SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement
[_] Confidential, for Use of the Commission only (as permitted by Rule
14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to 240.14a-11(c) or 240.14a-12
NETTAXI.COM
-----------
(Name of Registrant as Specified In Its Charter)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.001 per share, of Nettaxi.com
(2) Aggregate number of securities to which transaction applies:
35,486,088 shares
(3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is
calculated and state how it was determined): $0.213 which is the average of the
bid and asked price for the common stock of Nettaxi.com as of February 12, 2002.
(4) Proposed maximum aggregate value of transaction: $7,558,537
(5) Total fee paid: $1,511.71
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: N/A
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
NETTAXI.COM
1875 SOUTH BASCOM AVENUE; NO. 116
CAMPBELL, CALIFORNIA 95008
March ___, 2002
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
(the "Special Meeting") of Nettaxi.com, which will be held at
_______________________, on ____________, March ___, 2002, at ____________ a.m.
For directions to the Special Meeting, please call (408) 879-9880.
Details of the business to be conducted at the Special Meeting are given in
the attached Notice of Special Meeting and Proxy Statement.
If you do not plan to attend the Special Meeting, please complete, sign,
date and return the enclosed proxy promptly in the accompanying reply envelope.
If you decide to attend the Special Meeting and wish to change your proxy vote,
you may do so automatically by voting at the Special Meeting.
We look forward to seeing you at the Special Meeting.
--------------------------
Robert A. Rositano, Jr.
Chief Executive Officer
Campbell, California
YOUR VOTE IS IMPORTANT
In order to assure your representation at the meeting, you are requested to
complete, sign, and date the enclosed proxy as promptly as possible and return
it in the enclosed envelope (to which no postage need be affixed if mailed in
the United States).
NETTAXI.COM
1875 South Bascom Avenue; No. 116
Campbell, California 95008
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD MARCH ___, 2002
The Special Meeting of Stockholders (the "Special Meeting") of Nettaxi.com,
a Nevada corporation ("Nettaxi"), will be held at ___________________________,
California 9____, on __________, March ___, 2002, at ___________ a.m. for the
following purposes:
1. To consider and vote upon the Merger Agreement and Plan of
Reorganization, dated as of January 9, 2002, by and among Nettaxi.com, a Nevada
corporation, RAE Systems Inc., a California corporation ("RAE") and RAES
Acquisition Corporation, a California corporation and a wholly-owned subsidiary
of Nettaxi.com ("RSAC"), as it may be amended from time to time (the "Merger
Agreement"), and the transactions contemplated thereby (collectively, the
"Merger").
2. In connection with the proposed Merger, to approve the reverse stock
split of our issued and outstanding shares of common stock, par value $0.001 per
share, such that each five and sixty-seven hundredths (5.67) shares of our
issued and outstanding shares of common stock are converted into one (1) share
of our issued and outstanding common stock, as contemplated by the Merger
Agreement.
3. In connection with the proposed Merger, to consider and vote upon a
proposal to approve the reincorporation of Nettaxi from the State Nevada to the
State of Delaware, as contemplated by the Merger Agreement.
4. To consider and vote upon a proposal to ratify our 1999 Stock Option
Plan, as amended.
5. To consider and vote upon a proposal to adopt the 2002 Stock Option
Plan.
No other business may be transacted at the Special Meeting.
The items of business set forth above are more fully described in the Proxy
Statement accompanying this Notice. Pursuant to our Bylaws, we have fixed the
time and date for the determination of stockholders entitled to notice of and to
vote at the Special Meeting as the close of business as March ___, 2002.
Accordingly, only stockholders of record on such date and at such time will be
entitled to vote at the Special Meeting, notwithstanding any transfer of stock
on our books thereafter.
Approval of the proposed reverse stock split and the proposed
reincorporation of our corporation in Delaware set forth in Proposals 2 and 3,
respectively, are conditions to the closing of the Merger. There are other
conditions that must also be satisfied for the Merger to be consummated. Even if
you approve Proposals 2 and 3, the reverse stock split and reincorporation will
not become effective if the Merger does not occur for any reason. In that case,
the outstanding number of Nettaxi shares and the corporate domicile of Nettaxi
will remain unchanged. The proposed Merger with RAE is discussed in more detail
in the sections of the attached proxy entitled "The Merger" and "The Merger
Agreement," which you should read carefully.
Adoption of Proposals 1, 2 and 3 enumerated in this Notice requires the
affirmative vote of a majority of the votes represented by all shares of our
common stock outstanding on the record date. Adoption of Proposals 4 and 5
require the affirmative vote of at least two-thirds of outstanding shares
entitled to vote at the Special Meeting. In order to carry on the business of
the meeting, we must have a quorum. This means at least one-third of the
outstanding shares of common stock must be represented at the meeting, either by
proxy or in person. Broker non-votes count for purposes of a quorum. Broker
non-votes occur when a broker returns a proxy but does not have authority to
vote on a particular proposal. If there are not enough stockholders present or
represented by proxy to constitute a quorum, the meeting may be adjourned.
If your shares are held of record in "street name" by a broker, bank or
other nominee, follow the voting instructions that you receive from the nominee.
The Board of Directors of Nettaxi has approved of the Proposals enumerated
in this Notice and recommends that Nettaxi stockholders vote FOR their adoption.
Whether or not you expect to attend the Special Meeting, please complete,
sign, date and return the enclosed white proxy card promptly in the accompanying
reply envelope. If you decide to attend the Special Meeting and wish to change
your proxy vote, you may do so automatically by voting in person at the Special
Meeting.
BY ORDER OF THE BOARD OF DIRECTORS
-----------------------------
Robert A. Rositano, Jr.
Chief Executive Officer
Campbell, California
March ___, 2002
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
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THE MERGER
Q: WHAT IS THE STRUCTURE OF THE PROPOSED MERGER OF NETTAXI AND RAE?
A: Prior to the Merger, Nettaxi will be reincorporated in Delaware.
Following the reincorporation, RSAC will merge with and into RAE and will cease
to exist. RAE will remain as the surviving corporation after the Merger and
will be a wholly-owned subsidiary of Nettaxi-Delaware.
Q: WHAT WILL RAE SHAREHOLDERS RECEIVE IN THE MERGER?
A: The number of shares of common stock of Nettaxi-Delaware to be issued for
each share of RAE common stock is not fixed and will be adjusted based upon the
exchange ratio which is defined in the Merger Agreement (the "Exchange Ratio").
Although the parties anticipate that Nettaxi-Delaware will issue approximately
1.48 shares of common stock for each outstanding share of RAE common stock, the
final Exchange Ratio will not be determined until immediately prior to the
Effective Time of the Merger. The following discussion summarizes certain terms
of the Exchange Ratio and is not intended to be a complete description of the
Exchange Ratio. RAE shareholders are encouraged to carefully review the
description of the Exchange Ratio in the Merger Agreement and section of this
proxy statement entitled "Manner and Basis of Converting Shares" on page 46.
The number of shares to be issued to RAE shareholders by Nettaxi-Delaware
in connection with the Merger varies depending upon Nettaxi-Delaware's value per
share at the effective time of the Merger (the "Effective Time"). For purposes
of determining the Exchange Ratio, Nettaxi-Delaware's value per share will equal
(i) one hundred thousand dollars ($100,000) plus its net cash and cash
equivalents, minus its payables and other fixed obligations (excluding certain
listed liabilities) and minus an appropriate reserve for payables and other
contingencies divided by (ii) the number of issued and outstanding
Nettaxi-Delaware common stock immediately prior to the Effective Time. If
Nettaxi-Delaware's net cash at the Effective Time of the Merger is equal to
seven million five hundred thousand dollars ($7,500,000), then RAE shareholders
will have the right to receive 1.48225 shares of Nettaxi-Delaware common stock
for each share of RAE common stock they own. Nettaxi-Delaware will issue shares
representing approximately 80.12% of the combined company to stockholders of RAE
and approximately 2.23% of the combined company to Baytree Capital Associates,
which acted as a financial advisor in connection with the Merger. Stockholders
of Nettaxi-Delaware would retain shares representing approximately 17.65% of the
combined company.
THERE CAN BE NO ASSURANCE THAT THE FINAL EXCHANGE RATIO WILL RESULT IN RAE
SHAREHOLDERS RECEIVING THE NUMBER OF SHARES OF NETTAXI-DELAWARE COMMON STOCK
DESCRIBED ABOVE. FURTHER, THERE CAN BE NO ASSURANCE THAT THE PERCENTAGE
OWNERSHIP OF THE COMBINED COMPANY WILL RESULT AS DESCRIBED ABOVE. IF
NETTAXI-DELAWARE'S NET CASH WERE TO DROP BELOW SEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE TIME OF THE MERGER,
NETTAXI-DELAWARE WOULD HAVE TO ISSUE ADDITIONAL SHARES IN CONNECTION WITH THE
MERGER AND STOCKHOLDERS OF NETTAXI-DELAWARE WOULD OWN LESS THAN 17.65% OF THE
i
COMBINED COMPANY. ADDITIONALLY, IF NETTAXI-DELAWARE'S NET CASH WERE TO DROP
BELOW SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE
TIME OF THE MERGER, RAE WOULD NOT BE OBLIGATED TO CONSUMMATE THE MERGER.
Q: WHAT IF NETTAXI'S STOCKHOLDERS DO NOT APPROVE PROPOSALS 1, 2 AND 3?
A: If Nettaxi's stockholders do not approve Proposals 1, 2 and 3 of this
proxy statement and the Merger Agreement is terminated, Nettaxi shall pay to
RAE, within five days of the date of the termination, an amount equal to two
hundred and fifty thousand dollars ($250,000).
Q: WHAT WILL RAE OPTION HOLDERS RECEIVE IN THE MERGER?
A: At the Effective Time, each option to purchase shares of RAE common stock
("RAE Option"), whether vested or unvested, will be assumed by Nettaxi-Delaware
and shall be subject to the same terms and conditions governing the option
immediately prior to the Effective Time, except that:
(a) the option will be exercisable for that number of whole shares
of Nettaxi-Delaware common stock equal to the product of the number of shares of
RAE common stock that were issuable upon exercise of such option immediately
prior to the Effective Time multiplied by the Exchange Ratio and rounded down to
the nearest whole number of shares of Nettaxi-Delaware common stock;
(b) the per share exercise price for the shares of Nettaxi-Delaware
common stock issuable upon exercise of such assumed option will be equal to the
quotient determined by dividing the exercise price per share of RAE common stock
at which such option was exercisable immediately prior to the Effective Time by
the Exchange Ratio, rounded up to the nearest whole tenth of a cent; and
(c) any restriction on the exercisability of such RAE System Option
shall continue in full force and effect, and the term, exercisability, vesting
schedule and other provisions of such RAE System Option shall remain unchanged.
Q: WHAT RIGHTS DO NETTAXI'S STOCKHOLDERS HAVE TO SEEK AN APPRAISAL OF THEIR
SHARES?
