -------------------- ------------------- ------------------- Net Revenues $ 1,102,500 $ 2,254,000 $ 2,980,900 $ 8,003,800 Operating Expenses: Cost of operations 1,182,400 1,653,400 1,914,600 5,348,700 Sales and marketing 2,291,700 1,506,600 3,132,700 5,343,600 Research and development 855,500 427,700 1,585,200 1,258,100 General and administrative 748,100 1,026,800 2,756,700 3,715,800 -------------------- -------------------- ------------------- ------------------- Total Operating Expenses 5,077,700 4,614,500 9,389,200 15,666,200 -------------------- -------------------- ------------------- ------------------- Loss From Operations (3,975,200) (2,360,500) (6,408,300) (7,662,400) Interest Income 28,800 229,500 68,300 476,500 Interest Expense (147,600) (1,200) (299,400) (4,176,100) -------------------- -------------------- ------------------- ------------------- Loss before income taxes (4,094,000) (2,132,200) (6,639,400) (11,362,000) Income Tax (Expense) Benefit 4,900 - (96,700) (800) -------------------- -------------------- ------------------- ------------------- Net Loss $ (4,089,100) $ (2,132,200) $ (6,736,100) $ (11,362,800) -------------------- -------------------- ------------------- ------------------- Basic and diluted loss per common share $ (0.19) $ (0.05) $ (0.32) $ (0.29) Weighted average common shares Outstanding 21,178,333 42,896,030 21,132,778 38,133,760 **The accompanying notes are an integral part of these financial statements
4
NETTAXI.COM CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIENCY) EQUITY Common Stock Additional Paid-in Deferred Accumulated Shares Amount Capital Compensation Deficit Total ---------- ------- ------------------- -------------- ------------- ------------- Balances, December 31, 1999, (Audited) 23,214,446 $23,200 $ 11,804,300 $ (491,400) $(13,336,400) $ (2,000,300) Exchange of convertible notes payable 2,382,472 2,400 3,317,500 3,319,900 and accrued interest Proceeds from the issuance of common 632,472 600 834,300 834,900 stock Deemed interest on settlement 3,896,000 3,896,000 agreement Deferred Compensation 1,175,400 (1,175,400) - Amortization of deferred compensation 1,089,300 1,089,300 Conversion of trade payables to common stock 778,982 800 1,557,200 1,558,000 Issuance of common stock for services 611,250 600 910,400 911,000 Proceeds from sale of common stock, net of costs of $2,409,100 15,416,633 15,400 20,549,700 20,565,100 Issuance of common stock due to the exercise of stock options 13,331 16,000 16,000 Net loss (11,362,800) (11,362,800) - -------------------------------------- ---------- ------- ------------------- -------------- ------------- ------------- Balances, September 30, 2000 (unaudited) 43,049,586 $43,000 $ 44,060,800 $ (577,500) $(24,699,200) $ 18,827,100 - -------------------------------------- ---------- ------- ------------------- -------------- ------------- ------------- **The accompanying notes are an integral part of these financial statements
5
NETTAXI.COM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended Nine Months Ended September 30, September 30, 1999 2000 - ------------------------------------------------------------------------ ------------------- ------------------- (UNAUDITED) (UNAUDITED) INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (6,736,100) $ (11,362,800) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Depreciation and amortization 382,000 898,000 Allowance for doubtful accounts 19,300 162,300 Issuance of common stock for interest on convertible notes - 119,900 Issuance of common stock for services - 730,900 Compensation expense related to options granted 114,900 1,089,300 Interest expense related to settlement agreement - 2,400,000 Interest expense related to warrants granted 171,500 1,655,000 Changes in operating assets and liabilities: Accounts receivable (904,600) (804,600) Prepaid expenses and other assets (77,900) (196,500) Accounts payable 3,009,100 (859,900) Accrued expenses 811,700 (79,200) Income taxes payable 100,000 (125,600) Other current liabilities (14,000) -- - ------------------------------------------------------------------------ ------------------- ------------------- NET CASH USED IN OPERATING ACTIVITIES (3,124,100) (6,373,200) - ------------------------------------------------------------------------ ------------------- ------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Deposits (40,400) 19,200 Capital expenditures (2,043,900) (556,900) - ------------------------------------------------------------------------ ------------------- ------------------- NET CASH USED IN INVESTING ACTIVITIES (2,084,300) (537,700) - ------------------------------------------------------------------------ ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment on obligation under capital lease (5,000) (5,400) Proceeds from issuance of convertible note payable 5,000,000 - Net proceeds from issuance of common stock 1,188,100 21,416,000 - ------------------------------------------------------------------------ ------------------- ------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 6,183,100 21,410,600 - ------------------------------------------------------------------------ ------------------- ------------------- NET INCREASE IN CASH AND CASH EQUIVALENTS 974,700 14,499,700 CASH AND CASH EQUIVALENTS, beginning of period 465,800 987,700 - ------------------------------------------------------------------------ ------------------- ------------------- CASH AND CASH EQUIVALENTS, end of period $ 1,440,500 $ 15,487,400 ======================================================================== =================== =================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash Paid: Income taxes $ 1,600 $ 97,400 Interest $ 500 $ - Noncash Operating and Financing Activities: Issuance of common stock for accounts payable $ - $ 1,558,000 Issuance of common stock for convertible notes plus accrued interest $ - $ 3,319,900 Issuance of common stock for consulting services $ - $ 911,000
6 NETTAXI.COM NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF ACCOUNTING POLICIES THE COMPANY Nettaxi.com is a Nevada Corporation, which was incorporated on October 26, 1995. The Company's principal executive offices are located in Campbell, California. CONSOLIDATION The accompanying condensed consolidated financial statements include the accounts of Nettaxi.com and its wholly-owned subsidiary, Nettaxi Online Communities, Inc. All Intercompany accounts and transactions have been eliminated in the consolidated financial statements. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Acutal results could differ from those estimates. BASIS OF PRESENTATION The unaudited condensed consolidated interim financial statements reflect all adjustments (which include only normal, recurring adjustments), which are, in the opinion of management, necessary to state fairly the results for the periods presented. The results for three and nine month periods ended September 30, 2000 are not necessarily indicative of the results expected for the full fiscal year or for any future period. The unaudited historical financial statements included herein have been prepared in accordance with instructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of the Company's results of operations, financial position and cash flows. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999. REVENUE RECOGNITION AND DEFERRED REVENUE The Company's revenues are derived principally from the sale of banner advertisements and web hosting services. Advertising revenues are recognized in the period in which the advertisement is delivered, provided that collection of the resulting receivable is probable. Advertisers are charged on a per impression or delivery basis up to a maximum as specified in the contract. To date, the duration of the Company's advertising commitments has not exceeded one year. When the Company guarantees a minimum number of impressions or deliveries, revenue is recognized ratably in proportion to the number of impressions or deliveries recorded to the minimum number of impressions and deliveries guaranteed. Web hosting revenues are recognized in the period in which the services are provided. 7 Advertising revenue include barter transactions, which are the exchange by Nettaxi.com of advertising space on Nettaxi.com's web sites for reciprocal advertising space on other web sites or advertising media. Revenues from these barter transactions are recorded as advertising revenues at the lower of the estimated fair value of the advertisements received or delivered and are recognized when the advertisements are run on Nettaxi.com's web sites. Barter expenses are recorded when Nettaxi.com's advertisements are run on the reciprocal web sites, which is typically in the same period as when advertisements are run on Nettaxi.com's web sites. For the three and nine months ended September 30, 2000, barter revenues represented 41% and 28% of net revenues as compared to 0% for both comparable periods in 1999. In November 1999, the Financial Accounting Standards Board (FASB) issued Emerging Issues Task Force (EITF) Issue 99-17 "Accounting for Advertising Barter Transactions". Under EITF 99-17, revenues and expenses should be recognized from advertising barter transactions at the fair value of the advertising surrendered or received only when the company has a historical practice of receiving or paying cash for such transactions. As of September 30, 2000, the Company was in compliance with EITF 99-17. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In September 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133, as amended by SFAS No 138, requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. In September 1999, the FASB issued SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after September 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to have a material impact on the Company's results from operations, financial position or cash flows. 8 BASIC AND DILUTED LOSS PER COMMON SHARE Basic loss per common share is determined by dividing loss available to common shareholders by the weighted average number of common shares outstanding. Diluted per-common-share amounts assume the issuance of common stock for all potentially dilutive equivalent shares outstanding. Anti-dilution provisions of SFAS 128 require consistency between diluted per-common-share amounts and basic per-common-share amounts in loss periods. For the periods reported, there were no differences between basic and diluted earnings per share. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, INCLUDING, WITHOUT LIMITATION, STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, BELIEFS, INTENTIONS OR FUTURE STRATEGIES THAT ARE SIGNIFIED BY THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS", "BELIEVES", OR SIMILAR LANGUAGE. THESE FORWARD-LOOKING STATEMENTS INVOLVE RISKS, UNCERTAINTIES AND OTHER FACTORS. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS DOCUMENT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY ON THE DATE HEREOF AND SPEAK ONLY AS OF THE DATE HEREOF. THE FACTORS DISCUSSED BELOW UNDER "RISK FACTORS" AND ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED THE COMPANY'S RESULTS AND COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto. OVERVIEW We were incorporated in October 1997 and launched our web site in July 1998. We are a provider of content-rich and commerce-enabled communities that offer subscribers, or "citizens", a place to build their home pages or businesses on the Internet. The Nettaxi.com web site, at http://www.nettaxi.com, is structured as a virtual "urban" environment, populated by citizens, that is divided into thematic "communities," and from there into "streets" and "homes." Nettaxi.com provides access to information on news, sports, entertainment, health, politics, finances, lifestyle, travel and other areas of interest, and services such as free e-mail, personal home pages, chat and messages. 9 To date, our revenues have been derived principally from the sale of advertisements and internet connectivity service fees for corporate customers. We sell a variety of advertising packages to clients, including banner advertisements, event sponsorships, and targeted and direct response advertisements. Currently, our advertising revenues are derived principally from short-term advertising arrangements, averaging one to three months, in which we guarantee a minimum number of impressions for a fixed fee. Advertising revenues are recognized ratably in the period in which the advertisement is displayed, provided that we have no significant remaining obligations and that collection of the resulting receivable is probable. Payments received from advertisers prior to displaying their advertisements on the site are recorded as deferred revenues and are recognized as revenue ratably when the advertisement is displayed. To the extent minimum guaranteed impression levels are not met, we defer recognition of the corresponding revenues until guaranteed levels are achieved. We expect to continue to derive revenue for the foreseeable future from the sale of advertising space on our web site. In the third quarter of 1999, we began providing web site hosting and Internet connectivity services for corporate customers. Our services are delivered through a state-of-the-art Internet data center located in Southern California using a high-performance Internet backbone network. Customers pay monthly fees for the professional services utilized, one-time installation fees, and connectivity charges. These "hosting" revenues are recognized in the period the services are provided. Two customers accounted for more than 10% of total net revenues for the three months period ended September 30, 2000 and one customer accounted for more than 10% of the total net revenues for the nine months period ended September 30, 2000. The loss or reduction of revenue from this customer may have a material impact on total net revenues. The Company also receives other revenues from premium account membership subscriptions. Our membership programs offer premium services for a monthly fee, providing additional services such as unlimited personal e-mail accounts for family or friends, unlimited Nettaxi Site Builder web pages, themed web page templates, a personal event calendar, discussion groups, and options to customize personal homepages with pictures, colors and content. In May 1999, we completed the merger with Plus Net, Inc., a California corporation, which has allowed us to provide our users with a web based e-mail program and a robust meta search engine. Plus Net also has an e-commerce processing engine that enables the acceptance and processing of online credit card transactions. We believe this merger also enhanced our electronic commerce and advertising opportunities. As a result of this merger, we received revenues from credit card processing fees during the first half of 1999, with minimal revenues being earned in the third quarter of 1999. The contract through which these fees have been derived terminated in December 1999 and we anticipate that revenues of this type will be minimal in the foreseeable future. 10 In February 2000, we completed our private placement, which raised approximately $23 million in exchange for issuance of the Company's common stock and warrants, to purchase shares of our common, which, if fully exercised by all investors, will result in an additional $63 million in equity funding to Nettaxi.com. The acquisition of this new capital will provide Nettaxi.com the ability to become a more aggressive competitor in the community portal arena. The Company plans to use the funds raised to increase our ability to develop new community content and commerce relationships, and enhance each Nettaxi.com citizen's experience within our communities. This funding will also facilitate potential acquisitions, mergers, and other strategic partnerships which fit into the company's overall long-term business strategy. To date, we have entered into business and technology license arrangements in order to build our web site community, provide community-specific content, generate additional traffic, and provide our subscribers with additional products and services, including e-commerce tools. During the third quarter ended September 30, 2000, the Company entered into a contract with a third-party content provider to provide content for the citizens and page viewers. The Company expects this new content to increase brand awareness to our website. The Company also entered into a contract to enhance our marketing efforts for direct marketing to our citizens that may enhance their time spent online with other products and services for purchase. We intend to continue to investigate potential acquisitions and to seek additional relationships with content providers that fall within the scope of our business strategy, and will serve to increase our subscriber base and overall site traffic. Acquisitions carry numerous risks and uncertainties and we cannot guarantee that we will be able to successfully integrate any businesses, products, technologies or personnel that might be acquired in the future. RESULTS OF OPERATIONS Three months ended September 30, 2000 Compared to the Three months ended September 30, 1999. NET REVENUES. Net Revenues were $2.3 million and $1.1 million for the three months ended September 30, 2000 and 1999, respectively. Net revenues increased 104% as the result of both higher advertising and hosting revenues. Five and four customers each accounted for revenues greater than 10% of total net revenues for the three months ended September 30, 2000 and 1999, respectively. ADVERTISING REVENUES. For the three months ended September 30, 2000 and 1999, advertising revenues were approximately $1.3 million and $0.6 million, respectively. Advertising revenues increased as the result of advertisers placing higher number of banner advertisements on our web site due to value offered (as a result of higher web site traffic to nettaxi.com web pages) to the advertisers. Also, the average revenue generated per advertiser had more than doubled year over year. The Company cannot assure that advertisers will either increase or decrease their advertising sponsorship at the Company's web site. Additionally, the Company cannot predict various factors (such as competition or demand) that could lower the advertising prices currently in effect, or the continuous flow of web traffic to our web site. The Company does not expect that the prior growth in advertising revenues is indicative of future results. 