A: If they wish, Nettaxi's stockholders may seek an appraisal of the fair
value of their shares, but only if they comply with all requirements of Delaware
law as described in the section of this proxy statement entitled "Appraisal and
Dissenters Rights". Additionally, Nettaxi's stockholders may be entitled to
exercise dissenters' rights under California law, as described in the section of
this proxy statement entitled "Appraisal and Dissenters Rights".
Q: ARE RAE'S SHAREHOLDERS ENTITLED TO DISSENTERS' RIGHTS IN CONNECTION WITH
THE MERGER?
A: Yes. Under California law, the holders of RAE's common stock will have
dissenters' rights and may be entitled to receive cash equal to the fair market
value of their RAE common stock determined as of the day before the first
announcement of the terms of the Merger. To exercise such rights, RAE's
shareholders must follow the procedures set forth under Chapter 13 of the
California General Corporation Law. Chapter 13 is attached as Appendix E of
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this proxy statement.
ii
THE REVERSE STOCK SPLIT
Q: HOW MANY SHARES WILL NETTAXI'S STOCKHOLDERS RECEIVE AS A RESULT OF THE
REVERSE STOCK SPLIT?
A: Each five and sixty-seven hundredths (5.67) shares of Nettaxi's common
stock are converted into one (1) share of Nettaxi common stock as a result of
the reverse stock split. For example, a stockholder holding 1,000 shares of
common stock prior to the reverse stock split would receive 176 shares of common
stock and one additional share of common stock in lieu of four-tenths of a
post-split share of common stock.
Q: WILL THE REVERSE STOCK SPLIT AFFECT THE NUMBER OF AUTHORIZED SHARES OF
COMMON STOCK IN NETTAXI'S ARTICLES OF INCORPORATION?
No. Nettaxi's Board of Directors has approved a resolution to effect the
reverse stock split. The resolution would have the effect of causing the reverse
stock split of Nettaxi's issued and outstanding common stock, with no effect on
Nettaxi's two hundred million (200,000,000) authorized shares of common stock.
Q: WILL NETTAXI STOCKHOLDERS RECEIVE FRACTIONAL SHARES AS A RESULT OF THE
REVERSE STOCK SPLIT?
No. Nettaxi will not issue fractional shares in connection with the
reverse stock split. In lieu of issuing fractional shares, Nettaxi will issue
one full share to any stockholder who otherwise would have been entitled to
receive a fractional share as a result of the reverse stock split (after
aggregating all shares held by such stockholder).
Q: SHOULD NETTAXI STOCKHOLDERS SEND IN THEIR STOCK CERTIFICATES?
A: Nettaxi stockholders may, but are not required to, surrender their
present Nettaxi common stock certificates so that replacement certificates
representing shares of Nettaxi common stock following the reverse stock split
may be issued in exchange therefor. Nettaxi's transfer agent, Interwest Transfer
Company, will act as transfer agent for Nettaxi after the reverse stock split.
Stockholders may consult their stockbrokers or Nettaxi with respect to any
questions regarding the mechanics of such transactions.
Q: ARE NETTAXI STOCKHOLDERS ENTITLED TO DISSENTERS' RIGHTS IN CONNECTION
WITH THE REVERSE STOCK SPIT?
A: No. Stockholders of Nettaxi will be not be entitled to dissenters'
rights in connection with the reverse stock split.
THE REINCORPORATION
Q: WHAT IS THE REINCORPORATION?
A: Nettaxi is currently incorporated under the laws of Nevada. In
connection with the Merger, Nettaxi has agreed to reincorporate under the laws
of Delaware. The reincorporation will be effected upon the merger of Nettaxi
with its wholly-owned Delaware subsidiary created specifically for the purpose
of the reincorporation. As a result of the reincorporation, Nettaxi's name will
become "RAE Systems Inc." ("Nettaxi-Delaware").
iii
Q: WILL NETTAXI STOCKHOLDERS NEED TO EXCHANGE THEIR NETTAXI STOCK
CERTIFICATE?
A: Nettaxi stockholders may, but are not required to, surrender their
present Nettaxi common stock certificates so that replacement certificates
representing shares of Nettaxi-Delaware Common Stock may be issued in exchange
therefor. After the reincorporation, certificates representing Nettaxi common
stock will constitute "good delivery" in connection with sales through a broker,
or otherwise, of shares of Nettaxi, as reincorporated under Delaware law.
Nettaxi's transfer agent, Interwest Transfer Company, will act as transfer agent
for Nettaxi after the reincorporation. Stockholders may consult their
stockbrokers or Nettaxi with respect to any questions regarding the mechanics of
such transactions.
Q: WILL THE MERGER BE COMPLETED IF THE STOCKHOLDERS OF NETTAXI DO NOT
APPROVE OF THE REVERSE STOCK SPLIT AND THE REINCORPORATION?
A: Although stockholders are being asked to vote on Proposals 2 and 3
separately, the reverse stock split and the reincorporation are conditions to
the closing of the merger. If Nettaxi's stockholders do not approve of
Proposals 2 and 3, and RAE does not waive compliance with such conditions, the
Merger will not be completed.
Q: WILL THE REVERSE STOCK SPLIT OR THE REINCORPORATION BE EFFECTIVE IF THE
MERGER DOES NOT OCCUR?
A: No. Even if the requisite stockholder approval of Proposals 2 and 3 are
obtained, if the Merger does not occur, the reverse stock split and the
reincorporation will not be completed.
THE 1999 STOCK OPTION PLAN
Q: WHY IS NETTAXI PROPOSING THE ADOPTION OF THE 1999 STOCK OPTION PLAN?
A: The purpose of the 1999 Stock Option Plan has been to provide an
incentive to attract, retain and reward eligible persons performing services for
Nettaxi by motivating such persons to contribute to the growth and profitability
of Nettaxi. Nettaxi believes that the Plan has helped it to attract and retain
qualified directors, officers, employees and consultants and motivate their best
efforts on Nettaxi's behalf.
Q: WHO IS ELIGIBLE TO RECEIVE AN OPTION UNDER THE 1999 STOCK OPTION PLAN?
A: Options may be granted to employees, consultants and directors of
Nettaxi.
Q: WHAT IS THE TOTAL NUMBER OF SHARES THAT MAY BE ISSUED PURSUANT TO THE 1999
STOCK OPTION PLAN?
A: A total of 3,053,000 shares are reserved for issuance under the 1999
Stock Option Plan.
Q: WHAT TYPES OF OPTIONS MAY BE GRANTED UNDER THE 1999 STOCK OPTION PLAN?
A: Only nonstatutory stock options may be granted under the 1999 Stock
Option Plan.
THE 2002 STOCK OPTION PLAN
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Q: WHY IS NETTAXI PROPOSING THE ADOPTION OF THE 2002 STOCK OPTION PLAN?
A: The purpose of the 2002 Stock Option Plan is to provide an incentive to
attract, retain and reward eligible persons performing services for Nettaxi and
by motivating such persons to contribute to the growth and profitability of
Nettaxi.
Q: WHO IS ELIGIBLE TO RECEIVE AN OPTION UNDER THE 2002 STOCK OPTION PLAN?
A: Options may be granted to employees, consultants and directors of
Nettaxi.
Q: WHAT IS THE TOTAL NUMBER OF SHARES THAT MAY BE ISSUED PURSUANT TO THE 2002
STOCK OPTION PLAN?
A: A total of 28,350,000 shares are reserved for issuance under the 2002
Stock Option Plan.
Q: WHAT TYPES OF OPTIONS MAY BE GRANTED UNDER THE 2002 STOCK OPTION PLAN?
A: Both incentive stock options and nonstatutory stock options may be
granted under the 2002 Stock Option Plan.
Q: WILL THIS BE THE ONLY STOCK OPTION PLAN FROM WHICH OPTIONS WILL BE GRANTED
AFTER THE MERGER?
A: Yes, following the consummation of the Merger, the 2002 Stock Option Plan
will be the only plan from which stock options will be granted to the surviving
company's employees, officers and directors.
THE SPECIAL MEETING
Q: WHAT DO NETTAXI STOCKHOLDERS NEED TO DO NOW?
A: Nettaxi urges its stockholders to read this proxy statement carefully,
including its appendices, and to consider how the Merger affects them. Then mail
their signed proxy card in the enclosed return envelope as soon as possible so
that their shares can be voted at the Special Meeting.
Q: MAY NETTAXI STOCKHOLDERS VOTE IN PERSON?
A: Yes. Nettaxi stockholders may attend the Special Meeting and vote their
shares in person, rather than signing and returning their proxy card.
Q: MAY NETTAXI STOCKHOLDERS CHANGE THEIR VOTE AFTER THEY HAVE MAILED THEIR
SIGNED PROXY CARD?
A: Yes. Nettaxi stockholders may change their vote at any time before their
proxy card is voted at the Special Meeting. Nettaxi stockholders can do this in
one of three ways. First, Nettaxi stockholders can send a written, dated notice
stating that they would like to revoke their proxy. The notice must be received
by Nettaxi prior to the date of the Special Meeting. Second, Nettaxi
stockholders can complete, date, and submit a new proxy card. The new proxy card
must be received by Nettaxi prior to the Special Meeting. Third, Nettaxi
stockholders can attend the Special Meeting and vote in person. Nettaxi
stockholders' attendance alone will not invalidate their proxy. If Nettaxi
stockholders have instructed a broker to vote their shares, they must follow
directions received from their broker to change those instructions.
v
Q: IF NETTAXI STOCKHOLDERS' SHARES ARE HELD IN "STREET NAME" BY THEIR
BROKER, WILL THEIR BROKER VOTE THEIR SHARES FOR THEM?
A: Nettaxi stockholders' broker will not be able to vote their shares
without instructions from them. Nettaxi stockholders should instruct their
broker to vote their shares, following the procedure provided by their broker.
Q: WHO CAN HELP ANSWER NETTAXI STOCKHOLDERS' AND RAE SHAREHOLDERS'
QUESTIONS?
A: If you would like additional copies, without charge, of this proxy
statement or if you have questions about the Merger, including the procedures
for voting your shares, RAE Systems shareholders and Nettaxi stockholders should
contact the appropriate contact person below:
RAE Systems Inc. Nettaxi.com
Attn: Chief Financial Officer Attn: Investor Relations
1339 Moffett Park Drive 1875 South Bascom Avenue; No. 116
Sunnyvale, CA 94089 Campbell, California 95008
Telephone: (408) 752-0723 Telephone: (408) 879-9880
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Table of Contents
Page
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Summary Term Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Reverse Stock Split . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Reincorporation of Nettaxi from Nevada to Delaware. . . . . . . . . . . 6
Approval of 1999 Stock Option Plan, as amended. . . . . . . . . . . . . 6
2002 Stock Option Plan. . . . . . . . . . . . . . . . . . . . . . . . . 7
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Risk Related to the Merger. . . . . . . . . . . . . . . . . . . . . . . 9
Risk Factors If Merger Is Consummated . . . . . . . . . . . . . . . . . 9
Risk Factors Related to RAE . . . . . . . . . . . . . . . . . . . . . . 12
Cautionary Statement Regarding Forward-Looking Statements. . . . . . . . . . 19
Proxy Statement for Special Meeting of Stockholders. . . . . . . . . . . . . 20
Purpose of Meeting. . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Voting Rights and Solicitation. . . . . . . . . . . . . . . . . . . . . 20
Security Ownership of Certain Beneficial Owners and Management Of Nettaxi. . 21
Security Ownership of Certain Beneficial Owners and Management Of
RAE Systems Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Market Price and Dividend Information . . . . . . . . . . . . . . . . . 25
Proposal No. 1 - The Merger. . . . . . . . . . . . . . . . . . . . . . . . . 27
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
General Description of the Merger . . . . . . . . . . . . . . . . . . . 27
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Reasons for the Merger. . . . . . . . . . . . . . . . . . . . . . . . . 30
Management of RAE Following the Merger. . . . . . . . . . . . . . . . . 34
Interests of Nettaxi Officers and Directors in the Merger . . . . . . . 35
Indemnification and Insurance . . . . . . . . . . . . . . . . . . . . . 35
Automatic Acceleration of Stock Options; Severance Payments . . . . . . 36
Interests of Certain RAE Persons In the Merger. . . . . . . . . . . . . 37
Interests of Other Parties In The Merger. . . . . . . . . . . . . . . . 37
Material U.S. Federal Income Tax Consequences of the Merger . . . . . . 38
Anticipated Accounting Treatment. . . . . . . . . . . . . . . . . . . . 39
Appraisal and Dissenters Rights . . . . . . . . . . . . . . . . . . . . 39
Governmental Approvals. . . . . . . . . . . . . . . . . . . . . . . . . 45
Restriction on Resales. . . . . . . . . . . . . . . . . . . . . . . . . 45
The Merger Agreement. . . . . . . . . . . . . . . . . . . . . . . . . . 46
The Merger . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Effective Time of the Merger . . . . . . . . . . . . . . . . . . . 46
Manner and Basis of Converting Shares. . . . . . . . . . . . . . . 46
RAE Stock Options and Warrants . . . . . . . . . . . . . . . . . . 47
Representations and Warranties . . . . . . . . . . . . . . . . . . 47
Covenants; Conduct of Business Prior to the Merger . . . . . . . . 48
Exclusivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Conditions to the Merger . . . . . . . . . . . . . . . . . . . . . 49
Termination of the Merger Agreement . . . . . . . . . . . . . . . . . . 51
vii
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Voting Agreements. . . . . . . . . . . . . . . . . . . . . . . . . 52
Lock-Up Agreements . . . . . . . . . . . . . . . . . . . . . . . . 53
Pro Forma Condensed Combined Financial Information . . . . . . . . . . . . . 54
Selected Financial Data of Nettaxi . . . . . . . . . . . . . . . . . . . . . 57
Nettaxi's Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 58
Business of Nettaxi. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
Selected Financial Data of RAE Systems. . . . . . . . . . . . . . . . . 70
RAE's Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 71
Business of RAE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Description of Nettaxi Capital Stock . . . . . . . . . . . . . . . . . . . . 83
Anti-Takeover Effects of Various Provisions of Nevada Law and Nettaxi's
Articles of Incorporation and Bylaws. . . . . . . . . . . . . . . . . . 85
Application of California General Corporation Law . . . . . . . . . . . 88
Comparative Rights of Holders of Nettaxi-Delaware Common Stock and RAE
Capital Stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Reporting Requirements
Proposal No. 2 - Reverse Stock Split . . . . . . . . . . . . . . . . . . . . 98
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
Recommendation of the Board of Directors. . . . . . . . . . . . . . . . 98
Purpose of the Reverse Stock Split. . . . . . . . . . . . . . . . . . . 98
Material Effects of Proposed Reverse Stock Split. . . . . . . . . . . . 99
Procedure for Effecting Reverse Stock Split and Exchange of
Stock Certificates . . . . . . . . . . . . . . . . . . . . . . . . 100
Fractional Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
No Dissenters' Rights . . . . . . . . . . . . . . . . . . . . . . . . . 100
Material U.S. Federal Income Tax Consequences of the Reverse
Stock Split. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Proposal No. 3 - Reincorporation . . . . . . . . . . . . . . . . . . . . . . 102
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 103
Reasons For and Advantages of Reincorporation in Delaware . . . . . . . 104
Disadvantages of Reincorporation in Delaware. . . . . . . . . . . . . . 104
Description of Nettaxi-Delaware Capital Stock . . . . . . . . . . . . . 105
Summary of Certain Other Significant Differences Between Delaware
and Nevada Corporate Laws. . . . . . . . . . . . . . . . . . . . . 111
Proposal No. 4 - Adoption of the 1999 Stock Option Plan, As Amended. . . . . 116
Description of the Plan . . . . . . . . . . . . . . . . . . . . . . . . 116
Material U.S. Federal Income Tax Consequences of Options Granted
Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 117
Deductibility of Executive Compensation . . . . . . . . . . . . . . . . 117
Stockholder Approval. . . . . . . . . . . . . . . . . . . . . . . . . . 118
Recommendation of the Board of Directors. . . . . . . . . . . . . . . . 118
Proposal No. 5 - Adoption of the 2002 Stock Option Plan, As Amended. . . . . 119
Description of the 2002 Stock Option Plan . . . . . . . . . . . . . . . 119
Material U.S. Federal Income Tax Consequences of Options Granted
viii
Under the Plan . . . . . . . . . . . . . . . . . . . . . . . . . . 121
New Plan Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
Stockholder Approval. . . . . . . . . . . . . . . . . . . . . . . . . . 122
Recommendation of the Board of Directors. . . . . . . . . . . . . . . . 123
Stockholder Proposals. . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Where You Can Find Additional Information. . . . . . . . . . . . . . . . . . 125
Index to Financial Statements of Nettaxi . . . . . . . . . . . . . . . . . . F-1
Index to Financial Statements of RAE . . . . . . . . . . . . . . . . . . . . F-31
TABLE OF APPENDICES
Appendix A Merger Agreement
Appendix B Form of Voting Agreement
Appendix C Agreement of Merger
Appendix D Section 262 of the Delaware General Corporation Law
Appendix E Chapter 13 of the California General Corporation Law
Appendix F Resolution Adopted by the Board of Directors of Nettaxi
Appendix G Reincorporation Agreement
Appendix H Certificate of Incorporation of Nettaxi-Delaware
Appendix I Bylaws of Nettaxi-Delaware
Appendix J 1999 Stock Option Plan
Appendix K 2002 Stock Option Plan
ix
SUMMARY TERM SHEET
This summary term sheet highlights some of the important information
contained in this proxy statement but may not contain all of the information
that may be important to you. We urge you to read carefully this entire proxy
statement and the other documents to which it refers to understand fully the
consequences of the Merger and related Proposals to you. See "Where You Can Find
More Information" on page 125 Each item in this summary includes a page
reference directing you to a more complete description of that item elsewhere in
this proxy statement.
The Companies
NETTAXI.COM (PAGE 67)
Nettaxi.com is an Internet marketing portal that provides a range of
content and Internet based services for consumers and businesses. In 2001,
Nettaxi faced the challenges of an overall downturn in the Internet industry and
the economy in general. As of December 31, 2001, Nettaxi has incurred cumulative
losses of approximately $36.2 million. The bankruptcy and liquidation of many of
Nettaxi's Internet based customers and suppliers caused Nettaxi to re-evaluate
its business model. Since the Internet infrastructure is unstable and customer
base financially weak, Nettaxi took corrective action to significantly decrease
its cash burn and determine the best course of action to maintain and enhance
Nettaxi's value. In this regard, Nettaxi implemented an acquisition strategy
pursuant to which it sought to identify an appropriate entity with which to
merge, acquire or restructure its current business. Since the announcement of
its acquisition strategy in May, 2001, Nettaxi has evaluated a number of
potential merger candidates in a wide variety of industries. Of all of these
companies, Nettaxi believes RAE presents the best fit for its stockholders.
Mergers involve numerous risks and uncertainties and there can be no assurance
that the Merger with RAE will prove to enhance the value of Nettaxi or be
successful.
RAE SYSTEMS INC. (PAGE 78)
RAE Systems Inc., founded in 1991, designs and manufactures portable gas
detection instruments and wireless monitoring and communications equipment. Its
products and services enable its customers to monitor gas and other volatile
organic compounds in confined spaces, and to establish a perimeter defense
around hazardous material sites and sites of weapons of mass destruction.
THE MERGER (PAGE 27)
Nettaxi is proposing a Merger in which RSAC will merge into RAE and will
cease to exist. RAE will remain as the surviving corporation after the Merger
and will be a wholly-owned subsidiary of Nettaxi-Delaware, which is also named
"RAE Systems Inc."
MANNER AND BASIS OF CONVERTING SHARES (PAGE 46)
The number of shares of common stock of Nettaxi-Delaware to be issued for
each share of RAE common stock is not fixed and will be adjusted based upon the
exchange ratio which is defined in the Merger Agreement (the "Exchange Ratio").
Although the parties anticipate that Nettaxi-Delaware will issue approximately
1.48 shares of common stock for each outstanding share of RAE common stock, the
final Exchange Ratio will not be determined until immediately prior to the
Effective Time of the Merger. The following discussion summarizes certain terms
of the Exchange Ratio and is not intended to be a complete description of the
Exchange Ratio. RAE shareholders are encouraged to carefully review the
description of the Exchange Ratio in the Merger Agreement and section of this
proxy statement entitled "Manner and Basis of Converting Shares" on page 46.
1
The number of shares to be issued to RAE shareholders by Nettaxi-Delaware
in connection with the Merger varies depending upon Nettaxi-Delaware's value per
share at the effective time of the Merger (the "Effective Time"). For purposes
of determining the Exchange Ratio, Nettaxi-Delaware's value per share will equal
(i) one hundred thousand dollars ($100,000) plus net cash and cash equivalents,
minus its payables and other fixed obligations (excluding certain listed
liabilities) and minus an appropriate reserve for payables and other
contingencies divided by (ii) the number of issued and outstanding
Nettaxi-Delaware common stock immediately prior to the Effective Time. If
Nettaxi-Delaware's net cash at the Effective Time of the Merger is equal to
seven million five hundred thousand dollars ($7,500,000), then RAE shareholders
will have the right to receive 1.48225 shares of Nettaxi-Delaware common stock
for each share of RAE common stock they own. Nettaxi-Delaware will issue shares
representing approximately 80.12% of the combined company to stockholders of RAE
and approximately 2.23% of the combined company to Baytree Capital Associates,
which acted as a financial advisor in connection with the Merger. Stockholders
of Nettaxi-Delaware would retain shares representing approximately 17.65% of the
combined company.