11 Revenues from reciprocal advertising agreements, or barter transactions, accounted for approximately 41% total revenues for the three months ended September 30, 2000. There were no barter revenues for the comparable period of 1999. Barter revenues for the three months ended September 30, 2000 are the result of the Company's strategy in developing strategic relationships with other advertisers or service providers for non-cash media advertising. HOSTING REVENUES. Hosting revenues were approximately $0.9 million and $0.4 million for the three months ended September 30, 2000 and 1999, respectively. The 125% increase is the result of the Company providing internet web hosting and connectivity services for corporate customers beginning in the third quarter of 1999. Web hosting services are delivered through a state-of-the-art Internet data center located in Southern California using a high-performance Internet backbone network. Customers pay monthly fees for the professional services utilized, one-time installation fees, and monthly connectivity charges. These "hosting" revenues are recognized in the period the services are provided. The Company has experienced strong revenue growth in the internet web hosting for corporate customers, but does not expect this growth to continue at the current rate, or that the Company will sustain profitability from this business segment. Additionally, the Company cannot assure that it can increase the number of corporate customers or maintain the current customer base. As previously described, two web-hosting customers accounted for more than 10% of total net revenues for the three months ended September 30, 2000. COST OF OPERATIONS. Cost of operations were $1.7 million and $1.2 million for the three months ended September 30, 2000 and 1999, respectively. Cost of operations increased 40%, primarily the result of additional expenses related to costs for co-location expenses. In the third quarter of 1999, the Company began providing Internet connectivity services to corporate customers, which demanded purchases of additional bandwidth from third party providers. Also, the Company experienced a significant growth in web traffic to our web sites, which required the purchase of increased bandwidth to support this increased traffic. Other items contributing to higher costs were equipment costs and depreciation, amortization of intangible assets, and expenses for third party content and development. Separately, during the three months ended September 30, 2000, the Company also initiated cost effective measurement tools to limit the use of unauthorized excessive bandwidth or charging the individual users for the use of additional bandwidth. These cost measures resulted in substantial cost savings to the Company during the three months. The Company cannot be assured that these cost saving measures will continue to result in substantial savings or any savings at all. SALES AND MARKETING EXPENSES Sales and Marketing expenses were $1.5 million and $2.3 million for the three months ended September 30, 2000 and 1999, respectively. Sales and marketing expenses decreased 34% primarily driven by the Company's redirected marketing approach for brand awareness to direct marketing campaigns and cross marketing arrangements or barter transactions rather than cash intensive mass media marketing campaigns. The Company believes this new approach will reduce the per-citizen, or customer acquisition cost, and increase the number of citizens gained in relation to each marketing dollar spent. The result of this new plan has allowed the Company to rely on fewer Sales and Marketing personnel, therefore decreasing salaries and related expenses, and decreased expenditures on promotional print media advertising. 12 The Company recorded barter expenses in relation to barter advertising revenues of $0.9 million for the three months ended September 30, 2000. There were no barter expenses in 1999. The Company utilizes barter transactions as an inexpensive advertising media for increasing brand awareness. We expect that barter transactions will continue as one of the advertising medias for the Company. There can be no assurance that these increased expenditures will result in increased visitors to our Web site or additional revenues. RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were $0.4 million and $0.9 million for the three months ended September 30, 2000 and 1999, respectively. The 50% decrease was primarily attributable to the lower utilization of consultants by the Company. The Company expects the current economic prosperity and high cost of living in Silicon Valley to have a continuous impact on the ability of the Company to retain and hire additional technical personnel. This factor alone may offset any cost savings measures implemented by the Company and result in increases in overall research and development expenses. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $1.0 million and $0.7 million for the three months ended September 30, 2000 and 1999, respectively. General and administrative costs consisted primarily of salaries and related costs for executives, administrative, and finance personnel, as well as legal, accounting and other professional service fees. The 37% increase is attributable to amortization of deferred compensation expense related to stock, warrants and options granted during the year to various consultants for the services and increased costs associated with being a public company. Separately, during the three months ended September 30, 2000, the Company initiated cost cutting measures and evaluations to improve the efficiency of various functions of the Company with the expected reduction of costs. These measures have currently resulted in cost savings in the area of professional fees, recruiting fees and other costs. The Company does not expect that these improvements in efficiency will continue to result in future cost savings or that these improvements will continue to enhance the efficiency of the business. INTEREST EXPENSE. Net interest income for the three months ended September 30, 2000 was $228,300. Net interest expense for the three months ended September 30, 1999 was $118,800. For the 1999 period, the net interest expense was primarily the result of the interest on the convertible promissory note that was issued on March 31, partially offset by interest income. For the 2000 period, the net interest income was the result of higher average cash balance in the year 2000 compared to 1999 as a result of the completion of a private placement of common stock raising approximately $23 million in the first quarter of 2000, partially offset by interest expense. 13 INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards available to reduce future taxable income that aggregate approximately $11.20 million for Federal income tax purposes. These benefits expire through 2019. Pursuant to a "change in ownership" as defined by the provisions of the Tax Reform Act of 1986, utilization of our net operating loss carryforwards may be limited if a cumulative change of ownership of more than 50% occurs over a three-year period. We have not determined if an ownership change has occurred. Nine months ended September 30, 2000 Compared to the Nine months ended September 30, 1999. NET REVENUES. Net Revenues were $8.0 million and $3.0 million for the nine months ended September 30, 2000 and 1999, respectively. Net revenues increased 169% as the result of both higher advertising and hosting revenues. Five customers each accounted for revenues greater than 10% of total net revenues for the nine months ended September 30, 2000. No customer accounted for greater than 10% of revenues in 1999. ADVERTISING REVENUES. For the nine months ended September 30, 2000 and 1999, advertising revenues were approximately $5.2 million and $1.2 million, respectively. Advertising revenues increased 373% as the result of advertisers placing higher numbers of banner advertisements on our web site due to value offered (as a result of higher web site traffic to nettaxi.com web pages) to the advertisers. Also, the average revenue generated per advertiser had more than doubled for the year over year period. The Company cannot assure that advertisers will either increase or decrease their advertising sponsorship at the Company's web site. Additionally, the Company cannot predict various factors (such as competition or demand) that could lower the advertising prices currently in effect, or the continuous flow of web traffic to our web site. The Company does not expect that the prior growth in advertising revenues is indicative of future results. Revenues from reciprocal advertising agreements, or barter transactions, accounted for approximately 28% of total revenues for the nine months ended September 30, 2000. There were no barter revenues for the comparable periods of 1999. Barter revenues increased for the nine months period primarily the result of the Company's strategy in developing strategic relationships with other advertisers or service providers for non-cash media advertising. HOSTING REVENUES. Hosting revenues were approximately $2.7 million and $0.4 million for the nine months ended September 30, 2000 and 1999, respectively. The 580% increase is the result of the Company providing internet web hosting and connectivity services for corporate customers beginning in the third quarter of 1999. Web hosting services are delivered through a state-of-the-art Internet data center located in Southern California using a high-performance Internet backbone network. Customers pay monthly fees for the professional services utilized, one-time installation fees, and monthly connectivity charges. These "hosting" revenues are recognized in the period the services are provided. The Company has experienced strong revenue growth in the internet web hosting for corporate customers, but does not expect this growth to continue at the current rate, or that the Company will sustain profitability from this business segment. Additionally, the Company cannot assure that it can increase the number of corporate customers or maintain the current customer base. One web-hosting customer accounted for more than 10% of total net revenues for the nine months ended September 30, 2000, no one customer had revenues greater than 10% in the 1999 period. 14 TRANSACTION PROCESSING FEES Transaction processing fees were $1.3 million for the nine months ended September 30, 1999. There were no transaction processing fees in 2000. Transaction fees consist of revenue derived from credit card evaluations and from the processing of on-line credit card transactions. The 1999 revenue is attributable to the merger with Plus Net, Inc. in 1999. The Company does not expect revenues of this type in any future periods. COST OF OPERATIONS Cost of operations were $5.3 million and $1.9 million for the nine months ended September 30, 2000 and 1999, respectively. Cost of operations increased 179% primarily as the result of additional expenses related to costs for co-location expenses. In the third quarter of 1999, the Company began providing Internet connectivity services to corporate customers, which demanded purchases of additional bandwidth from third party providers. Also, during the nine months ended September 30, 2000, the Company experienced a significant growth in web traffic to our web sites, which required the purchase of increased bandwidth to support this increased traffic. Separately, during the three months ended September 30, 2000, the Company also initiated cost effective measurement tools to limit the use of unauthorized excessive bandwidth or charging the individual users for the use of additional bandwidth. These cost measures resulted in substantial cost savings to the Company during the three months. The Company cannot be assured that these cost saving measures will continue to result in substantial savings or any savings at all. Other items contributing to higher costs were equipment costs and depreciation, amortization of intangible assets, and expenses for third party content and development for the nine month period ended September 30, 2000. SALES AND MARKETING EXPENSES Sales and Marketing expenses were $5.3 million and $3.1 million for the nine months ended September 30, 2000 and 1999, respectively. The 70% increase is the result of the expansion of online and print advertising, barter transactions, public relations and other promotional expenditures as well as increased sales and marketing personnel and related expenses required to implement our marketing strategy which began in the third quarter of 1999, partially offset by the savings realized by the redirected marketing approach for brand awareness implemented in the third quarter of 2000. The Company recorded barter expenses in relation to barter advertising revenues of $2.2 million for the nine months ended September 30, 2000, respectively. The Company utilizes barter transactions as an inexpensive advertising media for increasing brand awareness. We expect that barter transactions will continue as one of the advertising medias for the Company. There can be no assurance that these increased expenditures will result in increased visitors to our Web site or additional revenues. 15 RESEARCH AND DEVELOPMENT EXPENSES Research and development expenses were $1.3 million and $1.6 million for the nine months ended September 30, 2000 and 1999, respectively. The 21% decrease was primarily attributable to the lower utilization of consultants by the Company and other cost saving measures implemented by the Company. The Company will continue to implement cost saving programs but cannot assure that these programs will be effective or that future cost savings will be realized. Also, the Company expects the current economic prosperity and high cost of living in Silicon Valley to have a continuous impact on the ability of the Company to retain and hire additional technical personnel. This factor alone may offset any cost savings measures implemented by the Company and result in increases in overall research and development expenses. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were $3.7 million and $2.8 million for the nine months ended September 30, 2000 and 1999, respectively. General and administrative costs consisted primarily of salaries and related costs for executives, administrative, and finance personnel, as well as legal, accounting and other professional service fees. The 35% increase in general and administrative expenses were attributable to amortization of deferred compensation expense related to stock, warrants and options granted during the year to various consultants for the services and increased costs associated with being a public company. Also, the increase is the result of legal fees related to the settlement agreement with the holder of convertible debentures. Separately, during the three months ended September 30, 2000, the Company initiated cost cutting measures and evaluations to improve the efficiency of various functions of the Company with the expected reduction of costs. These measures have currently resulted in cost savings in the area of professional fees, recruiting fees and other costs. The Company does not expect that these improvements in efficiency will continue to result in future cost savings or that these improvements will continue to enhance the efficiency of the business. INTEREST EXPENSE. Net interest expense was 3.7 million and $0.2 million for the nine months ended September 30, 2000 and 1999, respectively. For the 1999 period the net interest expense was primarily due to the convertible promissory note that was issued on March 31, 1999 and to amortization of deferred interest related to warrants issued in conjunction with the convertible promissory note, offset by interest income. For the 2000 period, the net interest expense was primarily the result of net deemed interest expense related to the convertible debenture issued on March 31, 1999. We recognized deemed interest expense of approximately $3.9 million in the second quarter of 2000. This non-cash interest expense resulted from the implied beneficial conversion feature and the value of warrants issued in connection with the settlement agreement that we reached with the holder of the convertible debenture. INCOME TAXES. At December 31, 1999, we had net operating loss carryforwards available to reduce future taxable income that aggregate approximately $11.20 million for Federal income tax purposes. These benefits expire through 2019. Pursuant to a "change in ownership" as defined by the provisions of the Tax Reform Act of 1986, utilization of our net operating loss carryforwards may be limited if a cumulative change of ownership of more than 50% occurs over a three-year period. We have not determined if an ownership change has occurred. 16 LIQUIDITY AND CAPITAL RESOURCES As of September 30, 2000, the Company had cash and cash equivalents of approximately $15.5 million, compared to approximately $1.0 million at December 31, 1999. Net cash used in operating activities equaled approximately $6.4 million and $3.1 million for the nine-month period ended September 30, 2000 and 1999, respectively. We had significant negative cash flows from operating activities for the nine month period ended September 30, 2000 primarily from our net operating losses, adjusted for non-cash items, and increases in accounts receivable balances due to the time lag between revenue recognition and the receipt of payments from advertisers and decreases in accounts payable. These factors were offset by the significant interest expense related to the settlement agreement on the conversion of the note payable issued on March 31, 1999. Net cash used in investing activities was approximately $0.5 million and $2.1 million for the nine-month periods ended September 30, 2000 and 1999, respectively. Substantially all of the cash used in investing activities for both periods was primarily related to the purchase of capital equipment in connection with the build out of our web site and infrastructure. The Company expects to continue to purchase capital equipment to meet the needs of the growth of the Company. Net cash provided by financing activities was approximately $21.4 million and $6.2 million for the nine month periods ended September 30, 2000 and 1999, respectively. Net cash provided by financing activities in 2000 consisted primarily of net proceeds from the issuance of our common stock. Net cash provided by financing activities in 1999 consisted of issuance of a convertible note and to a lesser extent the issuance of common stock. We incurred net losses of approximately $11.4 million and $6.7 million for the nine months ended September 30, 2000, and 1999, respectively. At September 30, 2000, we had an accumulated deficit of approximately $24.7 million. The net losses and accumulated deficit resulted from the significant operational, infrastructure and other costs incurred in the development and marketing of our services and the fact that revenues failed to keep pace with such costs. As a result of our expansion plans and our expectation that our operating expenses, especially in the areas of sales and marketing, will continue to increase significantly, we expect to incur additional losses from operations for the foreseeable future. To the extent that increases in our operating expenses precede or are not subsequently followed by commensurate increases in revenues, or that we are unable to adjust operating expense levels accordingly, our business, results of operations and financial condition would be materially and adversely affected. There can be no assurance that we will ever achieve or sustain profitability or that our operating losses will not increase in the future. The Company does not have any long-term commitments that currently require a specified capital budget other than normal operations. We currently believe that we have sufficient cash to fund our operations through December 2001. After that time, we will be required to seek additional capital to sustain our operations, fund expansion of our business, to develop new or enhanced services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. 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. If we are unsuccessful in generating resources from one or more of the anticipated sources and are unable to replace any shortfall with resources from another source, we may be able to extend the period for which available resources would be adequate by deferring the creation or satisfaction of various commitments, deferring the expansion or introduction of various services, and otherwise scaling back operations. If we were unable to generate the required resources, our ability to meet our obligations and to continue our operations would be adversely affected. 17 IMPACT OF THE YEAR 2000 In our previous filings with the Securities and Exchange Commission, we have discussed the nature and progress of our plans to deal with potential Year 2000 problems. These problems arise from the fact that many currently installed computer systems and software products were coded to accept or recognize only two digit entries in the date code field. These systems may recognize a date using "00" as the year 1900 rather than the year 2000. As a result, computer systems and/or software used by many companies and governmental agencies needed to be upgraded to comply with Year 2000 requirements or risk system failure or miscalculations causing disruptions of normal business activities. Prior to December 31, 1999, we completed our assessment of all material information technology and non-information technology systems at our headquarters, as well as our review of Year 2000 compliance by our key vendors, distributors and suppliers. To date, we have experienced no significant disruptions in mission critical information technology and non-information technology systems and we believe those systems successfully responded to the Year 2000 date changes. We are not aware of any material problems resulting from Year 2000 issues, either with our own internal systems or the products and services of third parties. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the year 2000 to ensure that any latent Year 2000 matters that may arise are addressed promptly. RISK FACTORS You should consider carefully the following risks before you decide to buy our common stock. Our business, financial condition or results of operations could be materially and adversely affected by any of the following risks. WE HAVE A LIMITED OPERATING HISTORY, HAVE INCURRED LOSSES SINCE INCEPTION, AND EXPECT LOSSES FOR THE FORESEEABLE FUTURE We were incorporated in October 1997. Accordingly, we have only a limited operating history upon which you can evaluate our business and prospects. Since our inception, we have incurred net losses, resulting primarily from costs related to developing our web site, attracting users to our web site and establishing the Nettaxi.com brand. At September 30, 2000, we had an accumulated deficit of $24,699,200. 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. 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. If we do achieve profitability, we may be unable to sustain or increase profitability on a quarterly or annual basis. 18 WE REQUIRE FURTHER CAPITAL TO PURSUE OUR BUSINESS OBJECTIVES We currently believe that we have sufficient cash to fund our operations through December 2001. After that time, we will be required to seek additional capital to sustain our operations. We expect to generate a portion of the necessary cash flow through advertising and hosting revenues, but will also need to obtain capital through other sources such as equity or debt financing. We are currently negotiating with prospective investors, however to date, no agreements for additional financing have been consummated. We cannot assure you that we will be able to achieve and sustain positive cash flow or profitability or that we will have other sources available to provide the financial resources necessary to continue our operations. Given our limited resources and our history of losses from operations, we will also need to raise additional funds in order to fund expansion of our business, to develop new or enhanced services or products, to respond to competitive pressures or to acquire complementary products, businesses or technologies. No assurances can be given, however, that we will be able to obtain such additional resources. If we are unsuccessful in generating anticipated resources from one or more of the anticipated sources, and unable to replace the shortfall with resources from another source, we may be able to extend the period for which available resources would be adequate by deferring the creation or satisfaction of various commitments, deferring the introduction of various services or entry into various markets, and otherwise scaling back operations. If we are unable to generate the required resources, our ability to meet our obligations and to continue our operations would be adversely affected. OUR NEED TO RAISE ADDITIONAL CAPITAL MAY CAUSE OUR STOCKHOLDERS TO EXPERIENCE SIGNIFICANT DILUTION IN THE FUTURE It is likely that we will need to raise additional funds in the future in order to pursue our business objectives. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of our common stock. This may make an investment in our common stock less attractive to other investors, thereby weakening the trading market for our common stock. 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. 19 OUR REVENUE GROWTH IN PRIOR PERIODS IS NOT INDICATIVE OF FUTURE GROWTH AND WE CANNOT ACCURATELY PREDICT OUR FUTURE REVENUES We had revenues of $8,003,800 and $2,980,900 for the nine months ended September 30, 2000 and 1999, 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. Accurate predictions regarding our revenues in the future are difficult and should be considered in light of our limited operating history and rapid changes in the ever evolving Internet market. For example, our ability to generate revenues in the future is dependent in part on the success of our capital-raising efforts and the investments that we intend to make in sales and marketing, infrastructure, and content development. Our revenues for the foreseeable future will remain primarily dependent on the number of customers that we are able to attract to our web site, and secondarily on sponsorship and advertising revenues. We cannot forecast with any degree of certainty the number of visitors to our web site, the number of visitors who will become customers, or the amount of sponsorship and advertising revenues. Similarly, we cannot provide any guarantees regarding the revenues that will be generated from e-commerce products and services that we intend to make available on our site. OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, THEREBY INCREASING THE VOLATILITY OF OUR STOCK PRICE In addition to the uncertainties regarding the rate of growth of our future revenues, we anticipate that our operating results will fluctuate significantly from quarter to quarter. These fluctuations may be due to seasonal and cyclical patterns that may emerge in Internet e-commerce and advertising spending. For example, we believe that the use of our web site will be somewhat lower during periods of the year if the patterns that currently effect traditional media, such as television and radio where advertising sales are lower during the first and third calendar quarters because of the summer vacation period and post winter holiday season slowdown, develop in the Internet industry. It is likely that similar seasonal patterns will develop in the Internet industry and thus result in decreasing revenues for us during periods of the year. Quarterly results may also vary for some of the same reasons and because it is difficult to predict the long-term revenue growth of our business. If investments in marketing and content development are delayed, we may experience corresponding delays in anticipated revenues from such investments, thereby leading to uneven quarterly results. Because of these factors, we believe that quarter-to-quarter comparisons of our results of operations are not good indicators of our future performance. If our operating results fall below the expectations of investors in future periods, then our stock price may decline. 20 SHARES ELIGIBLE FOR FUTURE SALE BY OUR CURRENT STOCKHOLDERS MAY ADVERSELY AFFECT OUR STOCK PRICE As of September 30, 2000, 16,484,904 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 of the 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, including options for 1,170,704 shares that were exercisable as of April 30, 2000, are eligible for resale in the public market without restriction. Additionally, we 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 September 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 September 30, 2000 approximately 21 million 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 2,200,000 shares of our common stock outstanding and exercisable over the next five years at an exercise price per share of $1.50, subject to adjustment. There are also warrants to purchase 269,692 shares of common stock outstanding and exercisable over the next four and a half years at a price of $4.38, subject to adjustment. The shares underlying all of these warrants have been registered pursuant to our registration statement on Form S-1 (File No. 333-38538). Additionally, pursuant to our registration statement on Form S-1 (File No. 333-36826) we registered shares underlying warrants to purchase 15,567,133 shares of common stock issued having an exercise price per share of $4.00, warrants to purchase 436,351 shares of common stock having an exercise price of $2.76 and warrants to purchase 50,000 shares of common stock having an exercise price of $12.38. Additionally, pursuant to our registration statement on Form S-1 (File No. 333-30074), we registered warrants to purchase 125,000 shares of common stock having an exercise price of $8.00 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. 21 OUR PLANNED ONLINE AND TRADITIONAL MARKETING CAMPAIGNS MAY NOT ATTRACT SUFFICIENT ADDITIONAL VISITORS TO OUR WEB SITE We plan to pursue aggressive marketing campaigns online and in traditional media to promote the Nettaxi.com brand and attract an increasing number of visitors to our web site. We believe that maintaining and strengthening the Nettaxi.com brand will be critical to the success of our business. This investment in increased marketing carries with it significant risks, including the following: - Our advertisements may not properly convey the Nettaxi.com brand image, or may even detract from our image. Advertising in print and broadcast media is expensive and is often typically difficult to modify quickly in order to take into account feedback that may indicate that we have failed to convey the optimal message. If our advertisements fail to positively promote our brand and image, the damage to our business may be long-lasting and costly to repair. - Even if we succeed in creating the right messages for our promotional campaigns, these advertisements may fail to attract new visitors to our web site at levels commensurate with their costs. We may fail to choose the optimal mix of television, radio, print and other media to cost effectively deliver our message. Moreover, if these efforts are unsuccessful, we will face difficult and costly choices in deciding whether and how to redirect our marketing dollars. WE MAY FAIL TO ESTABLISH AN EFFECTIVE INTERNAL SALES ORGANIZATION TO ATTRACT SPONSORSHIP AND ADVERTISING REVENUES To date, we have relied principally on outside advertising agencies to develop sponsorship and advertising opportunities. We believe that the growth of sponsorship and advertising revenues will depend on our ability to establish an aggressive and effective internal sales organization. Our internal sales team currently has nine members. We will need to substantially increase this sales force in the coming year in order to execute our business plan. Our ability to increase our sales force involves a number of risks and uncertainties, including competition and the length of time for new sales employees to become productive. If we do not develop an effective internal sales force, our business will be materially and adversely affected by our inability to attract sponsorship and advertising revenues. WE RELY HEAVILY ON THIRD PARTIES FOR DEVELOPMENT OF SOFTWARE AND CONTENT AND FOR ESSENTIAL BUSINESS OPERATIONS AND MAY BE ADVERSELY AFFECTED BY OUR FAILURE TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH SUCH PARTIES We depend on third parties for important aspects of our business, including Internet access, the development of software for new web site features, content, and telecommunications. 22 We have limited control over these third parties, and we are not their only client. We may not be able to maintain satisfactory relationships with any of them on acceptable commercial terms, and there is no guarantee that we will be able to renew these agreements at all. Further, we cannot be sure that the quality of products and services that they provide may remain at the levels needed to enable us to conduct our business effectively. WE ARE HEAVILY RELIANT ON THIRD PARTIES TO HOUSE AND SERVICE OUR WEB SITE AND ARE VULNERABLE TO POSSIBLE DAMAGE TO OUR OPERATING SYSTEMS We maintain substantially all of our computer systems at our Campbell, California site and the Santa Clara, California site of Exodus Communications. We are heavily reliant on the ability of Exodus to house and service our web site. This system's continuing and uninterrupted performance is critical to our success. Growth in the number of users accessing our web site may strain its capacity, and we rely on Exodus to upgrade our system's capacity in the face of this growth. Exodus also provides our connection to the Internet. Sustained or repeated system failures or interruptions of our web site connection services would reduce the attractiveness of our web site to customers and advertisers, and could therefore have a material and adverse effect on our business due to loss of membership and advertising revenues. In 1999 and 1998, we experienced several interruptions and degradations of service as a result of our third party service provider's inability to deliver the contractual bandwidth required to handle our traffic volume. These interruptions result in decreased web usage volume and therefore impact our ability to serve advertising impressions for our customers. These interruptions can materially impact our revenues. We estimate that during 1998 we lost approximately $35,000 in revenue because of this, and during 1999 we lost an additional $35,000 in revenues. 