THERE CAN BE NO ASSURANCE THAT THE FINAL EXCHANGE RATIO WILL RESULT IN RAE
SHAREHOLDERS RECEIVING THE NUMBER OF SHARES OF SHARES OF NETTAXI-DELAWARE COMMON
STOCK DESCRIBED ABOVE. FURTHER, THERE CAN BE NO ASSURANCE THAT THE PERCENTAGE
OWNERSHIP OF THE COMBINED COMPANY WILL RESULT AS DESCRIBED ABOVE. IF
NETTAXI-DELAWARE'S NET CASH WERE TO DROP BELOW SEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE TIME OF THE MERGER,
NETTAXI-DELAWARE WOULD HAVE TO ISSUE ADDITIONAL SHARES IN CONNECTION WITH THE
MERGER AND STOCKHOLDERS OF NETTAXI-DELAWARE WOULD OWN LESS THAN 17.65% OF THE
COMBINED COMPANY. ADDITIONALLY, IF NETTAXI-DELAWARE'S NET CASH WERE TO DROP
BELOW SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE
TIME OF THE MERGER, RAE WOULD NOT BE OBLIGATED TO CONSUMMATE THE MERGER.
NO FAIRNESS OPINION (PAGE 32)
The terms and conditions of the Merger were negotiated at arm's-length
between the managements of Nettaxi and RAE and were the result of a number of
factors, including but not limited to the factors listed below in the section of
this proxy statement entitled "Nettaxi's Reasons for the Merger".
Nettaxi's Board of Directors did not feel that an investment banker's
opinion was beneficial or necessary given Nettaxi's Board of Directors'
knowledge of Nettaxi and its business, nor did the Board of Directors believe
that obtaining such an opinion would be an appropriate use of corporate funds.
Nettaxi's Board of Directors believes that the acquisition of such an opinion
would require a substantial amount of capital and time. Given Nettaxi's limited
resources, the fact that Nettaxi is essentially being valued at an amount equal
to its net cash, and the need to complete the Merger in a timely manner,
Nettaxi's Board of Directors did not believe it was in the best interests of
Nettaxi to incur the cost of a fairness opinion.
Based on Nettaxi's current operating performance and prospects, including
the decline in such performance, and RAE's strong interest in the Merger,
Nettaxi's Board of Directors felt that significantly better terms and conditions
could not be obtained in the foreseeable future.
Accordingly, there can be no assurance that consummation of the Merger will
be fair from a financial point of view to the stockholders of Nettaxi.
2
INTERESTS OF CERTAIN NETTAXI PERSONS IN THE MERGER AND POSSIBLE CONFLICTS OF
INTEREST (PAGE 35)
In August 1998, Nettaxi entered into executive employment agreements
containing change in control provisions with Robert A. Rositano, Jr., its Chief
Executive Officer, Secretary and a Director and Dean Rositano, its President,
Chief Operating Officer, Interim Chief Financial Officer and a Director. These
arrangements provide for benefits if there is a change in control of Nettaxi.
The Merger is a change in control for this purpose. Under their employment
agreements, the executives were entitled to receive severance payments in the
amount of more than one million dollars ($1,000,000) each. In light of
management's desire to complete the Merger with RAE, management requested that
the Compensation Committee of the Board of Directors review the executive
employment arrangements and recommend an alternative severance package. In this
regard, the Compensation Committee, composed of Andrew Garroni, reviewed the
following factors:
- the terms and conditions of the executive employment agreements;
- the responsibilities of the executives prior to and following the
execution of the Merger Agreement;
- the performance of the executives compared with similar executives in
comparable companies; and
- Nettaxi's experience with severance payments to other executives who
have departed from Nettaxi.
Upon the evaluation of all of these factors, the Compensation Committee
recommended the following severance arrangements, which have been accepted by
the executive officers. In lieu of severance payments payable pursuant to the
executive employment agreements and any accrued minimum bonus payable
thereunder, or any other payments due, and in exchange for complete releases of
employment liability to the Company, each executive will receive the following:
- a cash payment of $150,000;
- accelerated vesting on outstanding options to purchase 67,020 shares
of common stock of Nettaxi (after taking into account the stock split described
in Proposal 2), having an exercise price of $0.737 per share, and a cash bonus
of an amount necessary to exercise the options;
- warrants to purchase up to 176,366 shares of common stock of Nettaxi
(after taking into account the stock split described in Proposal 2), having an
exercise price per share of $1.134.
The executives will assume Nettaxi's lease for its current facilities,
consisting of 1,700 square feet and having an ascribed value equal to the amount
of rent which has been prepaid by Nettaxi as of the Effective Time of the
Merger. Nettaxi has paid its rent through May 31, 2002. Thus, if the Effective
Time of the Merger were to be March 31, 2002, the value of the lease transferred
would equal approximately $9,500, the cost of two months rent. Nettaxi will also
transfer to the executives title to furniture, fixtures and equipment having a
value of approximately $76,000. Additionally, Nettaxi will assign the domain
name "nettaxi.com" to the executives. Additionally, each executive will receive
a payment equal to the amount necessary for them to purchase continued health
and medical benefits until January 2003.
3
The shares underlying the warrants issued in connection with the above
arrangement will be registered with the Securities and Exchange Commission by
Nettaxi on a registration statement on Form S-8. Shares underlying options
issued pursuant to our 1998 and 1999 stock option plans are registered with the
Securities and Exchange Commission.
BAYTREE CAPITAL ASSOCIATES
Baytree Capital Associates has acted as a financial adviser to Nettaxi in
connection with the Merger. As compensation for its services, at the effective
time of the Merger, the surviving company shall issue to Baytree 960,000 shares
of its common stock. Additionally, Baytree will continue to provide consulting
services on behalf of the surviving company in exchange for warrants to purchase
1,750,000 shares of common stock, after giving effect to the reverse stock split
contemplated Proposal 2, having an exercise price of $1.19 per share. Michael
Gardner is a principal member of Baytree.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER (PAGE 38)
No gain or loss will be recognized for U.S. federal income tax purposes by
Nettaxi stockholders with respect to the Merger.
For U.S federal income tax purposes, the exchange of RAE common stock for
shares of Nettaxi-Delaware common stock generally will not cause RAE
shareholders to recognize any gain or loss. RAE shareholders may, however,
recognize gain or loss with respect to cash they receive instead of a fractional
share of Nettaxi-Delaware common stock. If RAE shareholders exercise
dissenters' rights, they will likely recognize gain or loss in connection with
the sale of their RAE common stock.
REGULATORY APPROVALS (PAGE 45)
No material federal or state regulatory requirements remain to be complied
with, and no material federal or state regulatory approval must be obtained, in
connection with the Merger.
MARKET FOR NETTAXI COMMON STOCK
The Nettaxi common stock trades in the over-the-counter market under the
symbol "NTXY." After consummation of the Merger, Nettaxi anticipates that the
common stock will continue to trade in the over-the-counter market.
DISSENTERS' RIGHTS (PAGE 39)
APPRAISAL AND DISSENTERS' RIGHTS
Nettaxi-Delaware Stockholders
Delaware Law. Under Delaware law, if Nettaxi's stockholders do not vote in
favor of the merger and instead follow the appropriate procedures for demanding
appraisal rights, they will be entitled to receive a cash payment for the "fair
value" of their shares of Nettaxi's common stock, as determined by the Delaware
Court of Chancery.
Nettaxi stockholders who want to exercise their appraisal rights under
Delaware law will have to comply with Section 262 of the Delaware General
Corporation Law, a copy of which is attached to this proxy statement as Appendix
--------
D. Failure to take all of the steps required under Delaware law may result in
- -
the loss of appraisal rights.
4
California Law. Additionally, pursuant to Section 2115 of the California
General Corporation Law, stockholders who do not vote in favor of the approval
and adoption of the Merger Agreement and the merger may be entitled to certain
dissenters' rights under Chapter 13 of the California General Corporation Law.
Nettaxi Stockholders who want to exercise their dissenter's rights under
California law will have to comply with Chapter 13 of the California General
Corporation Law, a copy of which is attached to this proxy statement as Appendix
--------
E. Failure to take all of the steps required under California law may result in
- -
the loss of their dissenters' rights.
RAE Shareholders. Under California law, the holders of RAE's common stock
will have dissenters' rights and may be entitled to receive cash equal to the
fair market value of their RAE common stock determined as of the day before the
first announcement of the terms of the Merger. To exercise such rights, RAE's
shareholders must follow the procedures set forth under Chapter 13 of the
California General Corporation Law. Chapter 13 is attached as Appendix E of
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this proxy statement.
RECOMMENDATION OF THE NETTAXI BOARD OF DIRECTORS (PAGE 32)
The Board of Directors of Nettaxi has concluded that the Merger, together
with the proposed reverse stock split, the proposed reincorporation, the
ratification of the 1999 Plan, and the adoption of the 2002 Plan are fair to and
in the best interests of the Nettaxi stockholders, and recommends that Nettaxi
stockholders vote FOR adoption of Proposals 1, 2, 3, 4 and 5.
RECOMMENDATION OF THE RAE BOARD OF DIRECTORS
The Board of Directors of RAE has approved the Merger Agreement and related
transaction and recommends that RAE shareholders vote for the Merger Proposal.
OTHER AGREEMENTS
VOTING AGREEMENTS RELATING TO NETTAXI SHARES. Robert A. Rositano, Jr. and
Dean Rositano, each executive officers and directors of Nettaxi and Michael
Gardner, a principal of Baytree Capital Associates, which acted as a financial
advisor in connection with the Merger, have each entered into voting agreements
dated January 9, 2002 with RAE. They have agreed in the voting agreements to
vote all shares of Nettaxi common stock owned by them as of the record date in
favor of the approval and adoption of the Merger Agreement and approval of the
Merger. Approximately 4,588,012 shares, or 10.6% of the Nettaxi common stock
outstanding on the record date, are subject to these voting agreements.
VOTING AGREEMENTS RELATING TO RAE SHARES. Robert I. Chen and Peter H. Hsi,
Lien Q.C. Chen, T.Z. Chu and Philip J. Sheridan, each as either an officer,
director or other affiliate of RAE, have each entered into voting agreements
dated January 9, 2002 with Nettaxi. They have agreed to vote all shares of RAE
capital stock owned by them as of the record date in favor of the approval and
adoption of the Merger Agreement and approval of the Merger. Approximately
17,380,000 shares on an as-converted basis, or approximately 76% of the RAE
common stock outstanding on as converted basis on the record date, are subject
to these voting agreements.
LOCK-UP AGREEMENTS (PAGE 53). Robert A. Rositano, Jr. and Dean Rositano,
each executive officers and directors of Nettaxi, as well as Craig Sukekane,
Nettaxi's controller, have entered into Lock-Up Agreements with RAE dated
January 9, 2002. Under the agreements, for a period of one year following the
5
closing of the Merger, such executive officers may not offer, sell, contract to
sell, pledge or otherwise dispose of more than 25% of their shares of Nettaxi
common stock in any three month period.
REVERSE STOCK SPLIT (PAGE 98)
Nettaxi is asking its stockholders to approve the reverse stock split of
its common stock such that each five and sixty-seven hundredths (5.67) shares of
Nettaxi's common stock are converted into one (1) share of Nettaxi common stock.