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. Our insurance policies may not adequately compensate us for any losses that may occur due to any failures or interruptions in our systems. WE PLAN TO GROW RAPIDLY, AND EFFECTIVELY MANAGING OUR GROWTH MAY BE DIFFICULT Our business plan contemplates a period of significant expansion. In order to execute our business plan, we must grow significantly. This growth will strain our personnel, management systems and resources. To manage our growth, we must implement operational and financial systems and controls and recruit, train and manage new employees. These individuals have had little experience working with our management team. We cannot be sure that we will be able to integrate new executives and other employees into our organization effectively. In addition, there will be significant administrative burdens placed on our management team as a result of our status as a public company. If we do not manage growth effectively, we will not be able to achieve our financial and business goals. 23 WE DEPEND ON OUR KEY PERSONNEL TO OPERATE OUR BUSINESS, AND WE MAY NOT BE ABLE TO HIRE ENOUGH ADDITIONAL MANAGEMENT AND OTHER PERSONNEL AS OUR BUSINESS GROWS Our performance is substantially dependent on the continued services and on the performance of our executive officers and other key employees, particularly Robert A. Rositano, Jr., our Chief Executive Officer, and Dean Rositano, our Chief Operating Officer. The loss of the services of any of our executive officers could materially and adversely affect our business due to their experience with our business plan and the disruption in the conduct of our day-to-day operations. Additionally, we believe we will need to attract, retain and motivate talented management and other highly skilled employees to be successful. Competition for employees that possess knowledge of both the Internet industry and our target market is intense. We may be unable to retain our key employees or attract, assimilate and retain other highly qualified employees in the future. OUR PROJECTED E-COMMERCE SERVICES 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 e-commerce tools for our citizens. The availability of many of these tools is dependent on our ability to enter into satisfactory contractual relationships with parties offering e-commerce related products 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 site. To date, our revenues from e-commerce services have not been material, and we have yet to launch a number of the services that we hope to provide to our citizens and visitors to our site. We may not be able to commence those services on a timely basis, and there is no assurance that the services will generate the anticipated amount of revenues. 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. 24 WE MAY FAIL TO ESTABLISH AND MAINTAIN STRATEGIC RELATIONSHIPS WITH OTHER WEB SITES TO INCREASE NUMBERS OF WEB SITE USERS AND INCREASE OUR REVENUES We intend to establish numerous strategic relationships with popular web sites to increase the number of visitors to our web site. There is intense competition for placements on these sites, and we may not be able to enter into these relationships on commercially reasonable terms or at all. Even if we enter into relationships with other web sites, they themselves may not attract significant numbers of users. Therefore, our site may not receive additional users from these relationships. Moreover, we may have to pay significant fees to establish these relationships. Our inability to enter into new distribution relationships and expand our existing ones could have a material and adverse effect on our business due to our inability to increase the number of users of our site. WE MAY NOT BE ABLE TO ADAPT AS INTERNET TECHNOLOGIES AND CUSTOMER DEMANDS CONTINUE TO EVOLVE To be successful, we must adapt to rapidly changing Internet technologies and continually enhance the features and services provided on our web site. We could incur substantial, unanticipated costs if we need to modify our web site, software and infrastructure to incorporate new technologies demanded by our audience. We may use new technologies ineffectively or we may fail to adapt our web site, transaction-processing systems and network infrastructure to user requirements or emerging industry standards. If we fail to keep pace with the technological demands of our web-savvy audience for new services, products and enhancements, our users may not use our web site and instead use those of our competitors. WE MAY NOT BE ABLE TO PROTECT AND ENFORCE OUR TRADEMARKS, WEB ADDRESSES AND PROPRIETARY RIGHTS Our Nettaxi.com brand and our web address, www.nettaxi.com, are critical to our success. We have filed a trademark application for "Nettaxi", among other trademark applications. We cannot guarantee that any of these trademark applications will be granted. In addition, we may not be able to prevent third parties from acquiring web addresses that are confusingly similar to our addresses, which could harm our business. Also, while we have entered into confidentiality agreements with our employees, contractors and suppliers in order to safeguard our trade secrets and other proprietary information, there can be no assurance that technology will not be misappropriated or that others may lawfully develop similar technologies. WE WOULD LOSE REVENUES AND INCUR SIGNIFICANT COSTS IF OUR SYSTEMS OR MATERIAL THIRD PARTY SYSTEMS ARE NOT YEAR 2000-COMPLIANT We have not devised a Year 2000 contingency plan. Although we did not experience any Year 2000-related problems on January 1, 2000, and have not experienced any such problems to date, the failure of our internal systems, or any material third party systems, to be Year 2000-compliant could have a material and adverse effect on our business, results of operations and financial condition if the compliance problems significantly impair access to and use of our web site. 25 In addition, there can be no assurance that governmental agencies, utility companies, Internet access companies, third party service providers and others outside our control will be Year 2000 compliant. The failure by these entities to be Year 2000 compliant could result in a systemic failure beyond our control, including, for example, a prolonged Internet, telecommunications or electrical failure, which could also prevent us from delivering our services to our users, decrease the use of the Internet or prevent users from accessing our services. ACQUISITIONS MAY DISRUPT OR OTHERWISE HAVE A NEGATIVE IMPACT ON OUR BUSINESS We may acquire or make investments in complementary businesses, products, services or technologies on an opportunistic basis when we believe they will assist us in carrying out our business strategy. Growth through acquisitions has been a successful strategy used by other Internet companies. We do not have any present understanding relating to any such acquisition or investment. If we were to buy a content, service or technology company, the amount of time and level of resources required to successfully integrate their business operation could be substantial. The challenges in assimilating their people and organizational structure, and in encountering potential unforeseen technical issues in integrating their content, service or technology into ours, could cause significant delays in executing other key areas of our business plan. This could include delays in integrating other content, services or technology into our communities, or moving forward on other business development relationships, as management and employees, both of which are time constrained, may be distracted. In addition, the key personnel of the acquired company may decide not to work for us, which could result in the loss of key technical or business knowledge to us. Furthermore, in making an acquisition, we may have to incur debt or issue equity securities to finance the acquisition, the issuance of which could be dilutive to our existing shareholders. WE ARE VULNERABLE TO ADDITIONAL TAX OBLIGATIONS THAT COULD BE IMPOSED ON ONLINE COMMERCE TRANSACTIONS We do not expect to collect sales or other similar taxes in respect of transactions engaged in by customers on our web site. However, various states or foreign countries may seek to impose sales tax obligations on us and other e-commerce and direct marketing companies. A number of proposals have been made at the federal, 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. 26 WE MAY NOT BE ABLE TO TAKE FULL ADVANTAGE OF POTENTIAL TAX BENEFITS FROM OUR NET OPERATING LOSS CARRYFORWARDS At December 31, 1999 we had net operating loss carryforwards available to reduce future taxable income that aggregated approximately $11,200,000 for Federal income tax purposes. These benefits expire through 2019. Pursuant to a "change in ownership" as defined by the provisions of the Tax Reform Act of 1986, utilization of our net operating loss carryforwards may be limited, if a cumulative change of ownership of more than 50% occurs within a three-year period. We have not determined if an ownership change has occurred. If it has, we may not be able to take full advantage of potential tax benefits from our net operating loss carryforwards. 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. Internet usage may be inhibited for a number of reasons, including inadequate Internet infrastructure, security concerns, inconsistent quality of service, the unavailability of cost-effective, high-speed service, the imposition of transactional taxes, or the limitation of third party service provider's ability and willingness to invest in new or updated equipment to handle traffic volume. If web usage grows, the Internet infrastructure may not be able to support the demands placed on it by this growth, or its performance and reliability may decline. We are highly dependant on third party service providers. Any interruption experienced by these service providers may have a material impact on our business due to our inability to serve our advertising customers or end users. In addition, web sites, including ours, have experienced a variety of interruptions in their service as a result of outages and other delays occurring throughout the Internet network infrastructure. If these outages or delays frequently occur in the future, web usage, including usage of our web site, could grow slowly or decline. This may have a material impact on future revenues. OUR LONG-TERM SUCCESS DEPENDS ON THE DEVELOPMENT OF THE E-COMMERCE MARKET, WHICH IS UNCERTAIN Our future revenues and profits substantially depend upon the widespread acceptance and use of the Internet as an effective medium of commerce by consumers. Rapid growth in the use of the Internet and commercial online 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. The development of the Internet and online services as a viable commercial marketplace is subject to a number of factors. For example, e-commerce is at an early stage and buyers may be unwilling to shift their purchasing from traditional vendors to online vendors, there may be insufficient availability of telecommunication services or changes in telecommunication services could result in slower response times and adverse publicity and consumer concerns about the security of commerce transactions on the Internet could discourage its acceptance and growth. 27 ADOPTION OF THE INTERNET AS AN ADVERTISING MEDIUM IS UNCERTAIN The growth of Internet sponsorships and advertising requires validation of the Internet as an effective advertising medium. This validation has yet to fully occur. In order for us to generate sponsorship and advertising revenues, marketers must direct a significant portion of their budgets to the Internet and, specifically, to our web site. To date, sales of Internet sponsorships and advertising represent only a small percentage of total advertising sales. Also, technological developments could slow the growth of sponsorships and advertising on the Internet. For example, widespread use of filter software programs that limit access to advertising on our web site from the Internet user's browser could reduce advertising on the Internet. Our business, financial condition and operating results would be adversely affected if the market for Internet advertising fails to further develop due to the loss of anticipated revenues. BREACHES OF SECURITY ON THE INTERNET MAY SLOW THE GROWTH OF E-COMMERCE AND WEB ADVERTISING AND SUBJECT US TO LIABILITY The need to securely transmit confidential information, such as credit card and other personal information, over the Internet has been a significant barrier to e-commerce and communications over the Internet. Any well-publicized compromise of security could deter more people from using the Internet 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. 28 Efforts to regulate or eliminate the use of mechanisms which automatically collect information on users of our web site may interfere with our ability to target our marketing efforts and tailor our web site offerings to the tastes of our users. Web sites typically place a tracking program on a user's hard drive without the user's knowledge or consent. These programs automatically collect data on anyone visiting a web site. Web site operators use these mechanisms for a variety of purposes, including the collection of data derived from users' Internet activity. Most currently available web browsers allow users to elect to remove these mechanisms at any time or to prevent such information from being stored on their hard drive. In addition, some commentators, privacy advocates and governmental bodies have suggested limiting or eliminating the use of these tracking mechanisms. Any reduction or limitation in the use of this software could limit the effectiveness of our sales and marketing efforts. WE COULD FACE ADDITIONAL BURDENS ASSOCIATED WITH GOVERNMENT REGULATION OF AND LEGAL UNCERTAINTIES SURROUNDING THE INTERNET Any new law or regulation pertaining to the Internet, or the application or interpretation of existing laws, could have a material and adverse effect on our business, results of operations and financial condition due to increased costs of doing business. Laws and regulations directly applicable to Internet communications, commerce and advertising are becoming more prevalent. The law governing the Internet, however, remains largely unsettled, even in areas where there has been some legislative action. It may take years to determine whether and how existing laws governing intellectual property, copyright, privacy, obscenity, libel and taxation apply to the Internet. In addition, the growth and development of e-commerce may prompt calls for more stringent consumer protection laws, both in the United States and abroad. We also may be subject to future regulation not specifically related to the Internet, including laws affecting direct marketers. WE COULD INCUR MONETARY DAMAGES FROM LITIGATION ARISING OUT OF OUR BUSINESS ACTIVITIES On July 9, 1999, we were named as one of several defendants in a lawsuit filed by four disaffected shareholders in Simply Interactive, Inc. The lawsuit arises out of a series of events relating to certain assets our operating company, Nettaxi Online Communities, purchased from SSN Properties in October 1997. The complaint alleges that we owed, and either intentionally or negligently breached, fiduciary duties to the plaintiffs. The suit also claims that we either intentionally or negligently interfered with the plaintiffs' contract or prospective advantage. While our officers and directors believe that the suit is without merit, we cannot provide you with any assurances that we will prevail in this dispute. If the plaintiffs successfully prosecute any of their claims against us, the resulting monetary damages and reduction in our working capital could significantly harm our business. For more information please see the section of this prospectus called "Legal Proceedings". 29 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. In addition, our articles of incorporation provide that our board of directors may issue preferred stock in one or more series. Our board of directors can fix the price, rights, preferences, privileges and restrictions of the preferred stock without any further vote or action by our stockholders. If our board of directors issues preferred stock, potential acquirers may not make acquisition bids for us, our stock price may fall and the voting rights of existing stockholders may diminish as a result. OUR COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AS IS TYPICAL OF INTERNET COMPANIES The market price of our common stock has been, and is likely to continue to be, highly volatile as the stock market in general, and the market for Internet-related and technology companies in particular, has been highly volatile. Investors may not be able to resell their shares of our common stock following periods of volatility because of the market's adverse reaction to volatility. The trading prices of many technology and Internet-related companies' stocks have reached historical highs within the last two years and have reflected valuations substantially above historical levels. During the same period, these companies' stocks have also been highly volatile and have recorded lows well below historical highs. We cannot assure you that our stock will trade at the same levels of other Internet stocks or that Internet stocks in general will sustain their current market prices. Factors that could cause such volatility may include, among other things actual or anticipated fluctuations in our quarterly operating results, announcements of technological innovations, conditions or trends in the Internet industry, and changes in the market valuations of other Internet companies. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We could be exposed to market risk related to any and all of our debt obligations for financing working capital and capital equipment requirements in the future. Historically we have financed such requirements from the issuance of both preferred and common stock. In addition, we have augmented our equity financing activities via the issuance of convertible debt financing. We continue to consider financing alternatives, which may include the incurrence of long-term indebtedness. Actual capital requirements may vary based upon the timing and success of the expansion of our operations. We believe that based on the terms and maturities of any future debt obligations that the market risk would be minimal. We currently do not have any material market rate risks. 30 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Please refer to our previous disclosures in our Annual report on Form 10-K for the year ended December 31, 1999 and our Form 8-K filed on May 8, 2000 for a description of certain matters. From time to time, we are involved in legal proceedings incidental to our business. We believe that these pending actions, individually and in the aggregate, will not have a material adverse effect on our financial condition, and that adequate provision has been made for the resolution of such actions and proceedings. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (1) From January to September, 2000 the Company under its 1999 Stock Option Plan issued options to purchase up to 3,417,200 shares of common stock to members of its board of directors who were not employees of the Company, 3 current and former officers, and 39 current and former employees and 7 consultants with exercise prices ranging from $0.46 to $2.44 per share, which was not less than the fair market value of the shares on the date of grant. Shares cancelled as a result of unexercised expired options were 327,200 shares. The issuances were made in reliance on Section 4(2) of the Securities Act of 1933 and was made without general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate the investments, and who represented to the Company that the shares were being acquired for investment. (2) In February 2000 we issued 175,000 shares of common stock to Sinclair Davis Trading Corp. in exchange for consulting services. The issuance was made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. (3) In February 2000 we issued 15,416,633 shares of common stock and warrants to purchase up to 15,416,633 shares of common stock in exchange for approximately $23 million. The issuances were made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and were made without general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. (4) In February 2000 we issued 6,250 shares of common stock to PPC Racing pursuant to a letter of intent agreement. The issuance was made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. 31 (5) In March and April, 2000 we issued 778,982 shares of common stock and warrants to purchase up to 389,491 shares of common stock to consultants in exchange for the conversion of approximately $1.6 million in debt owed to the consultants. The issuances were made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and were made without general solicitation or advertising. The purchasers were sophisticated investors with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. (6) In July 2000 we issued 100,000 shares of common stock to Newport Capital Consultants, Inc. in exchange for consulting services. The issuance was made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. (7) In August 2000 we issued 80,000 shares of common stock to James D. Stubler in exchange for consulting services. The issuance was made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. (8) In August 2000 we issued 250,000 shares of common stock to Robert Shatles in exchange for consulting services. The issuance was made in reliance on Section 4(2) of the Securities Act of 1933 and/or Regulation D promulgated under the Securities Act of 1933 and was made without general solicitation or advertising. The purchaser was a sophisticated investor with access to all relevant information necessary to evaluate these investments, and who represented to the Company that the shares were being acquired for investment. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None ITEM 5. OTHER INFORMATION. Not applicable. 32 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits Exhibit Number Description of Exhibit - -------------- ---------------------- 27.1 Financial Data Schedule (b) Reports on Form 8-K No report on Form 8-K were filed during the quarter ended September 30, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934,the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NETTAXI.COM Date: November 14, 2000 By: /s/ Dean Rositano --------------------- Dean Rositano, President and Interim Chief Financial Officer (Principal Accounting Officer) 33 EXHIBIT INDEX Exhibit Number Description of Exhibit - --------------- ------------------------ 10.57 Co-Branded agreement dated November 5, 1999 by and between Solutions Media, Inc. and the Company. 10.58 Web Content Distribution agreement dated January 1, 2000 by and between White Sand Communications and the Company. 10.59 Web Content Distribution agreement dated January 1, 2000 by and between Whitehorn Ventures and the Company. 27.1 Financial Data Schedule 34 EX-10.57 2 0002.txt CO-BRANDING AGREEMENT (FORM) This CO-BRANDING AGREEMENT (the "Agreement") is made and entered into as of Nov 5, 1999, (the "Effective Date") by and between NETTAXI Online Communities, Inc., a Delaware corporation with principal offices at 2165 S. Bascom Avenue, Campbell, California 95008 ("NETTAXI"), and Solutions Media, Inc., dba SpinRecords.com a Delaware Corporation, with offices at 11440 West Barnardo Ct., Suite 170, San Diego, CA 32127 ("SpinRecords.com" or "Client"). RECITALS A. NETTAXI is in the business of providing entertainment, education, and information services over the world wide web through its Internet web site at http://www.NETTAXI.com. B. SpinRecords.com is in the business of providing entertainment and information services over the World Wide Web through its internet website at http://www.spinrecords.com. C. NETTAXI and SpinRecords.com desire co-brand their services under the terms and conditions set forth herein. AGREEMENT NOW, THEREFORE, in consideration of the mutual promises contained herein, the parties hereby agree as follows: 1. DEFINITIONS 1.1 "Spinrecords.com Brand Features" means the SpinRecords.com name and logo and other trademarks, trade names and service names including but not limited to those set forth on Exhibit A attached hereto and incorporated herein --------- by reference and all Intellectual Property Rights related thereto. SpinRecords.com Brand Features shall include any derivatives, improvements or modifications thereto or thereof and any Intellectual Property rights related thereto. 1.2 "SpinRecords.com Pages" means the SpinRecords.com Web-based pages that incorporate certain SpinRecords.com services, as the same may be updated or modified from time to time in SpinRecords.com's sole discretion, currently located at http://www.spinrecords.com. 1.3 "Impressions" means the loading of all or part of a Web page into the browser of a User. 1.4 "Intellectual Property Rights" means all current and future worldwide trademark, patents and patent rights, utility models, copyrights, mask work rights, trade secrets, and all other intellectual property rights and the related documentation or other tangible expression thereof. 1.5 "NETTAXI Brand Features" means the NETTAXI name and logo and any other trademarks, trade names and service names of NETTAXI, including but not limited to those set forth on Exhibit B attached hereto and incorporated herein --------- by reference and all Intellectual Property Rights related thereto. NETTAXI Brand Features shall include any derivatives, improvements or modifications thereto or thereof and any Intellectual Property rights related thereto. 1.6 "NETTAXI Pages" means the NETTAXI's Web-based pages that incorporate certain NETTAXI services, as the same may be updated or modified from time to time in NETTAXI's sole discretion, currently located at http://www.NETTAXI.com. 1.7 "Statement of Work" means the Statement of Work attached hereto as Exhibit C and incorporated herein by reference. - ---------- 1.8 "User" means a person using a software browser to view the World Wide Web. 2. CO-BRANDING, MARKETING AND PROMOTION 2.1 The SpinRecords.com Pages. SpinRecords.com shall brand the --------------------------- SpinRecords.com Pages with the NETTAXI Brand Features in the manner set forth in the Statement of Work. NETTAXI will provide electronic copies of the NETTAXI Brand Features upon SpinRecords.com's request. All Spinrecords.com Pages shall display appropriate intellectual property legends, including but not limited to the copyright notice and trademark references. 1 2.2 The NETTAXI Pages. NETTAXI shall brand certain NETTAXI Pages with ------------------ the SpinRecords.com Brand Features in the manner set forth in the Statement of Work. SpinRecords.com will provide electronic copies of the SpinRecords.com Brand Features upon NETTAXI's request. All NETTAXI Pages shall display appropriate intellectual property legends, including but not limited to the copyright notice and trademark references. NETTAXI shall not be obligated to co-brand those pages containing content which NETTAXI has branded with a third party which: (i) NETTAXI is prohibited from co-branding pursuant to another agreement; (ii) NETTAXI is technically unable to co-brand; or (iii) are commercially unreasonable, in NETTAXI's discretion, to co-brand. 2.3 Marketing by SpinRecords.com. Throughout the term of this ------------------------------ Agreement, SpinRecords.com shall use reasonable commercial efforts to market the NETTAXI Brand Features in order to maximize the number of visitors to the NETTAXI Pages in accordance with the Statement of Work. The parties shall review the Statement of Work and NETTAXI's marketing activities on a quarterly basis in order to assess the performance and agree upon additional activities, if necessary, in order to increase usage of the pages. 2.4 Marketing by NETTAXI. Throughout the term of this Agreement, ----------------------- NETTAXI shall use reasonable commercial efforts to market the SpinRecords.com Brand Features in order to maximize the number of visitors to the SpinRecords.com Pages in accordance with the Statement of Work. The parties shall review the Statement of Work and Spinrecords.com's marketing activities on a quarterly basis in order to assess the performance and agree upon additional activities, if necessary, in order to increase usage of the pages. 2.5 Additional Statements of Work. If the parties hereto desire to -------------------------------- engage each other for additional services which are not included in the Statement of Work and which do not constitute merely a revision or modification of the Statement of Work, the parties shall in good faith negotiate additional Statements of Work, each of which upon signing shall be deemed a part of this Agreement. Additional Statements of Work shall be entered into by mutual agreement between NETTAXI and SpinRecords.com and shall be substantially in the form of the Statement of Work attached hereto. Each Statement of Work shall be signed by authorized representatives of the parties. This Agreement may cover more than one Statement of Work at any given time. 3. Licenses AND OWNERSHIP. 3.1 Licenses by NETTAXI to SpinRecords.com. NETTAXI hereby grants to ----------------------------------------- SpinRecords.com a non-exclusive, worldwide, nontransferable, revocable, royalty free license to use the NETTAXI Brand Features as the same may be modified from time to time for the purposes of this Agreement 3.2 Licenses by SpinRecords.com to NETTAXI. SpinRecords.com hereby ------------------------------------------- grants NETTAXI a nonexclusive, worldwide, nontransferable, revocable, royalty free license to display and distribute the, and make derivative works from the SpinRecords.com Brand Features and any enhancements, modifications or improvements thereto as necessary to carry out the terms of this Agreement. 3.3 Ownership by NETTAXI. NETTAXI shall own all right, title, and ---------------------- interest in the NETTAXI Brand Features, the NETTAXI Pages and all Intellectual Property Rights therein, including any derivatives, improvements thereof, excluding the SpinRecords.com Brand Features 3.4 Ownership by SpinRecords.com. Except as otherwise set forth below, ----------------------------- SpinRecords.com shall own all right, title, and interest in the SpinRecords.com Brand Features and the SpinRecords.com Pages and all Intellectual Property Rights therein, including any derivatives, improvements thereof, excluding the NETTAXI Brand Features. 3.5 Impressions. Neither party nor its employees shall take actions ---------- which will artificially increase the number of Impressions on the party's web pages. For example, a party's employees shall not repeatedly access the other party's web pages. 4. PAYMENT 4.1 Payment. In consideration of the duties and obligations of the ------- parties hereto, SpinRecords.com shall pay NETTAXI in the manner set forth in the Statement of Work. 5. REPRESENTATIONS AND WARRANTIES. 5.1 Representations and Warranties of SpinRecords.com. SpinRecords.com -------------------------------------------------- hereby represents and warrants to NETTAXI that: (i) SpinRecords.com has the full power and authority to enter into this Agreement and to carry out its obligations under this Agreement; (ii) SpinRecords.com has the full power and authority to grant the rights and licenses granted to NETTAXI in this Agreement; and (iii) SpinRecords.com owns the SpinRecords.com Brand Features. 2 5.2 Representations and Warranties of NETTAXI. NETTAXI hereby --------------------------------------------- represents and warrants to SpinRecords.com that (i) NETTAXI has the full power and authority to enter into this Agreement and to carry out its obligations under this Agreement; (ii) NETTAXI has the full power and authority to grant the rights and licenses granted to SpinRecords.com in this Agreement; and (iii) NETTAXI owns the NETTAXI Brand Features. 5.3 THE NETTAXI SERVICES FURNISHED AS A RESULT OF OR UNDER THIS AGREEMENT ARE PROVIDED ON AN "AS IS" BASIS, WITHOUT ANY WARRANTIES OR REPRESENTATIONS EXPRESS, IMPLIED OR STATUTORY; INCLUDING, WITHOUT LIMITATION, WARRANTIES OF QUALITY, PERFORMANCE, NONINFRINGEMENT, MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. NOR ARE THERE ANY WARRANTIES CREATED BY A COURSE OF DEALING, COURSE OF PERFORMANCE OR TRADE USAGE. NETTAXI DOES NOT WARRANT THAT THE SERVICES, WILL MEET SPINRECORDS.COM'S OR ANY END USERS NEEDS OR BE FREE FROM ERRORS, OR THAT THE OPERATION OF ITS WEB PAGES WILL BE UNINTERRUPTED. THE FOREGOING EXCLUSIONS AND DISCLAIMERS ARE AN ESSENTIAL PART OF THIS AGREEMENT. 6. CONFIDENTIALITY. 6.1 Agreement as Confidential Information. The parties shall treat the -------------------------------------- terms and conditions and the existence of this Agreement as Confidential Information. Each party shall obtain the other's consent prior to any publication, presentation, public announcement or press release concerning the existence or terms and conditions of this Agreement. 6.2 Confidential Information. "Confidential Information" means all ------------------------- information identified in written or oral format by the Disclosing Party as confidential, trade secret or proprietary information, and, if disclosed orally, summarized in written format within thirty (30) days of disclosure. "Disclosing Party" is the party disclosing Confidential Information. "Receiving Party" is the party receiving Confidential Information. The Receiving Party shall not disclose the Confidential Information to any third party other than persons in the direct employ of the Receiving Party who have a need to have access to and knowledge of the Confidential Information solely for the purpose authorized above. Each party shall take appropriate measures by instruction and agreement prior to disclosure to such employees to assure against unauthorized use or disclosure. The Receiving Party shall have no obligation with respect to information which (i) was rightfully in possession of or known to the Receiving Party without any obligation of confidentiality prior to receiving it from the Disclosing Party; (ii) is, or subsequently becomes, legally and publicly available without breach of this Agreement; (iii) is rightfully obtained by the Receiving Party from a source other than the Disclosing Party without any obligation of confidentiality; (iv) is disclosed by the Receiving Party under a valid order created by a court or government agency, provided that the Receiving Party provides prior written notice to the Disclosing Party of such obligation and the opportunity to oppose such disclosure. Upon written demand of the Disclosing Party, the Receiving Party shall cease using the Confidential Information and return the Confidential Information and all copies, notes or extracts thereof to the Disclosing Party within seven (7) days of receipt of notice. 7. INDEMNITY AND LIMITATION OF LIABILITY. 7.1 Indemnification by Spinrecords.com. SpinRecords.com shall defend, ------------------------------------ indemnify and hold NETTAXI harmless from any and all damages, liabilities, costs and expenses (including, but not limited to reasonable attorneys' fees) incurred by NETTAXI as a result of (i) any breach of this Agreement; (ii) any claim that the SpinRecords.com Brand Features or any part thereof, infringes or misappropriates any Intellectual Property Right of a third party; (iii) any claim arising out of NETTAXI's display of the SpinRecords.com Brand Features; or (iv) the operation of the SpinRecords.com Pages. NETTAXI shall provide SpinRecords.com with written notice of the claim and permit SpinRecords.com to control the defense, settlement, adjustment or compromise of any such claim. NETTAXI may employ counsel at its own expense to assist it with respect to any such claim; provided, however, that if such counsel is necessary because of a conflict of interest of either SpinRecords.com or its counsel or because SpinRecords.com does not assume control, SpinRecords.com will bear the expense of such counsel. 