Nettaxi's Board of Directors will have the ability to effect the reverse
stock split only if the Merger described in Proposal 1 is approved. The Board of
Directors has approved a resolution to effect the reverse stock split. The
resolution would have the effect of causing the reverse stock split of Nettaxi's
issued and outstanding common stock, with no effect on Nettaxi's two hundred
million (200,000,000) authorized shares of common stock. At February 12, 2002
Nettaxi had 43,124,586 shares of common stock issued and outstanding. After the
reverse stock split, approximately 7,605,747 shares of common stock would be
issued and outstanding. The resolution adopted by the Board of Directors is
attached as Appendix F to this proxy statement.
----------
Nettaxi's Board of Directors has adopted a resolution approving, declaring
advisable and recommending to its stockholders for their approval the reverse
stock split. In addition, Nettaxi's Board of Directors has reserved the right to
abandon the reverse stock split, without further direction by Nettaxi's
stockholders, at any time before it becomes effective. Because the reverse stock
split is a condition to the closing of the Merger, if this Proposal 2 is
approved Nettaxi expects to complete the reverse stock split prior to the
consummation of the Merger if the Merger is approved and is being implemented.
REINCORPORATION OF NETTAXI FROM NEVADA TO DELAWARE (PAGE 102)
The Board of Directors of Nettaxi has proposed that the state of
incorporation of Nettaxi be changed from Nevada to Delaware. On the effective
date of the reincorporation, Nettaxi's wholly-owned Delaware subsidiary
("Nettaxi-Delaware") will succeed to all of the assets, liabilities and business
of Nettaxi and will possess all of the rights and powers of Nettaxi. The
current officers and directors of Nettaxi will become the officers and directors
of Nettaxi-Delaware until such time as the Merger between Nettaxi-Delaware and
RAE, as described elsewhere in this proxy statement, is consummated.
The certificate of incorporation and bylaws of Nettaxi-Delaware shall
remain in full force and effect after the reincorporation, without amendment.
Nettaxi-Delaware will remain subject to the Delaware General Corporation Law.
Differences between the Delaware Charter and Delaware Bylaws, on the one hand,
and the articles of incorporation and bylaws of Nettaxi, on the other hand,
should be considered in the context of the differences between the DGCL and the
Nevada Revised Statutes ("NRS"). These differences are discussed in more
detail in the section entitled "Reincorporation" below.
On the effective date of the Reincorporation, each issued and outstanding
share of common stock of Nettaxi, $0.001 par value per share, will be converted
automatically into one share of Nettaxi-Delaware common stock, $0.001 par value
per share, and each issued and outstanding option and warrant of Nettaxi will be
converted automatically into one option or warrant, as the case may be, of
Nettaxi-Delaware. Each stock certificate representing issued and outstanding
shares of Nettaxi common stock will continue to represent the same number of
shares of Nettaxi-Delaware common stock.
APPROVAL OF 1999 STOCK OPTION PLAN, AS AMENDED (PAGE 116)
6
Nettaix's Board of Directors proposes that stockholders adopt the 1999
Stock Option Plan (the "Plan"), which was adopted by the Board of Directors on
January 20, 2000 and amended by the Board of Directors on April 3, 2000 and on
January 7, 2002.
Nettaxi believes that the Plan has helped it to attract and retain
qualified directors, officers, employees and consultants and motivate their best
efforts on Nettaxi's behalf. Thus, Nettaxi believes that the Plan has been an
important part of Nettaxi's compensation of directors, officers, employees and
consultants.
The Plan is set forth in full as Appendix J to this Proxy Statement. The
----------
principal features of the Plan are summarized below, but the summary is
qualified in its entirety by the full text of the Plan.
Under the Plan as originally adopted by the Board of Directors, the number
of shares available for issuance was three million three hundred thousand
(3,300,000). The Board of Directors amended the plan on April 3, 2000 to
increase the number of shares available for issuance to an aggregate total of
eight million nine hundred thousand (8,900,000) shares of common stock. In
connection with the Merger described in Proposal 1, Nettaxi's Board of Directors
amended the Plan on January 7, 2002 to reduce the number of shares available for
issuance under the Plan to 3,053,000, the number of shares underlying options
which were outstanding as of that date. The Plan provides for adjustment as to
the number and kinds of shares covered by the outstanding options and the option
price therefor to give effect to any stock dividend, stock split, stock
combination or other reorganization of or by Nettaxi. If the reverse stock
split described under Proposal 2 is implemented, the number of shares available
for issuance under the Plan will be approximately 539,000.
THE 2002 STOCK OPTION PLAN
APPROVAL OF 2002 STOCK OPTION PLAN (PAGE 119)
The Board of Directors proposes that the stockholders approve the 2002 Stock
Option Plan. The 2002 Stock Option Plan was adopted by the Board of Directors
on as of February 20, 2002, to become effective on the date of its approval by
stockholders (the "Effective Date").
The Board of Directors believes that Nettaxi must offer a competitive
equity incentive program if it is to continue to successfully attract and retain
the best possible candidates for positions of responsibility within Nettaxi.
The Board expects that the 2002 Stock Option Plan will be an important factor in
attracting and retaining the high caliber employees, directors and consultants
essential to the success of Nettaxi and in motivating these individuals to
strive to enhance Nettaxi's growth and profitability.
The 2002 Stock Option Plan is set forth in full as Appendix K to this Proxy
----------
Statement. Some of the principal features of the 2002 Stock Option Plan are
summarized below, but the summary is qualified in its entirely by the full text
of the 2002 Stock Option Plan.
The 2002 Stock Option Plan is designed to preserve Nettaxi's ability to
deduct in full for federal income tax purposes the compensation recognized by
its executive officers in connection with options granted under the 2002 Stock
Option Plan. Section 162(m) of the Code, generally denies a corporate tax
deduction for annual compensation exceeding $1 million paid to the chief
executive officer or to any of the four other most highly compensated officers
of a publicly held company. However, certain types of compensation, including
performance-based compensation, are generally excluded from this deductibility
limit. To enable compensation in connection with options awarded under the 2002
7
Stock Option Plan to qualify as "performance-based" within the meaning of
Section 162(m), the 2002 Stock Option Plan limits the size of the options as
further described below. By approving the 2002 Stock Option Plan, the
stockholders will be approving, among other things, eligibility requirements for
participation in the 2002 Stock Option Plan, limits on the numbers of shares
that could be made subject to option, and the other material terms of options
described below.
THE SPECIAL MEETING
The Special Meeting of Stockholders (the "Special Meeting") will be held at
__________________________ 9____, on ___________, March ___, 2002, at ______
a.m. These proxy materials were first mailed to stockholders on or about March
___, 2002.
Nettaxi's common stock is the only type of security entitled to vote at the
Special Meeting. On March __, 2002, the record date for determination of
stockholders entitled to vote at the Special Meeting, there were 43,124,586
shares of common stock outstanding. Each stockholder of record on the record
date is entitled to one vote for each share of common stock held by such
stockholder on that date.
Proposals 1, 2 and 3 each require the approval of the affirmative vote of a
majority of the outstanding voting shares present or represented and entitled to
vote at the Special Meeting. Proposals 4 and 5 require the affirmative vote of
at least two-thirds of the outstanding shares entitled to vote at the Special
Meeting.
Approval of the proposed reverse stock split and the proposed
reincorporation of Nettaxi's corporation in Delaware set forth in Proposals 2
and 3, respectively, are conditions to the closing of the Merger. There are
other conditions that must also be satisfied for the Merger to be consummated.
Even if Proposals 2 and 3 are approved, the reverse stock split and
reincorporation will not become effective if the Merger does not occur for any
reason. In that case, the outstanding number of Nettaxi shares and the
corporate domicile of Nettaxi will remain unchanged. The proposed Merger with
RAE is discussed in more detail in the sections of this proxy statement entitled
"The Merger" and "The Merger Agreement," which Nettaxi's stockholders should
read carefully.
8
RISK FACTORS
You should carefully consider the risks described below, as well as the
other information included in this proxy statement, regarding the Merger,
Nettaxi's business, and RAE's business, which will be the business of the
combined company following the completion of the Merger, before making a
decision about voting on the proposals submitted for your consideration. The
risks described under the header "Risk Factors Related to RAE" will also apply
to combined company following consummation of the Merger. If any of the
following risks occur, Nettaxi's, RAE's and, following the Merger, the combined
company's business, results of operations and financial condition could be
materially adversely affected, the trading prices of Nettaxi's common stock
could decline, and you could lose all or part of your investment.
RISK RELATED TO THE MERGER
RISK FACTORS IF MERGER IS CONSUMMATED
THERE CAN BE NO ASSURANCE THAT THE BUSINESS MODEL OF RAE WILL BE MORE SUCCESSFUL
THAN THE BUSINESS MODEL OF NETTAXI.
If the Merger is consummated, Nettaxi's current business model will be
terminated and the company will implement the current business model of RAE.
There can be no assurance that the business model of RAE will be profitable or
successful. There can be no assurance that the business model of RAE will
enhance the value of the combined company or that the business model of RAE will
be any more successful than the business model currently employed by Nettaxi.
THE SHARES OF COMMON STOCK RAE'S CURRENT SHAREHOLDERS WILL RECEIVE IN THE MERGER
WILL BE "RESTRICTED SECURITIES" AND WILL NOT BE ELIGIBLE FOR IMMEDIATE RESALE
Although shares of Nettaxi's common stock currently trade on the OTC
Bulletin Board, the shares of common stock RAE's shareholders will receive in
the Merger will be "restricted securities," as such term is used in Rule 144
promulgated under the Securities Act of 1933, as amended, and therefore, will
not be immediately eligible for resale. Unless the combined company elects to
register the resale of such shares following the consummation of the Merger,
RAE's shareholders may not be able to sell their shares for at least a period of
one year from the Effective Time.
POTENTIAL PUBLIC SALES OF A SIGNIFICANT NUMBER OF SHARES OF NETTAXI COMMON STOCK
COULD REDUCE THE MARKET PRICE OF THE COMBINED COMPANY'S COMMON STOCK.
If stockholders of the combined company sell substantial amounts of their
shares of common stock in the public market following the Merger, then the
market price of the combined company's common stock could fall. Restrictions
under the securities laws and the lock-up agreements that certain stockholders
of Nettaxi have entered into in connection with Merger will limit the number of
shares of the combined company's common stock that will be available for sale in
the public market. The lock-up agreements are described below in the section of
this proxy statement entitled "Lock-up Agreements".
As of December 31, 2001, approximately 4,938,000 shares of our common
stock, after giving effect to the reverse stock split contemplated in Proposal
2, 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 Nettaxi's, as that term is defined in Rule 144
9
promulgated under that Act. Additionally, approximately 2,469,000 shares of
common stock, after giving effect to the reverse stock split contemplated in
Proposal 2, were eligible for sale under Rule 144. These shares include many of
the shares which have been registered by Nettaxi pursuant to its registration
statements on Form S-1. If Nettaxi's stockholders sell substantial amounts of
Nettaxi's common stock, the market price of Nettaxi's common stock could be
adversely affected and Nettaxi's ability to raise additional capital at that
time through the sale of Nettaxi's securities could be impaired.
NETTAXI MAY NEED TO UPDATE ITS REGISTRATION STATEMENTS; ITS REGISTRATION
STATEMENTS MAY NOT BE MAINTAINED FOLLOWING THE MERGER.