7.2 Indemnification by NETTAXI. NETTAXI shall defend, indemnify and ---------------------------- hold SpinRecords.com harmless from any and all damages, liabilities, costs and expenses (including, but not limited to reasonable attorneys' fees) incurred by SpinRecords.com as a result of (1) any breach of this Agreement; (ii) any claim that the NETTAXI Brand Features or any part thereof, infringes or misappropriates any Intellectual Property Right of a third party; or (iii) any claim arising out of Spinrecords.com's display of the NETTAXI Brand Features SpinRecords.com shall provide NETTAXI with written notice of the claim and permit NETTAXI to control the defense, settlement, adjustment or compromise of any such claim. SpinRecords.com may employ counsel at its own expense to assist it with respect to any such claim; provided, however, that if such counsel is necessary because of a conflict of interest of either NETTAXI or its counsel or because NETTAXI does not assume control, NETTAXI will bear the expense of such counsel. 7.3 Limitation of Liability. EXCEPT AS SET FORTH IN SECTION 6 AND 7.1, ------------------------ UNDER NO CIRCUMSTANCES WILL EITHER PARTY BE LIABLE TO THE OTHER UNDER ANY CONTRACT, STRICT LIABILITY, NEGLIGENCE OR OTHER LEGAL OR EQUITABLE THEORY, FOR ANY INCIDENTAL OR CONSEQUENTIAL DAMAGES OR LOST PROFITS IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT. 3 8. TERM AND TERMINATION 8.1 Term of Agreement. This Agreement shall be effective upon the ------------------- Effective Date and shall remain in force for a period of one (1) year, and shall be automatically renewed for successive periods of one (1) year unless otherwise terminated as provided herein. 8.2 Convenience. NETTAXI may terminate this Agreement at any time for ----------- its convenience, for no reason or for any reason, upon sixty (60) days prior written notice to SpinRecords.com. In the event of such termination, Spinrecords.com shall be entitled to receive and retain all payments made or payable by NETTAXI prior to the date of termination. SpinRecords.com may terminate this Agreement for no reason or for any reason upon sixty (60) days prior written notice to NETTAXI. 8.3 Termination for Cause. This Agreement may be terminated by a party ---------------------- for cause immediately upon the occurrence of and in accordance with the following: (a) Insolvency Event. Either may terminate this Agreement by delivering written notice to the other party upon the occurrence of any of the following events: (i) a receiver is appointed for either party or its property; (ii) either makes a general assignment for the benefit of its creditors; (iii) either party commences, or has commenced against it, proceedings under any bankruptcy, insolvency or debtor's relief law, which proceedings are not dismissed within sixty (60) days; or (iv) either party is liquidated or dissolved. (b) Change of Control. In the event more that there is a change in ownership representing fifty percent (50%) or more of the equity ownership of either party, the other party may, at its option, terminate this Agreement upon written notice. (c) Default. Either party may terminate this Agreement effective upon written notice to the other if the other party violates any covenant, agreement, representation or warranty contained herein in any material respect or defaults or fails to perform any of its obligations or agreements hereunder in any material respect, which violation, default or failure is not cured within thirty (30) days after notice thereof from the non-defaulting party stating its intention to terminate this Agreement by reason thereof. 8.4 Survival of Rights and Obligations Upon Termination. Sections 6 and --------------------------------------------------- 7 shall survive termination or expiration of this Agreement. Notwithstanding anything in the foregoing to the contrary, in the case of termination by NETTAXI for cause pursuant to Section 8.3, NETTAXI shall not be required to pay any fee to SpinRecords.com after termination. 8.5 Return of Materials Upon Termination. On or before ten (10) days --------------------------------------- after the termination of this Agreement, SpinRecords.com shall deliver to NETTAXI all NETTAXI Confidential Information and NETTAXI Brand Features, including but not limited to all work product, diagrams, designs and schematics in Spinrecords.com's possession and NETTAXI.com shall deliver to SpinRecords.com all SpinRecords.com Confidential Information and SpinRecords.com Brand Features, including but not limited to all work product, diagrams, designs and schematics in Nettaxi.com's possession 9. MISCELLANEOUS 9.1 Force Majeure. Neither party shall be liable to the other for -------------- delays or failures in performance resulting from causes beyond the reasonable control of that party, including, but not limited to, acts of God, labor disputes or disturbances, material shortages or rationing, riots, acts of war, governmental regulations, communication or utility failures, or casualties. 9.2 Relationship of Parties. The parties are independent contractors ------------------------- under this Agreement and no other relationship is intended, including a partnership, franchise, joint venture, agency, employer/employee, fiduciary, master/servant relationship, or other special relationship. Neither party shall act in a manner which expresses or implies a relationship other than that of independent contractor, nor bind the other party. 9.3 No Third Party Beneficiaries. Unless otherwise expressly provided, ----------------------------- no provisions of this Agreement are intended or shall be construed to confer upon or give to any person or entity other than NETTAXI and SpinRecords.com any rights, remedies or other benefits under or by reason of this Agreement. 9.4 Equitable Relief. Each party acknowledges that a breach by the ----------------- other party of any confidentiality or proprietary rights provision of this Agreement may cause the non-breaching party irreparable damage, for which the award of damages would not be adequate compensation. Consequently, the non-breaching party may institute an action to enjoin the breaching party from any and all acts in violation of those provisions, which remedy shall be cumulative and not exclusive, and a party may seek the entry of an injunction enjoining any breach or threatened breach of those provisions, in addition to any other relief to which the non-breaching party may be entitled at law or in equity. 4 9.5 Attorneys' Fees. In addition to any other relief awarded, the ---------------- prevailing party in any action arising out of this Agreement shall be entitled to its reasonable attorneys' fees and costs. 9.6 Notices. Any notice required or permitted to be given by either ------- party under this Agreement shall be in writing and shall be personally delivered or sent by a reputable overnight mail service (e.g., Federal Express), or by first class mail (certified or registered), or by facsimile confirmed by first class mail (registered or certified), to the party at the address indicated above. Notices will be deemed effective (i) three (3) working days after deposit, postage prepaid, if mailed, (ii) the next day if sent by overnight mail, or (iii) the same day if sent by facsimile and confirmed as set forth above. 9.7 Assignment. Neither NETTAXI or SpinRecords.com shall assign its ---------- respective rights or delegate its obligations hereunder, either in whole or in part, whether by operation of law or otherwise, without the prior written consent of the other party. Any attempted assignment or delegation without the other party's written consent will be void. 9.8 Waiver and Modification. Failure by either party to enforce any ------------------------- provision of this Agreement will not be deemed a waiver of future enforcement of that or any other provision. Any waiver, amendment or other modification of any provision of this Agreement will be effective only if in writing and signed by the parties. 9.9 Severability. if for any reason a court of competent jurisdiction ------------ finds any provision of this Agreement to be unenforceable, that provision of the Agreement will be enforced to the maximum extent permissible so as to effect the intent of the parties, and the remainder of this Agreement will continue in full force and effect. 9.10 Controlling Law and Jurisdiction. This Agreement and any action ----------------------------------- related thereto shall be governed, controlled, interpreted and defined by and under the laws of the State of California and the United States, without regard to the conflicts of laws provisions thereof. Unless waived by NETTAXI (which it may do in its sole discretion) the exclusive jurisdiction and venue of any action with respect to the subject matter of this Agreement shall be the Superior Court of California for the County of Santa Clara or the United States District Court for the Northern District of California and each of the parties hereto submits itself to the exclusive jurisdiction and venue of such courts for the purpose of any such action. The parties specifically disclaim the UN Convention on Contracts for the International Sale of Goods. 9.11 Headings. Headings used in this Agreement are for ease of -------- reference only and shall not be used to interpret any aspect of this Agreement. 9.12 Entire Agreement. This Agreement, including all exhibits which are ---------------- incorporated herein by reference, constitutes the entire agreement between the parties with respect to the subject matter hereof, and supersedes and replaces all prior and contemporaneous understandings or agreements, written or oral, regarding such subject matter. 9.13 Counterparts. This Agreement may be executed in two counterparts, ------------ each of which shall be an original and together which shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement by persons duly authorized as of the date and year first above written. NETTAXI: NETTAXI ONLINE COMMUNITIES, INC. By: /s/ --------------------------------------------- Its: Executive Vice President Sales & Marketing -------------------------------------------- Solutions Media SOLUTIONS MEDIA, INC. ----------------------- By: /s/ --------------------------------------------- Its: President --------------------------------------------- TABLE OF EXHIBITS EXHIBIT A - SPINRECORDS.COM BRAND FEATURES EXHIBIT B - NETTAXI BRAND FEATURES EXHIBIT C - STATEMENT OF WORK 5 EXHIBIT A SPINRECORDS.COM BRAND FEATURES 1. Service Marks: "SpinRecords.com" "SpinRadio" "Spin TV" "Local Spin" "Spin Chat" "Gig-a-board" "Spin Cuts" "Spin Charts" "Join the evolution" "The promise of music on the Internet delivered" 2. SpinRecords.com collateral and dress - SpinRecords.com color scheme, fonts and general "look and feel" 3. SpinRecords.com logos 4. "Anything but that" cartoon series 5. SpinRecords.com source materials 6. SpinRecords.com website 6 EXHIBIT B NETTAXI BRAND FEATURES 1. Service Marks: "NETTAXI" "NETTAXI.COM" "NETTAXI ONLINE COMMUNITIES" "INTERNET THE CITY" "DRIVING YOUR INTERNET EXPERIENCE" 2. Trade dress - Nettaxi color scheme and checkered motif; "look and feel" 3. Nettaxi logos 4. Nettaxi source materials 5. The Website 7 EXHIBIT C STATEMENT OF WORK 1. GENERAL This is a Statement of Work under the Co-Branding Agreement by and between NETTAXI Online Communities, Inc. ("NETTAXI") and Solutions Media, Inc., ("SpinRecords.com") dated effective as of Nov. 5, 1999. 2. PROJECT MANAGERS. NETTAXI: Will Richards SPINRECORDS.COM: Criona Mclaughlin 2165 S. Bascom Avenue 11440 West Bernardo Ct Campbell, California 95008 San Diego, California 92127 Phone: (408) 879-9880 Phone: (619)451-3223 Fax: (408) 879-9907 Fax: (619)451-2373 3. BRANDING METHODS Spinrecords.com and Nettaxi.com will enter into a multi-phase launch of a co-branded community for Nettaxi, and the implementation of community services for Spinrecords.com members. The following defines the agreement after the final phase. The individual phases are specified following the Marketing Section of the Statement of Work. 1) SpinRecords.com will develop a co-branded site showing the Nettaxi.com logo. The co-branding shall not include SpinRadioTM, SpinTVTM, feature modules, and Spin branded charts. All other navigation bar features shall be modified to the co-brand including localnettaxi, and nettaxichat. The spinwares and spinstore will be modified to include licensed content purchased directly from Spinrecords.com and to eliminate products that will compete with the Nettaxi store. 2) Spinrecords.com will incorporate from the navigation bar a link from nettaxistores to the Nettaxi commerce site. 3) The co-branded nettaximusic store will contain spingear, spingallery, spinmusic, and Kingdom Skateboard products and services. Spin agrees to pay Nettaxi a 5% commission of the gross sales price on all transactions. 4) Spinrecords.com will maintain the Spin logo on the site in a corner of their choice. 5) Nettaxi web based e-mail will replace spinmail on the co-branded site. 6) Nettaxi's search engine shall be the default search engine on the co-branded site and on the Spinrecords.com homesite, with the exception that, in the event Spinrecords.com provides its content to or otherwise develops any co-branded sites with any ISP, Internet Portal or other entity, Spinrecords.com shall not be required to employ the Nettaxi search engine. In all cases in which the Nettaxi search engine is employed, the search shall first deliver results found on the Spinrecords.com website. The search feature shall have the tag line "Driven by Nettaxi" underneath the search bar. 7) Nettaxi shall cause its search engine to search and deliver results from the SpinRecords.com site and co-branded site as one of the top results for all searches for related words on the co-branded site, the SpinRecords.com homesite and the Nettaxi.com site. Related words shall include, but not be limited to: "music," "mp3," "independent artist/music" and "CD." 8) Nettaxi will create a music template for the Nettaxi homepage builder. Every registered member of Spinrecords.com and Nettaximusic will be provided a dynamically generated home page. Spinrecords.com will submit to Nettaxi the existing list of Spinrecords.com members from which a homepage shall be generated. 9) Nettaximusic and Spinrecords.com will share registered users by synchronizing the databases for registered users. Nettaxi will maintain unique ID's for each community home page built in the Spinrecords.com domain and Nettaximusic.com domain (for the purpose of the auto-generation of fan page templates). This synchronization shall not include any users that arrive at SpinRecords.com through any other co-branded site or through any other means of co-branding/co-marketing with any other ISP, Website or other entity. 10) Nettaxi will develop a link from the Nettaxi Arts & Entertainment area for the co-branded site. 11) Nettaxi will add Nettaximusic to the street sign on the A&E page. 12) Nettaxi will make the word "music" on the splash page, under A&E a link, and have it link to nettaxi.spinrecords.com. the co-branded site. 13) The co-branded site will have the Nettaxi mp3 player as an available mp3 player on the site. 14) Spinrecords.com will place the Nettaxi logo on promotional CDROM's and Samplers that contain the Nettaxi mp3 player or site banners. Banners on CDROM's will link straight to Nettaxi and Nettaximusic. 15) Nettaxi will include the Spinrecords.com logo on promotional CDROM's containing music provided Spinrecords.com. 16) Spinrecords.com will provide a link from all artists' pages to the co-branded registration site for fans to produce fan pages. 17) Nettaxi.com and Spinrecords.com will develop ability for all registered users of the co-branded site to achieve one-click buying on the co-branded site whether purchasing from Nettaxi's store or the Spinstore. 8 4. MARKETING EFFORTS 1) Spinrecords.com will sell ad space on the co-branded site, in accordance with the agreement, within 30 days of the Effective Date. 2) Both Parties agree to develop a Nettaxi co-branded CD featuring Nettaximusic.com. Both parties will share the production costs of the Nettaximusic.com Co-Branded CD. The per unit cost shall be 50 cents or less, unless both parties agree otherwise. 3) Nettaxi will develop a community based affinity model for music that features SpinRecords.com artists. 4) Nettaxi will provide in-house advertising to promote the co-branded music site. 5) Spinrecords.com will engage with Nettaxi as an -advertising sponsor promoting the co-branded site with each party contributing a monthly investment of not less than $20,000 per month, in cash expenditure or in-kind contribution toward the marketing effort(s). 6) SpinRecords.com will promote Nettaximusic.com as a music affiliate in their non-traditional street marketing methods, to include flyer's created in-house for Spin Bands, will have the logo of Nettaxi.com Music in-order that consumers see alternate choices to find the bands music. 7) Both parties agree to include advertisements for the other party in the advertising included with their web-based e-mail offered to their users. 8) Spinrecords.com will grant Nettaxi the rights to use the artist's likeness in promotions of the co-branded site. 9) Nettaxi.com agrees to participate in Spinrecords.com fourth quarter promotional plans by procuring $250,000 worth of co-promotional placement in Spinrecords advertising targeted towards colleges, extreme sports and other mutually agreed upon target audiences. 