Nettaxi has filed a registration statement on Form S-1 (File No.
333-36826), declared effective by the Securities and Exchange Commission on June
12, 2000, registering 5,772,636 shares, after giving effect to the reverse stock
split contemplated in Proposal 2, issued and issuable, upon the exercise of
warrants, pursuant to recent private placement transactions. Additionally,
Nettaxi has 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 744,213 shares of common stock, after giving effect to the
reverse stock split contemplated in Proposal 2, issued and issuable, upon the
exercise of warrants, pursuant to recent private placement transactions. These
registration statements may need to be updated in order to maintain their
effectiveness. Although RAE has agreed to use its commercially reasonable
efforts to maintain the effectiveness of Nettaxi's registration statements, and
although the combined company anticipates updating these registration statements
following the Merger, the company may face liability from shareholders, if
ineligible to sell without restriction under Rule 144, who are unable to sell
their shares under the registration statements before they are updated.
Additionally, Nettaxi will not be able to control whether or not the
registration statements are kept effective following the Merger. Should there be
a lapse in effectiveness of one or all of the registration statements, Nettaxi
could potentially face liability from stockholders who would be unable to trade
their securities due to such a lapse.
FUTURE EXERCISE OF WARRANTS OR ISSUANCES OF SECURITIES MAY SIGNIFICANTLY DILUTE
YOUR HOLDINGS.
There are currently warrants to purchase approximately 3,267,000 shares of
Nettaxi's common stock, after giving effect to the reverse stock split
contemplated in Proposal 2, outstanding and exercisable over the next four to
five years having exercise prices ranging from $8.50 to $70.20, subject to
adjustment. The shares underlying these warrants have been included in the
registration statements referenced above. There are also warrants to purchase
approximately 326,000 shares of our common stock, after giving effect to the
reverse stock split contemplated in Proposal 2, outstanding having exercise
prices ranging from of $0.74 to $1.99 per share. Nettaxi intends to register the
shares underlying these warrants on a registration statement on Form S-8.
Additionally, there are options to purchase approximately 1 million shares of
Nettaxi's common stock, after giving effect to the reverse stock split
contemplated in Proposal 2, outstanding under Nettaxi's 1998 and 1999 Stock
Option Plans. These shares have been registered pursuant to Nettaxi's
registration statement on Form S-8 (File No. 333-32678). As a result, shares
issued upon exercise of stock options are eligible for resale in the public
market without restriction. If the holders of Nettaxi's outstanding options,
warrants and other convertible securities were to exercise their rights, holders
of Nettaxi's common stock could experience substantial dilution of their
investment.
THE MERGER WILL RESULT IN SUBSTANTIAL DILUTION OF THE OWNERSHIP INTEREST OF
CURRENT NETTAXI STOCKHOLDERS.
10
Upon completion of the Merger, each share of RAE common stock will be
exchanged for approximately 1.48 shares of Nettaxi-Delaware common stock,
subject to adjustment under the terms of the Merger Agreement, resulting in the
issuance of an aggregate of approximately 34,526,088 shares of Nettaxi-Delaware
common stock to RAE shareholders. As a result, the current stockholders of
Nettaxi will own no more than 17.65% of the outstanding common stock of the
combined company. This represents substantial dilution of the ownership
interests of the current Nettaxi stockholders.
THE CONSUMMATION OF THE MERGER IS CONDITIONED ON A MINIMUM CASH BALANCE OF
NETTAXI, WHICH CONDITION MAY NOT BE SATISFIED.
The obligation of RAE to effect the Merger is subject to the condition that
at the Effective Time of the Merger, Nettaxi will have approximately $7,500,000
in cash on its unconsolidated balance sheet, net of certain liabilities. If
Nettaxi does not have enough cash at the closing to satisfy this condition, it
may be required to raise additional capital prior to the closing of the Merger
to satisfy this condition, which may not be available on terms that it considers
acceptable, or at all. If this condition is waived by RAE, the combined company
may have weaker financial resources, poorer business prospects or greater
potential liabilities than if the condition were satisfied.
THE COMBINED COMPANY'S COMMON STOCK PRICE IS LIKELY TO BE HIGHLY VOLATILE AND AN
ACTIVE PUBLIC MARKET MAY NOT CONTINUE.
Trading in the shares of Nettaxi's common stock has been, and is likely to
continue to be, highly volatile as the stock market in general, and the market
for technology companies in particular, has been highly volatile. Investors may
not be able to resell their shares of Nettaxi's common stock following periods
of volatility because of the market's adverse reaction to volatility. The
trading prices of many technology and Internet-related companies' stocks have
decreased substantially within the last two years. The market downturn and
downward adjustment of the high valuations for technology companies continue and
investors may not see a return to the stock price and valuation levels of late
1999 and early 2000. There can be no assurance that Nettaxi's stock will trade
at the same levels of other technology stocks before or after the Merger or that
technology stocks in general will regain their prior market prices. The per
share closing price of Nettaxi's common stock in 2001 ranged from a high of
$0.46 as of June 11, 2001 to a low of $0.085 as of September 21, 2001. In
addition, following the Merger, an active public market for the combined
company's common stock may not continue, which would have a material adverse
effect on your ability to sell your shares.
THE MARKET PRICE OF NETTAXI'S COMMON STOCK MAY DECLINE AS A RESULT OF THE
MERGER.
The market price of Nettaxi's common stock may decline as a result of the
Merger if:
- the operations of the company following the Merger are unsuccessful;
- the perception that the business model of the company following the
Merger has less opportunities for growth and expansion than our current business
model;
- the new management of the company following the Merger is unsuccessful
in achieving the goals of their business model;
- the combined company does not achieve the perceived benefits of the
Merger as rapidly or to the extent anticipated by financial analysts or
investors; or
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- the effect of the Merger on the combined company's financial results
is not consistent with the expectations of financial analysts or investors.
IF THE MERGER IS NOT CONSUMMATED, NETTAXI WILL BE SUBJECT TO A NUMBER OF RISKS
The Merger is subject to several closing conditions, and Nettaxi cannot
assure its stockholders that any one condition will be satisfied or that the
Merger will be successfully completed. If the Merger is not successfully
completed, Nettaxi may be subject to a number of material risks, including the
following:
Nettaxi may be required to pay RAE a termination fee of $250,000;
The trading price of our common stock may decline if the current market
price reflects a market assumption that the Merger will be completed;
Nettaxi must pay costs related to the proposed Merger, such as legal and
accounting fees, whether or not the Merger is completed;
Many of these factors are beyond Nettaxi's control and may materially
adversely affect the market price of our common stock, regardless of our future
operating results;
Additionally, if the Merger is not completed and Nettaxi's Board of
Directors determines to seek another Merger or business combination, it may not
be able to find a prospect on terms favorable to Nettaxi, or at all.
Nettaxi will remain subject to the risk factors attributable to its current
business model including risks related to:
- its history of substantial losses;
- its declining revenues;
- the credit risks of its customers in the Internet industry;
- its dependence on key personnel;
- intense competition;
- the volatility of its common stock.
These and other risks related to Nettaxi's current business model are set
forth in more detail in Nettaxi's filings with the Securities and Exchange
Commission.
RISK FACTORS RELATED TO RAE
RAE'S FUTURE REVENUES ARE UNPREDICTABLE, ITS OPERATING RESULTS ARE LIKELY TO
FLUCTUATE FROM QUARTER TO QUARTER, AND IF RAE FAILS TO MEET THE EXPECTATIONS OF
SECURITIES ANALYSTS OR INVESTORS, THE COMBINED COMPANY'S STOCK PRICE COULD
DECLINE SIGNIFICANTLY.
RAE's quarterly and annual operating results have fluctuated in the past
and are likely to fluctuate significantly in the future due to a variety of
factors, some of which are outside of RAE's control. Accordingly, RAE believes
that period-to-period comparisons of its results of operations are not
12
meaningful and should not be relied upon as indications of future performance.
Some of the factors that could cause RAE's quarterly or annual operating results
to fluctuate include market acceptance of its products, ongoing product
development and production, competitive pressures and customer retention.
It is likely that in some future quarters RAE's operating results may fall
below the expectations of securities analysts and investors. In this event, the
trading price of the combined company's common stock would significantly
decline.
BECAUSE RAE'S EXPENSE LEVELS ARE BASED IN LARGE PART ON ITS ESTIMATES OF FUTURE
REVENUES, AN UNEXPECTED SHORTFALL IN REVENUE WOULD SIGNIFICANTLY HARM ITS
RESULTS OF OPERATIONS
RAE's expense levels are based largely on its investment plans and
estimates of future revenue. RAE may be unable to adjust its spending to
compensate for an unexpected shortfall in revenue. Accordingly, any significant
shortfall in revenue relative to RAE's planned expenditures in a particular
quarter would harm its results of operations and could cause its stock price to
fall sharply, particularly following quarters in which its operating results
fail to meet the expectations of securities analysts or investors.
THE COMPANY'S INVESTMENT IN RENEX WILL CAUSE RAE TO INCUR LOSSES THAT IT WOULD
NOT OTHERWISE INCUR
RAE Systems owns approximately 47 percent of, and has management control
over, REnex, a wireless systems development company. As such, RAE is required
to consolidate REnex's financial statements. REnex is still in the research and
development stage, and to date, REnex has not generated any revenues. While RAE
anticipates that REnex will be ready to release its wireless modems in the third
quarter of 2002, should there be a delay in such release, the losses REnex
generates will not be offset by any significant revenue. As a result, RAE could
incur greater losses than it anticipates and its results of operations will
suffer.
COMPENSATION EXPENSES RELATED TO PAST OPTION GRANTS WILL REDUCE RAE'S EARNINGS
OVER THE NEXT FOUR YEARS
Options granted to RAE's employees have historically had exercise prices
equal to the fair market value of RAE's common stock on the date of grant, as
determined by RAE's board of directors at the time of grant. In connection with
the proposed merger, for financial reporting purposes, RAE has reevaluated the
fair value of its common stock during the periods in which stock options were
granted. In this regard, RAE has recorded aggregate unearned compensation of
$1,002,100 of which $284,300 has been recognized as of December 31, 2001 and
$717,800 will be recognized in future periods as non-cash compensation. These
adjustments will have a negative affect on RAE's earnings and results of
operations.
RAE MAY BE UNABLE TO MEET ITS FUTURE CAPITAL REQUIREMENTS. ANY ATTEMPTS TO RAISE
ADDITIONAL CAPITAL IN THE FUTURE MAY CAUSE SUBSTANTIAL DILUTION TO RAE'S
STOCKHOLDERS.
RAE may need to seek additional funding in the future and it is uncertain
whether it will be able to obtain additional financing on favorable terms, if at
all. Further, if RAE issues equity securities in connection with additional
financing, its stockholders may experience dilution and/or the new equity
securities may have rights, preferences or privileges senior to those of
existing holders of common stock. If RAE cannot raise funds on acceptable terms,
13
if and when needed, it may not be able to develop or enhance its products and
services, take advantage of future opportunities or respond to competitive
pressures or unanticipated requirements, any of which could seriously harm its
business.
SHOULD THE BENEFITS OF RAE'S INVENTORY PROCUREMENT STRATEGY IN ASIA NOT
MATERIALIZE AS IT ANTICIPATES, ITS RESULTS OF OPERATIONS MAY SUFFER
As part of its overall strategy to increase gross margins and improve
operating results, RAE has devised a strategy to procure a number of its
component parts from Asia. RAE's current strategy involves the purchase of
parts in, and delivery of parts from its vendors, to the United States. The
parts are then kitted, and shipped to Shanghai, where the subassemblies are
made. The proposed strategy involves the procurement of component parts in
Asia, where the effective price is much lower. The parts would be shipped
directly to Shanghai, thereby reducing the transit time and shipping cost of the
inventory. Further, executing the proposed strategy, may have some adverse
consequences. RAE's vendors have to be qualified to ensure that the parts are
of acceptable quality and meet the requisite specifications called for by
engineering drawings. A significant amount of time and funding may be required
to complete the analysis. Should RAE fail to execute on its proposed
procurement strategy in a timely and effective manner, its results of operations
may suffer
RAE DEPENDS ON ITS DISTRIBUTORS
RAE derives approximately 90% of its revenues via its sales distribution
channels, and therefore is dependant on its distributors. Should any of its
principal distributors, or a significant group of its distributors, experience
financial difficulties or become unwilling to promote and sell RAE's products,
RAE's business and results of operations could be materially harmed.
RAE DEPENDS ON THIRD PARTY SUPPLIERS.
RAE is dependent on third party suppliers for its component parts,
including various sensors, microprocessors and other material components.
Should there be any interruption in the supply of these component parts, RAE's
business could be adversely affected.
IF RAE'S EXPANSION FROM A GAS DETECTION INSTRUMENT MANUFACTURER TO A WIRELESS
SYSTEMS COMPANY IS UNSUCCESSFUL, ITS BUSINESS AND RESULTS OF OPERATIONS WILL
SUFFER
RAE is in the process of expanding its current business of providing gas
detection instruments to include wireless systems for local and remote security
monitoring. The pricing of its wireless products and services is subject to
rapid and frequent change. RAE may be forced for competitive or technical
reasons to reduce prices for its wireless products, which would reduce its
revenue and could harm its business. Further, the wireless systems market is
still evolving, and RAE has little basis to assess the demand for its wireless
products and services or to evaluate whether its wireless products and services
will be accepted by the market. If RAE's wireless products and services do not
gain broad market acceptance, its business and results of operations will be
harmed.
THE ECONOMIC DOWNTURN IN THE UNITED STATES AND ABROAD COULD HAVE A MATERIAL
ADVERSE IMPACT ON RAE'S BUSINESS AND RESULTS OF OPERATIONS
While RAE's business to date has been minimally impacted by the current
economic downturn in the United States and abroad, it could eventually succumb
to such conditions. Many of RAE's customers have already experienced severe
declines in their revenues, which could impact the size and frequency of their
purchases of RAE's products and services. Although RAE routinely performs
14
credit checks on its customer base to assess their creditworthiness, there can
be no assurance that RAE will be able to collect payments from its customers as
they become due. Any decrease in the size or frequency of purchases by RAE's
customers, or a failure by RAE to collect payments as they become due could have
a material adverse impact on RAE's business and results of operations.
COMPLIANCE WITH SAFETY REGULATIONS COULD DELAY NEW PRODUCT DELIVERY AND
ADVERSELY AFFECT RAE'S RESULTS OF OPERATIONS
Compliance with safety regulations, specifically the need to obtain UL,
CUL, ATEX and EEX approvals, could delay the introduction of new products by
RAE. As a result, RAE may experience delays in realizing revenues from its new
products, which could have an adverse effect on its results of operations.
A DETERIORATION IN TRADE RELATIONS WITH CHINA COULD HAVE A MATERIAL ADVERSE
AFFECT ON RAE'S BUSINESS AND RESULTS OF OPERATIONS
A significant portion of RAE's products and components are manufactured at
its wholly-owned facility in Shanghai, China. Should trade relations between
the United States and China deteriorate, RAE's ability to transfer products
between China and other regions of the world, including the United States, Asia
and Europe, could be significantly impacted. As a result, RAE's business and
results of operations would suffer.
RAE IS INVOLVED IN PENDING LEGAL PROCEEDINGS
On November 21, 2001, RAE filed a patent infringement claim in the United
States District Court of the Northern District of California against Ion Science
and its distributors. The suit alleges that Ion Science manufactures, uses,
imports into the United States, offers for sale, and sells photo-ionization
detectors, including but not limited to the "PhoCheck" line of photo-ionization
detectors. RAE alleges that Ion Science's photo-ionization detectors, including
but not limited to its "PhoCheck" line of photo-ionization detectors, infringe
patents held by RAE. RAE intends to pursue the lawsuit vigorously. RAE expect
to incur substantial legal fees and expenses in connection with the litigation,
which may also result in the diversion of RAE's internal resources. As a result,
RAE's pursuit of this litigation, regardless of its eventual outcome, could be
costly and time consuming. The litigation is in the preliminary stage, and RAE
is unable to predict its final outcome. However, an adverse outcome could
materially affect RAE's results of operations and financial position.
On October 23, 2001, the estate of Virgil Johnson filed a products
liability lawsuit against RAE in the District Court of Harris County of the
State of Texas. The plaintiffs allege that RAE's product was defective and
unsafe for its intended purposes at the time it left its premises, and that the
product was defective in that it failed to conform to the product design and
specifications of other gas monitors. Additionally, the plaintiffs allege that
the product was defectively designed and marketed so as to render it
unreasonably dangerous to the plaintiff. RAE is not certain if its product
liability insurance coverage will be adequate to cover the unspecified damages
alleged in the lawsuit. Further, in the event that RAE does not have adequate
coverage for the expenses it will incur defending the lawsuit, it will incur
substantial legal fees and expenses in connection with the litigation. The
litigation may also result in the diversion of RAE's internal resources. RAE's
defense of this litigation, regardless of its eventual outcome, will likely be
costly and time consuming. The litigation is in the preliminary stage, and RAE
is unable to predict its final outcome. However, an adverse outcome could
materially affect RAE's results of operations and financial position.
15
In addition to the litigation described above, from time to time RAE may be
subject to various legal proceedings and claims that arise in the ordinary
course of business.
THE MARKET FOR GAS DETECTION MONITORING DEVICES IS HIGHLY COMPETITIVE, AND IF
RAE CANNOT COMPETE EFFECTIVELY, ITS BUSINESS MAY BE HARMED
The market for gas detection monitoring devices is highly competitive. RAE
expects the emerging wireless gas monitoring system market to be equally
competitive. Competitors in the gas monitoring industry differentiate
themselves on the basis of their technology, quality of product and service
offerings, cost and time to market. In the market for gas detection monitoring
devices, RAE's primary competitors include Industrial Scientific Corporation,
Mine Safety Appliances Company, BW Technologies, PerkinElmer, Inc., Drager
Safety Inc., Gastec Corporation, and Bacou-Dalloz. Most of RAE's competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial and marketing resources than
RAE. In addition, some of RAE's competitors may be able to:
- devote greater resources to marketing and promotional campaigns;
- adopt more aggressive pricing policies; or
- devote more resources to technology and systems development.
In light of these factors, RAE may be unable to compete successfully.
RAE MAY NOT BE SUCCESSFUL IN DEVELOPING ITS BRAND, WHICH COULD PREVENT IT FROM
REMAINING COMPETITIVE
RAE believes that its future success will depend on its ability to maintain
and strengthen the RAE Systems brand, which will depend, in turn, largely on the
success of its marketing efforts and ability to provide its customers with
high-quality products. If RAE fails to successfully promote and maintain its
brand, or incurs excessive expenses in attempting to promote and maintain its
brand, its business will be harmed.
RAE MAY NOT BE ABLE TO RECRUIT OR RETAIN QUALIFIED PERSONNEL
RAE's future success depends on its ability to attract, retain and motivate
highly skilled employees. Despite the recent economic slowdown, competition for
qualified employees in the Silicon Valley, particularly management, technical,
sales and marketing personnel, is intense. Although RAE provides compensation
packages that include stock options, cash incentives and other employee
benefits, it may be unable to retain its key employees or to attract, assimilate
and retain other highly qualified employees in the future, which could harm its
business.
RAE'S BUSINESS COULD SUFFER IF IT LOSES THE SERVICES OF ANY OF ITS EXECUTIVE
OFFICERS
RAE's future success depends to a significant extent on the continued
service of its executive officers, including Robert I. Chen, Joseph Ng, Peter
Hsi and Robert Henderson. The loss of the services of any of its executive
officers could harm RAE's business.
RAE MIGHT NOT BE SUCCESSFUL IN THE DEVELOPMENT OR INTRODUCTION OF NEW PRODUCTS
AND SERVICES IN A TIMELY AND EFFECTIVE MANNER
RAE's revenue growth is dependent on the timely introduction of new
products to market. RAE may be unsuccessful in identifying new product and
16
service opportunities or in developing or marketing new products and services in
a timely or cost-effective manner. In addition, product innovations may not
achieve the market penetration or price stability necessary for profitability.
UPON CONSUMMATION OF THE MERGER, RAE'S OFFICERS, DIRECTORS AND PRINCIPAL
STOCKHOLDERS WILL BENEFICIALLY OWN APPROXIMATELY 52% OF ITS COMMON STOCK AND,
ACCORDINGLY, MAY EXERT SUBSTANTIAL INFLUENCE OVER THE COMPANY
RAE's executive officers and directors and principal stockholders, will, in
the aggregate, beneficially own approximately 52% of its common stock following
the Merger. These stockholders acting together will have the ability to control
all matters requiring approval by RAE's stockholders. These matters include the
election and removal of the directors, amendment of RAE's certificate of
incorporation, and any merger, consolidation or sale of all or substantially all
of RAE's assets. In addition, they may dictate the management of RAE's business
and affairs. Furthermore, this concentration of ownership could have the effect
of delaying, deferring or preventing a change in control, or impeding a merger
or consolidation, takeover or other business combination, and may substantially
reduce the marketability of RAE's common stock.
A SALE OF THE COMMON STOCK HELD BY ANY OF RAE'S MAJOR INVESTORS COULD ADVERSELY
AFFECT THE COMBINED COMPANY'S STOCK PRICE
Sales of substantial amounts of the combined company's common stock in the
public market after the consummation of the Merger could reduce the prevailing
market prices of its common stock. Except with respect to certain lock-up
agreements entered into by certain Nettaxi shareholders as described elsewhere
in this proxy statement, there will be no contractual restrictions on the
ability of the combined company's major stockholders and affiliates, to sell
shares of the combined company's common stock immediately following the Merger
and the majority of the shares issued in the Merger will be "restricted
securities" as such term is used in Rule 144 promulgated under the Securities
Act of 1933, as amended. Of the approximately 43,091,835 shares of common stock
to be outstanding upon the consummation of the Merger, 7,605,747 shares will be
freely tradable without restriction or further registration. Beginning on the
one year anniversary of the consummation of the Merger, approximately 34,526,088
shares held by RAE's current shareholders will become eligible for resale in the
public market, subject to the limitations of Rule 144. Future sales by the
holders of such shares could adversely affect the trading price of RAE's common
stock.