10) Spinrecords.com agrees to purchase in the fourth quarter, $250,000 worth of advertising and sponsorship space within the Nettaxi site for promotion of the co-branded and Spinrecords.com community. PHASED ROLL OUT PLAN PHASE I: NOVEMBER 8TH The existing site located at Spinrecords.com/Nettaxi shall be launched - target date one week from agreement date. This site shall contain the web based e-mail from Nettaxi. This site shall also use Spinstore and Spinware as it currently exists on the site. Nettaxi will begin development of the music template for the home page builder. Spinrecords will submit their existing list of members to Nettaxi to integrate the homepage builder database and resolve duplicate ID's existing between Nettaxi and Spinrecords member registration. Nettaxi and Spinrecords will integrate their respective registrations to allow both companies to synchronize their registered users from the co-branded site. Spinrecords can announce the partnership in a press release the day the co-branded site launches. This press release will detail the co-branded relationship. PHASE II: NOVEMBER 22ND Community home pages will be available to all members of Nettaximusic.com and Spinrecords.com. Spinrecords.com will announce to their existing membership the existence of their new homepage, provide them with their Unique URL and promote their ability to develop a unique web site. Nettaxi will announce the same ability to all registered members of Nettaximusic.com. Nettaxi's search engine will be launched on the Spinrecords.com domain. Nettaxi's e-commerce offering will be launched on the co-branded site. Spinrecords.com e-comnerce offerings will be reduced to provide licensed merchandise and content and any additional products mutually agreed upon by Nettaxi.com and Spinrecords.com. Both companies will announce their users ability to shop on the co-branded site using one-click buying. Each member can move between the stores on the co-brand site and order in each individual store. 9 PHASE III: JANUARY 1, 2000 Nettaxi launches citizen and small business e-commerce offering for all community sites. This feature will allow current Nettaxi home page web sites to integrate e-commerce offerings from their own products and products from the Nettaxi store. 5. PAYMENT PERCENTAGE OF ADVERTISING REVENUE 5.1 "SpinRecords.com's Advertising Revenue" means the gross revenue from advertising invoiced by SpinRecords.com in a calendar quarter for advertising by third parties on the SpinRecords.com Pages, less any commissions not to exceed 35%. 5.2 "SpinRecords.com's AR Share" means the number of Impressions on the SpinRecords.com Pages by Users arriving through the Co-branded NETTAXI Pages in a calendar quarter divided by the total number of Impressions on the SpinRecords.com Pages by all Users in that calendar quarter. 5.3 "NETTAXI Advertising Revenue" means the gross revenue from advertising invoiced by NETTAXI in a calendar quarter for advertising by third parties on the NETTAXI Pages, less any commissions. 5.4 "NETTAXI's AR Share" means the number of Impressions on the NETTAXI Pages by Users arriving through the Co-branded SpinRecords.com Pages in a calendar quarter divided by the total number of Impressions on the NETTAXI Pages by all Users in that calendar quarter. 5.5 SpinRecords.com Rate. In full consideration for the rights granted --------------------- by NETTAXI, SpinRecords.com agrees to pay NETTAXI fifty (50%) percent of ad revenue at an average rate no lower then $6.50 per one thousand impressions (CPM) payable to NETTAXI which results when the SpinRecords.com Advertising Revenue is multiplied by SpinRecords.com's AR Share. SpinRecords.com shall be responsible for payment of all taxes based on the Advertising Revenue except taxes based on NETTAXI's income. 5.6 NETTAXI Rate. N/A. ------------- 5.7 Payment Schedule. The parties shall make such payments within ----------------- thirty (30) days of the end of each calendar quarter for the Advertising Revenue invoiced during such calendar quarter. 5.8 Records. SpinRecords.com agrees to keep accurate books of account ------- and records at its principal place of business covering all Advertising Revenues and associated commissions. Upon reasonable notice of not less than seven (7) business days, but in no event more than once per year (unless the immediately preceding audit showed a material underpayment), NETTAXI shall have the right, subject to suitable confidentiality measures, to cause a certified public accountant to inspect those portions of the books of account and records which relate to the royalties owed NETTAXI, to confirm that the correct amount owing NETTAXI under this Agreement has been paid. SpinRecords.com shall maintain such books of account and records which support each statement for at least two years after the termination or expiration of this contract or after the final payment made by SpinRecords.com to NETTAXI, whichever is later. 2: PER CUSTOMER FEE 1. SpinRecords.com Payment. For each User that accesses the co-branded ------------------------ site and becomes a paying customer on the co-branded site, SpinRecords.com agrees to pay a fee of five (5%) percent of the gross sale. 2. NETTAXI Payment. N/A. ---------------- 3. Payment Terms. All fees will be paid on or before fifteen (15) days -------------- after the end of the month in which the party has received payment 4. Audit Rights. SpinRecords.com shall maintain for a period of two ------------- (2) years after the end of the year to which they pertain, complete records of it's customers in order to calculate and confirm SpinRecords.com's obligations hereunder. Upon reasonable prior notice, NETTAXI will have the right, exercisable not more than once every twelve (12) months, to appoint an independent accounting firm or other agent reasonably acceptable to SpinRecords.com, at NETTAXI'S expense, to examine such books, records and accounts during SpinRecords.com's normal business hours to verify the amounts due by SpinRecords.com to NETTAXI herein, subject execution of NETTAXI's standard confidentiality agreement by the accounting firm or agent; provided, however, that execution of such agreement will not preclude such firm from reporting its results to NETTAXI. In the event such audit discloses an underpayment or overpayment of royalties due hereunder, the appropriate party will promptly remit the amounts due to the other party. If any such audit discloses a shortfall in payment to NETTAXI of more than five percent (5%) for any quarter, SpinRecords.com agrees to pay or reimburse NETTAXI for the expenses of such audit. 10 EX-10.58 3 0003.txt NETTAXI.COM WEB CONTENT DISTRIBUTION AGREEMENT This Web Content Distribution Agreement (hereinafter "Agreement") is made and entered into on this 1st day of January, 2000 by and between NETTAXI.COM. (hereinafter "Nettaxi"), a Nevada corporation with offices located at 1696 Dell Avenue Campbell, California 95008 (hereinafter "Nettaxi") and White Sand Communications, Inc., a company located at 9800D Topanga Canyon Boulevard, Suite 318, Chatsworth, California 91311 (hereinafter "Customer"). WHEREAS, Nettaxi provides a service whereby Internet content providers can distribute a variety of content through the Internet and World Wide Web, and WHEREAS, Customer wishes to have Nettaxi distribute Content through Internet Servers using streaming technology, NOW THEREFORE, for good and valuable consideration, the parties do hereby agree as follows: 1. GENERAL TERMS A. This document, along with the Content Management Service Order ("CMSO") agreement, shall comprise a complete and binding agreement between Content Provider and Nettaxi. Each CMSO agreement, and any amendments thereto, when dated and subscribed by Customer and Nettaxi, shall incorporate the terms and conditions of this Agreement. In the event of any conflict or inconsistency between this Agreement and the terms set forth in a CMSO agreement, the terms of the CMSO agreement shall in all cases prevail. B. Web Content Management services shall consist of the distribution of content provided by Customer through computer servers owned and/or operated and/or controlled by Nettaxi. 2. STREAM MAGIC SERVICES A. Content Preparation: Nettaxi shall prepare Content consisting of ------------------- fully encoded audio or video product provided by Content Provider for placement on Nettaxi servers. (Encoding may also be performed by Nettaxi for an additional fee, as agreed by the parties). Customer shall provide Nettaxi with timely access to its Content as required for Nettaxi to prepare said Content and provide all services Customer has elected to receive. Customer understands and acknowledges that Nettaxi's performance depends, in part, upon Customer s assistance and cooperation in all matters pertaining to this Agreement. B. Connectivity and Content Streaming: Utilizing Nettaxi's servers, ----------------------------------- Customer shall be provided with Content storage and Internet connectivity. Customer's content shall be distributed on an "On-demand" basis on the Internet utilizing the Internet video formats specified by Customer, including, but not limited to, Microsoft(R) Windows Media Server(TM) ("WMS"), Real Networks(R) Real Server ("Real"), Apple(R) QuickTime Server ("QuickTime"), Server Push and Web Page serving. C. Technical Support/Maintenance: Nettaxi shall provide Customer with ----------------------------- technical support upon Customer's request and in accordance with Nettaxi's terms and conditions and any applicable fee. 3. LICENSES Customer hereby grants Nettaxi a worldwide, non-exclusive license to host, distribute, display, cache and transmit Content in connection with the Web Content Distribution Services. Nettaxi will take reasonable precautions to prevent the unauthorized reception and use of the Content while being streamed onto the Internet, which includes taking reasonable security measures to prevent unauthorized use or copying of Content by third parties not intended to receive Content. 4. OWNERSHIP Customer retains all right, title and interest in and to the Content it places with Nettaxi. Nettaxi is the Licensee authorized to provide streaming content services through the use of the licensed software, hardware, products, equipment and any other applicable intellectual properties. Nettaxi's Licensor, its heirs, successors and/or assigns retain all right, title and interest in and to all software, hardware, products, equipment and other intellectual properties created by or for Nettaxi in connection with the Web Content Distribution Services. 5. MARKETING AND PROMOTION Both Customer and Nettaxi shall have the right to create advertisements, make public announcements and press releases using each others names provided they have received prior written approval, which shall not be unreasonably withheld. 6. TERM OF AGREEMENT A. The term of this Agreement shall two(2) years unless otherwise specified in the CMSO. Either party may terminate this agreement upon thirty days (30) written notice. B. Following the expiration of the Term or the failure of the Parties to enter into a renewal, the services as enumerated in the then most recent CMSO shall continue in effect on a month-to-month basis upon the same terms and conditions specified herein, unless terminated by either Customer or Nettaxi upon thirty (30) days prior written notice. 2 7. TERMINATION A. Either party shall have the right to terminate this agreement should the other party breach a material term or condition of this Agreement and fail to cure such breach within thirty (30) days after receipt of written notice of the breach, except in the case of failure to make timely payment to Nettaxi, which must be cured within ten (10) days of the payment due date. Nettaxi has the option, at its sole discretion, to terminate this Agreement should Customer become insolvent or the subject of bankruptcy proceedings, a receivership, liquidation or a sale for the benefit of creditors. B. Upon termination or expiration of the Term or any subsequent renewal, Customer agrees to do the following: (i) pay any outstanding fees within ten (10) days of termination of service; (ii) return any confidential information it has received from Nettaxi and (iii) return any equipment or supplies that are the property of Nettaxi. 8. DEFAULT A. If Customer fails to perform its obligations, or fails to pay for services rendered hereunder, Nettaxi may, at its sole option and with written notice, issue a default notice letter to Customer, demanding the default condition be cured. If the default condition is not remedied within thirty (30) days, Nettaxi may then, without the necessity of any further notice, discontinue performance and terminate this Agreement, for default, and pursue any other remedies available at law or in equity, including reimbursement of the cost of collection and reasonable attorney fees. Nettaxi's failure to exercise any of its rights hereunder shall not constitute or be construed by Customer as being a waiver of any past, present, or future right or remedy. In the case of Customer's failure to cure any default within the thirty (30) day time period, Nettaxi may discontinue any or all services for any period of time as it deems appropriate without written notice to Customer, and Nettaxi shall not deem such action a breach of this Agreement. B. Nettaxi may, without notice, suspend or terminate services to customer if Customer is found to be engaged in unlawful activities or upon the request to do so by any legal or governmental agencies. 9. PRICES AND PAYMENT TERMS A. Customer shall pay Stream Magic in accordance with the most current CMSO associated with this Agreement. Fees shall include, but are not limited to, an initial set up fee, monthly minimum fees, Webcast distribution fees and monthly storage fees. All payments will be made in U.S. dollars. Late payments hereunder will accrue interest at a rate of one and one-half percent (1 1/2) per month, or the highest rate allowed by applicable law, whichever is lower. If in its judgment Nettaxi determines that Customer is not creditworthy or is otherwise not financially secure, Nettaxi may, upon written notice to Customer, modify the payment terms to require assurances to secure Customer's payment obligations hereunder. 3 B. All payments required by this Agreement are exclusive of all national, state, municipal or other governmental excise, sales, value-added, use, personal property, and occupational taxes, excises, withholding taxes and obligations and other levies now in force or enacted in the future, all of which Customer will be responsible for and will pay in full. Customer agrees to pay or reimburse Nettaxi for any applicable taxes that are levied based on the transactions hereunder, exclusive of taxes on income or real estate taxes. Any such charges shall be invoiced and payable within the payment terms of this Agreement. Nettaxi agrees to provide Customer with reasonable documentation to support invoiced amounts applied to taxes within thirty (30) calendar days of receipt of a Customer's written request. C. Payments shall be due thirty (30) days from Customer's receipt of each monthly invoice. Late payment charges will be calculated based on 1.5% per month of the unpaid amount 10. WARRANTIES AND INDEMNIFICATION A. Customer warrants and represents that it owns or licenses all rights in or has the right to distribute, the Content; that the Content does not violate any trademarks, service marks or copyrights or any right of privacy or publicity or otherwise infringe upon the rights of any third party; that the Content does not violate any federal, state or local laws, statutes or rules or regulations. Customer shall indemnify and hold harmless Nettaxi, its officers, directors, agents, contractors and employees, from and against any and all third party claims, costs, expenses or liabilities arising from or in connection with Customer's Content. Customer further agrees to indemnify Nettaxi against Customer's acts of negligence resulting in damage to third parties. B. Nettaxi warrants and represents that it owns or licenses all right in and to the technology associated with the Web Content Distribution service, that, to the best of its knowledge, none of the technology it uses for its services infringes upon or the intellectual property right of any third party and that, to the best of its knowledge, the operation of the Web Content Distribution Service does not violate any applicable federal, state or local statutes, rules or regulations. C. EXCEPT FOR THE WARRANTIES SET FORTH HEREIN, NEITHER PARTY MAKES ANY OTHER WARRANTIES IN CONNECTION WITH THE SUBJECT MATTER OF THIS AGREEMENT, WHETHER EXPRESSED OR IMPLIED, AND DISCLAIMS ANY SUCH WARRANTIES, INCLUDING THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON - INFRINGEMENT. NETTAXI SPECIFICALLY DISCLAIMS ALL WARRANTIES THAT THE WEB CONTENT DISTRIBUTION SERVICE WILL MEET ANY STANDARD OF PERFORMANCE OR ACCURACY OR THAT IT WILL BE TIMELY OR FREE OF ERRORS. 4 D. In the event of any breach, or reasonably anticipated breach, of any of the foregoing warranties, in addition to any other remedies available in law or equity, Nettaxi shall have the right, at Nettaxi's sole discretion, to suspend Web Content Distribution Services if deemed reasonably necessary by Nettaxi to prevent any harm to its business. 11. LIMITATION OF LIABILITIES A. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER OR ANY THIRD PARTY FOR SPECIAL, COLLATERAL, PUNITIVE, EXEMPLARY, INDIRECT INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF GOODWILL, LOSS OF PROFITS OR REVENUES, LOSS OF USE, INTERRUPTIONS OF BUSINESS OR CUSTOMER CLAIMS ALLEGED AS A RESULT OF TORTIOUS CONDUCT OR BREACH OF ANY OF THE PROVISIONS OF THIS AGREEMENT, EVEN IF EITHER PARTY HAS BEEN ADVISED BY THE OTHER OR ANY THIRD PARTY OF THE POSSIBILITY OF SUCH DAMAGES. B. THE LIABILITY OF NETTAXI FOR DAMAGES ARISING OUT OF THE SERVICES PROVIDED HEREIN, INCLUDING, WITHOUT LIMITATION, MISTAKES, OMISSIONS, INTERRUPTIONS, DELAYS, TORTIOUS CONDUCT OR ERRORS, WHETHER CAUSED BY ACTS OF COMMISSION OR OMISSION, SHALL BE LIMITED TO A PRORATED REFUND OF THE CHARGES PAID BY CLIENT FOR THE WEB CONTENT DISTRIBUTION SERVICES. THE RECEIPT OF SUCH REFUNDS SHALL BE THE SOLE REMEDY AFFORDED TO CUSTOMER. 12. CONFIDENTIAL INFORMATION A. Each party acknowledges that during the term of this Agreement it will have access to certain confidential information of the other party concerning the other party's business plans, customers, technology, financial status and products, including the terms and conditions of this Agreement ("Confidential Information"). Confidential Information will include, but not be limited to, each party's proprietary software and customer information. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party (except as required by law or to that party's attorneys, accountants and other advisors as reasonably necessary), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such information. 5 B. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 13. EXCUSED PERFORMANCE Neither Party shall be liable to the other Party under this Agreement for any failure nor delay in performance that is due to causes beyond its reasonable control, including but not limited to, acts of nature, governmental actions, fires, civil disturbances, interruptions of power, or transportation problems. 14. ASSIGNMENT OR TRANSFER Customer shall not assign or transfer the rights or obligations associated with this Agreement, in whole or in part, without Nettaxi's prior written consent. 15. GOVERNING LAW This Agreement shall be governed and construed by the laws of the State of California except as they pertain to its conflict of law provisions. The courts of the State of California, County of Los Angeles shall have jurisdiction over any legal disputes relating to or in connection with this Agreement. 16. RELATIONSHIP OF PARTIES The Parties to this Agreement shall be deemed independent contractors and neither Party shall have the right or authority to bind the other to any obligation not expressly agreed to in writing. 17. WAIVER Conduct by either party amounting to a waiver of a breach or default of any of the terms of this Agreement shall not be construed as a waiver of any subsequent breach or default. 6 18. NOTICES All notices pertaining to this Agreement shall be in writing and delivered via registered mail, return receipt requested, to the addresses first written above or by facsimile or email, with a written acknowledgement of receipt. 19. ENTIRE AGREEMENT This Agreement constitutes the entire understanding between the parties and supercedes all other agreements, whether written or oral. This Agreement may not be modified except in a writing, which is signed, by both parties or their duly authorized representatives. IN WITNESS WHEREOF the parties do hereby execute this Agreement as of the date set forth below. NETTAXI.COM WHITE SAND COMMUNICATIONS, INC. By: /s/ Dean Rositano By: /s/ VALDIR MANAGERS LIMITED, DIRECTOR -------------------------- ---------------------------------------- Date: 1/1/00 Date: 1-1-00 ------------------------ ---------------------- 7 EX-10.59 4 0004.txt NETTAXI.COM WEB CONTENT DISTRIBUTION AGREEMENT This Web Content Distribution agreement (hereinafter "Agreement") is made and entered into on this 1st day of January by and between NETTAXI.COM (hereinafter "Nettaxi"), a Nevada corporation with offices located at 1696 Dell Avenue, Campbell, California 95008 (hereinafter "Nettaxi") and Whitehorn Ventures Limited, a company located at 2001 Central Plaza, l Harbor Road, Wanchai, Hong Kong (hereinafter "Customer"). WHEREAS, Nettaxi provides a service whereby Internet content providers can distribute a variety of Content through the Internet and World Wide Web, and WHEREAS, Customer wishes to have Nettaxi distribute Content through Internet Servers using streaming technology, NOW THEREFORE, for good and valuable consideration, the parties do hereby agree as follows: 1. GENERAL TERMS A. This document, along with the Content Management Service Order (CMSO) agreement, shall comprise a complete and binding agreement between Content Provider and Nettaxi, Each CMSO agreement, and any amendments thereto, when dated and subscribed by Customer and Nettaxi, shall incorporate the terms and conditions of this Agreement. In the event of any conflict or inconsistency between this Agreement and the terms set forth in a CMSO agreement, the terms of the CMSO agreement shall in all cases prevail. B. Web Content Management services shall consist of the distribution of content provided by Customer through computer servers owned and/or operated and/or controlled by Nettaxi. 2. STREAM MAGIC SERVICES A. Content Preparation: Nettaxi shall prepare Content consisting of --------------------- fully encoded audio or video product provided by Content Provider for placement on Nettaxi servers. (Encoding may also be performed by Nettaxi for an additional fee, as agreed by the parties). Customer shall provide Nettaxi with timely access to its Content as required for Nettaxi to prepare said Content and provide all services Customer has elected to receive. Customer understands and acknowledges that Nettaxi's performance depends, in part, upon Customer's assistance and cooperation in all matters pertaining to this Agreement. 1 B. Connectivity and Content Streaming: Utilizing Nettaxi's servers, ------------------------------------ Customer shall be provided with Content storage and Internet connectivity. Customer's content shall be distributed on an "On-demand" basis on the Internet utilizing the Internet video formats specified by Customer, including, but riot limited to, Microsoft(R) Windows Media Server(TM) ("WMS"), Real Networks (R) Real Server(TM) ("Real"), Apple(R) QuickTime Server(TM) ("QuickTime"), Server Push and Web Page serving. C. Technical Support/Maintenance: Nettaxi shall provide Customer with ----------------------------- technical support upon Customer's request and in accordance with Nettax's terms and conditions and any applicable fee. 3. LICENSES Customer hereby grants Nettaxi a worldwide, non-exclusive license to host, distribute, display, cache and transmit Content in connection with the Web Content Distribution Services. Nettaxi will take reasonable precautions to prevent the unauthorized reception and use of the Content while being streamed onto the Internet, which includes taking reasonable security measures to prevent unauthorized use or copying of Content by third parties not intended to receive Content. 4. OWNERSHIP Customer retains all right, title and interest in and to the Content it places with Nettaxi. Nettaxi is the Licensee authorized to provide streaming content services through the use of the licensed software, hardware, products, equipment and any other applicable intellectual properties. Nettaxi's Licensor, its heirs, successors and/or assigns retain all right, title and interest in and to all software, hardware, products, equipment and other intellectual properties created by or for Nettaxi in connection with the Web Content Distribution Services. 5. MARKETING AND PROMOTION Both Customer and Nettaxi shall have the right to create advertisements, make public announcements and press releases using each others names provided they have received prior written approval, which shall not be unreasonably withheld. 6. TERM OF AGREEMENT A. The term of this Agreement shall be two (2) years unless otherwise specified in the CMSO. Either party may terminate this agreement upon thirty (30) days written notice. B. Following the expiration of the Term or the failure of the Parties to enter into a renewal, the services as enumerated in the then most recent CMSO shall continue in effect on a month-to-moth basis upon the same terms and conditions specifies herein, unless terminated by either Customer of Nettaxi upon thirty (30) days. 2 7. TERMINATION A. Either party shall have the right to terminate this agreement should the other party breach a material term or condition of this Agreement and fail to cure such breach within thirty (30) days after receipt of written notice of the breach, except in the case of failure to make timely payment to Nettaxi, which must be cured within ten (10) days of the payment due date. Nettaxi has the option, at its sole discretion, to terminate this Agreement should Customer become insolvent or the subject of bankruptcy proceedings, a receivership, liquidation or a sale for the benefit of creditors. B. Upon termination or expiration of the Term or any subsequent renewal, Customer agrees to do the following: (i) pay any outstanding fees within ten (10) days of termination of service; (ii) return any confidential information it has received from Nettaxi and (iii) return any equipment or supplies that are the property of Nettaxi. 8. DEFAULT A. If Customer fails to perform its obligations, or fails to pay for services rendered hereunder, Nettaxi may, at its sole option and with written notice, issue a default notice letter to Customer, demanding the default condition be cured. If the default condition is not remedied within thirty (30) days, Nettaxi may then, without the necessity of any further notice, discontinue performance and terminate this Agreement, for default, and pursue any other remedies available at law or in equity, including reimbursement of the cost of collection and reasonable attorney fees. Nettaxi's failure to exercise any of its rights hereunder shall not constitute or be construed by Customer as being a waiver of any past, present, or future right or remedy. In the case of Customer's failure to cure any default within the thirty (30) day time period, Nettaxi may discontinue any or all services for any period of time as it deems appropriate without written notice to Customer, and Nettaxi shall not deem such action a breach of this Agreement. B. Nettaxi may, without notice, suspend or terminate services to customer if Customer is found to be engaged in unlawful activities or upon the request to do so by any legal or governmental agencies. 9. PRICES AND PAYMENT TERMS 3 A. Customer shall pay Stream Magic in accordance with the most current CMSO associated with this Agreement. Fees shall include, but are not limited to, an initial set up fee, monthly minimum fees, Webcast distribution fees and monthly storage fees. All payments will be made in U.S. dollars. Late payments hereunder will accrue interest at a rate of one and one-half percent (1 1/2 %) per month, or the highest rate allowed by applicable law, whichever is lower. If in its judgment Nettaxi determines that Customer is not creditworthy or is otherwise not financially secure, Nettaxi may, upon written notice to Customer, modify the payment terms to require assurances to secure Customer's payment obligations hereunder. B. All payments required by this Agreement are exclusive of all national, state, municipal or other governmental excise, sales, value-added, use, personal property, and occupational taxes, excises, withholding taxes and obligations and other levies now in force or enacted in the future, all of which Customer will be responsible for and will pay in full. Customer agrees to pay or reimburse Nettaxi for any applicable taxes that are levied based on the transactions hereunder, exclusive of taxes on income or real estate taxes, Any such charges shall be invoiced and payable within the payment terms of this Agreement. Nettaxi agrees to provide Customer with reasonable documentation to support invoiced amounts applied to taxes within thirty (30) calendar days of receipt of a Customer's written request. C. Payments shall be due thirty (30) days Customers receipt of each monthly invoice. Late payment charges will be calculated based on 1.5% per month of the unpaid amount. 10. WARRANTIES AND INDEMNIFICATION A. Customer warrants and represents that it owns or licenses all rights in or has the right to distribute, the Content; that the Content does not violate any trademarks, service marks or copyrights or any right of privacy or publicity or otherwise infringe upon the rights of any third party; that the Content does not violate any federal, state or local laws, statutes or unless or regulations. Customer shall indemnify and hold harmless Nettaxi, its officers, directors, agents, contractors and employees, from and against any and all third party claims, costs, expenses or liabilities arising from or in connection with Customer's Content. Customer further agrees to indemnify Nettaxi against Customer's acts of negligence resulting in damage to third parties. B. Nettaxi warrants and represents that it owns or licenses all right in and to the technology associated with the Web Content Distribution service, that, to the best of its knowledge, none of the technology it uses for its services infringes upon or the intellectual property right of any third party and that, to the best of its knowledge, the operation of the Web Content Distribution Service does not violate any applicable federal, state or local statutes, rules or regulations. 4 C. EXCEPT FOR THE WARRANTIES SET FORTH Herein, NEITHER PARTY MAKES ANY OTHER WARRANTIES in CONNECTION WITH THE SUBJECT MATER OF THIS AGREEMENT, WHETHER EXPRESSED OR Implied, AND DISCLAIMS ANY SUCH WARRANTIES, INCLUDING THOSE OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT. NETTAXI SPECIFICALLY DISCLAIMS ALL WARRANTIES THAT THE WEB CONTENT DISTRIBUTION SERVICE WILL MEET ANY STANDARD OF PERFORMANCE OR ACCURACY OR THAT IT WILL BE TIMELY OR FREE OF ERRORS. D. In the event of any breach, or reasonably anticipated breach, of any of the foregoing warranties, in addition to any other remedies available in law or equity, Nettaxi shall have the right, at Nettaxi's sole discretion, to suspend Web Content Distribution Services if deemed reasonably necessary by Nettaxi to prevent any harm to its business. 11. LIMITATION OF LIABILITIES A. IN NO EVENT WILL EITHER PARTY BE LIABLE TO THE OTHER OR ANY THIRD PARTY FOR SPECIAL, COLLATERAL, PUNITIVE, EXEMPLARY, INDIRECT INCIDENTAL OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF GOODWILL, LOSS OF PROFITS OR REVENUES, LOSS OF USE, interruptions OF BUSINESS OR CUSTOMER CLAIMS ALLEGED AS A RESULT OF TORTUOUS CONDUCT OR BREACH OF ANY OF THE PROVISIONS OF THIS AGREEMENT, EVEN IF EITHER PARTY HAS BEEN ADVISED BY THE OTHER OR ANY THIRD PARTY OF THE POSSIBILITY OF SUCH DAMAGES. B. THE LIABILITY OF NETTAXI FOR DAMAGES ARISING OUT OF THE SERVICES PROVIDED HEREIN, INCLUDING, WITHOUT LIMITATION, MISTAKES, OMISSIONS, INTERRUPTIONS, DELAYS, TORTUOUS CONDUCT OR ERRORS, WHETHER CAUSED BY ACTS OF COMMISSION OR OMISSION, SHALL BE LIMITED TO A PRORATED REFUND OF THE CHARGES PAID BY CLIENT FOR THE WEB CONTENT DISTRIBUTION SERVICES. THE RECEIPT OF SUCH REFUNDS SHALL BE THE SOLE REMEDY AFFORDED TO CUSTOMER. 12. CONFIDENTIAL INFORMATION A. Each party acknowledges that during the term of this Agreement it will have access to certain confidential information of the other party concerning the other party's business plans, customers, technology, financial status and products, including the terms and conditions of this Agreement ("Confidential Information"). Confidential Information will include, but not be limited to, each party's proprietary software and customer information. Each party agrees that it will not use in any way, for its own account or the account of any third party, except as expressly permitted by this Agreement, nor disclose to any third party (except as required by law or to that party's attorneys, accountants and other advisors as reasonably necessary), any of the other party's Confidential Information and will take reasonable precautions to protect the confidentiality of such information. 5 B. Information will not be deemed Confidential Information hereunder if such information: (i) is known to the receiving party prior to receipt from the disclosing party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (ii) becomes known (independently of disclosure by the disclosing party) to the receiving party directly or indirectly from a source other than one having an obligation of confidentiality to the disclosing party; (iii) becomes publicly known or otherwise ceases to be secret or confidential, except through a breach of this Agreement by the receiving party; or (iv) is independently developed by the receiving party. 13. EXCUSED PERFORMANCE Neither Party shall be liable to the other Party under this Agreement for any failure nor delay in performance that is due to causes beyond its reasonable control, including but not limited to, acts of nature, governmental actions, fires, civil disturbances, interruptions of power, or transportation problems. 14. ASSIGNMENT OR TRANSFER Customer shall not assign or transfer the rights or obligations associated with this Agreement, in whole or in part, without Nettaxi's prior written consent. 15. GOVERNING LAW This Agreement shall be governed and construed by the laws of the State of California except as they pertain to its conflict of law provisions. The courts of the State of California, County of Los Angeles shall have jurisdiction over any legal disputes relating to or in connection with this Agreement. 16. RELATIONSHIP? OF PARTIES The Parties to this Agreement shall be deemed independent contractors and neither Party shall have the right or authority to bind the other to any obligation not expressly agreed to in writing. 17. WAIVER Conduct by either party amounting to a waiver of a breach or default of any of the terms of this Agreement shall not be construed as a waiver of any subsequent breach or default. 6 EX-27.1 5 0005.txt
5 This schedule contains summary financial information extracted from Nettaxi.com's condensed consolidated statements of operations and consolidated balance sheets and is qualified in its entirety by reference to such financial statements. 1 9-MOS DEC-31-2000 JAN-01-2000 SEP-30-2000 15,487,400 0 2,069,800 245,900 0 18,389,000 2,781,400 1,000,900 21,030,500 2,203,400 0 0 0 43,000 18,784,100 21,030,500 8,003,800 8,003,800 5,348,700 10,317,500 3,687,900 0 4,176,100 (11,362,800) 800 (11,362,800) 0 0 0 (11,362,800) (.29) (.29)
-----END PRIVACY-ENHANCED MESSAGE-----