RAE'S FACILITIES AND OPERATIONS ARE VULNERABLE TO NATURAL DISASTERS AND OTHER
UNEXPECTED LOSSES
RAE's success depends on the efficient and uninterrupted operation of its
business. RAE's facilities in Sunnyvale, California, is in an area that is
susceptible to earthquakes. RAE does not have a backup facility to provide
redundant capacity in the event of a natural disaster or other unexpected damage
from fire, floods, power loss, telecommunications failures, break-in and similar
events. If RAE seeks to replicate its operations at other locations, it will
face a number of technical as well as financial challenges, which it may not be
able to address successfully. Although RAE carries property and business
interruption insurance, its coverage may not be adequate to compensate it for
all losses that may occur.
RAE MAY BE UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY RIGHTS
RAE regards its intellectual property as critical to its success. RAE
relies on patent, trademark, copyright and trade secret laws to protect its
proprietary rights. Notwithstanding these laws, RAE may be unsuccessful in
protecting its intellectual property rights or in obtaining patents or
registered trademarks for which it applies. RAE's ability to compete is affected
by its ability to protect the company's intellectual property rights. RAE
relies on a combination of patents, trade secrets, non-disclosure agreements and
17
confidentiality procedures. Although processes are in place to protect its
intellectual property rights, RAE cannot guarantee that these procedures are
adequate to prevent misappropriation of its current technology or that its
competitors will not develop technology that is similar to its own.
Specifically, RAE cannot ensure that its future patent applications will be
approved or that its current patents will not be challenged by third parties.
Furthermore, RAE cannot ensure that, if challenged, its patents will be found to
be valid and enforceable.
Any litigation relating to its intellectual property rights, including the
patent infringement claim it has filed against Ion Science described above,
could, regardless of the outcome, have a materially adverse impact on RAE's
business and results of operations.
RAE MIGHT FACE INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT MIGHT BE COSTLY TO
RESOLVE
RAE may, from time to time, be subject to claims of infringement of other
parties' proprietary rights or claims that RAE's own trademarks, patents or
other intellectual property rights are invalid. Any claims of this type,
regardless of merit, could be time-consuming to defend, result in costly
litigation, divert management's attention and resources or require RAE to enter
into royalty or license agreements. The terms of any such license agreements
may not be available on reasonable terms, if at all, and the assertion or
prosecution of any infringement claims could significantly harm RAE's business.
ANY FUTURE ACQUISITIONS THAT RAE UNDERTAKES COULD BE DIFFICULT TO INTEGRATE,
DISRUPT ITS BUSINESS, DILUTE STOCKHOLDER VALUE OR HARM RAE'S RESULTS OF
OPERATIONS
RAE may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. The
process of integrating any acquired business, technology, service or product
into RAE's business and operations may result in unforeseen operating
difficulties and expenditures. Integration of an acquired company also may
consume much of RAE's management's time and attention that would otherwise be
available for ongoing development of RAE's business. Moreover, the anticipated
benefits of any acquisition may not be realized. Future acquisitions could
result in dilutive issuances of equity securities or the incurrence of debt,
contingent liabilities or expenses related to goodwill recognition and other
intangible assets, any of which could harm RAE's business.
PROVISIONS IN RAE'S CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT OR DELAY A
CHANGE IN CONTROL OF THE COMPANY, WHICH COULD REDUCE THE MARKET PRICE OF ITS
COMMON STOCK OR DISCOURAGE POTENTIAL ACQUIRORS FROM OFFERING A PREMIUM OVER THE
PREVAILING TRADING PRICE OF RAE'S COMMON STOCK.
Following the consummation of the Merger, provisions in RAE's certificate
of incorporation and bylaws could have the effect of delaying or preventing a
change of control of the company or changes in RAE's management. In addition,
provisions of Delaware law may discourage, delay or prevent a third party from
acquiring or merging with it. These provisions could limit the price that
investors might be willing to pay in the future for shares of RAE's common
stock. These provisions may also have the effect of discouraging or preventing
a potential acquiror from offering RAE's stockholders a premium over the
prevailing trading price of RAE's common stock.
RAE'S BUSINESS IS SUBJECT TO RISKS ASSOCIATED WITH CONDUCTING BUSINESS
INTERNATIONALLY.
In addition to the foregoing risk, RAE's business is subject to risks
normally associated with conducting business outside the United States, such as
foreign government regulations, nation-specific or region-specific
certifications political unrest, disruptions or delays in shipments,
fluctuations in foreign currency exchange rates and changes in the economic
conditions in the countries in which RAE's raw materials suppliers, service
18
providers, and customers are located. RAE's business may also be adversely
affected by the imposition of additional trade restrictions related to imported
products, including quotas, duties, taxes and other charges or restrictions. If
any of the foregoing factors were to render the conduct of business in a
particular country undesirable or impractical, or if RAE's current foreign
manufacturing sources were to cease doing business with RAE for any reason,
RAE's business and results of operations could be adversely affected.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
SOME OF THE INFORMATION IN THIS JOINT PROXY STATEMENT, INCLUDING THE RISK
FACTORS DISCUSSED ABOVE, CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. THESE STATEMENTS RELATE TO, AMONG OTHER THINGS, CONSUMMATION
OF THE MERGER, THE FUTURE BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE COMBINED COMPANY, AND BENEFITS OF THE PENDING MERGER. IN MANY
CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY,"
"WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES,"
"PREDICTS," "POTENTIAL," OR "CONTINUE," OR THE NEGATIVE OF THESE TERMS AND OTHER
COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING THE RISKS FACTORS
DESCRIBED ABOVE AND ELSEWHERE IN THIS PROXY STATEMENT. WE CAUTION YOU NOT TO
PLACE UNDUE RELIANCE ON THESE STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF
THIS PROXY STATEMENT OR THE DATE OF ANY DOCUMENT INCORPORATED BY REFERENCE IN
THIS PROXY STATEMENT. NEITHER NETTAXI NOR RAE ARE UNDER ANY OBLIGATION (AND
EXPRESSLY DISCLAIM ANY SUCH OBLIGATION) TO UPDATE OR ALTER THE FORWARD-LOOKING
STATEMENTS CONTAINED IN THIS PROXY STATEMENT, WHETHER AS A RESULT OF NEW
INFORMATION, FUTURE EVENTS OR OTHERWISE. BEFORE MAKING A DECISION REGARDING THE
MERGER AND, IN THE CASE OF NETTAXI STOCKHOLDERS, PROPOSALS 1, 2, 3, 4 AND 5, YOU
SHOULD BE AWARE THAT THE OCCURRENCE OF THE EVENTS DESCRIBED IN THESE RISK
FACTORS COULD HARM THE BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL CONDITION
OF NETTAXI, RAE AND, FOLLOWING THE MERGER, THE COMBINED COMPANY.
19
PROXY STATEMENT
FOR
SPECIAL MEETING OF STOCKHOLDERS
These proxy materials are furnished in connection with the solicitation of
proxies by the Board of Directors of Nettaxi.com, a Nevada corporation, for the
Special Meeting of Stockholders (the "Special Meeting") to be held at
__________________________ 9____, on ___________, March ___, 2002, at ______
a.m. These proxy materials were first mailed to stockholders on or about March
___, 2002.
PURPOSE OF MEETING
The specific Proposals to be considered and acted upon at the Special
Meeting are summarized in the accompanying Notice of Special Meeting of
Stockholders. Each Proposal is described in more detail in this proxy statement.
VOTING RIGHTS AND SOLICITATION
VOTING
Nettaxi's common stock is the only type of security entitled to vote at the
Special Meeting. On March ___, 2002, the record date for determination of
stockholders entitled to vote at the Special Meeting, there were 43,124,586
shares of common stock outstanding. Each stockholder of record on the record
date is entitled to one vote for each share of common stock held by such
stockholder on that date.
A majority of the outstanding shares of common stock entitled to vote must
be present or represented by proxy at the Special Meeting in order to have a
quorum. Abstentions and broker non-votes are counted as present for the purpose
of determining the presence of a quorum for the transaction of business.
Proposals 1, 2 and 3 each require the approval of the affirmative vote of a
majority of the outstanding voting shares present or represented and entitled to
vote at the Special Meeting. Proposals 2 and 5 require the affirmative vote of
at least two-thirds of the outstanding shares entitled to vote at the Special
Meeting.
Approval of the proposed reverse stock split and the proposed
reincorporation of Nettaxi from Nevada to Delaware set forth in Proposals 2 and
3, respectively, are conditions to the closing of the Merger. There are other
conditions that must also be satisfied for the Merger to be consummated. Even if
Nettaxi stockholders approve Proposals 2 and 3, the reverse stock split and
reincorporation will not become effective if the Merger does not occur for any
reason. In that case, the outstanding number of Nettaxi shares and the
corporate domicile of Nettaxi will remain unchanged. The proposed Merger with
RAE is discussed in more detail in the sections of the attached proxy entitled
"The Merger" and "The Merger Agreement," which Nettaxi stockholders should read
carefully.
Nettaxi's executive officers have executed voting agreements indicating
their intent to vote in favor of the Merger at the Special Meeting.
PROXIES
20
Whether or not Nettaxi stockholders are able to attend the Special Meeting,
Nettaxi stockholders are urged to vote their proxy, which is solicited by
Nettaxi's Board of Directors and which will be voted as Nettaxi stockholders
direct on their proxy when properly completed. In the event no directions are
specified, such proxies will be voted FOR Proposals 1, 2, 3, 4 and 5. Nettaxi
stockholders may revoke or change their proxy at any time before the Special
Meeting. To do this, send a written notice of revocation or another signed
proxy with a later date to the Secretary at 1875 South Bascom Avenue, No. 116,
Campbell, California 95008. Such revocation or subsequent proxy must be
received by Nettaxi prior to the beginning of the Special Meeting. Nettaxi
stockholders may also revoke their proxy by attending the Special Meeting and
voting in person.
SOLICITATION OF PROXIES
Nettaxi will bear the entire cost of solicitation, including the
preparation, assembly, printing, and mailing of this proxy statement, the proxy,
and any additional solicitation material furnished to stockholders. Copies of
solicitation material will be furnished to brokerage houses, fiduciaries, and
custodians holding shares in their names that are beneficially owned by others
so that, they may forward this solicitation material to such beneficial owners.
The original solicitation of proxies by mail may be supplemented by a
solicitation by telephone, telegram, facsimile or other means by our directors,
officers, or employees. Except as described above, Nettaxi does not presently
intend to solicit proxies other than by mail.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF NETTAXI
The following table sets forth certain information regarding the beneficial
ownership of Nettaxi's common stock as of February 12, 2002, and giving effect
to the Merger (i) by each of Nettaxi's directors and director nominees; (ii) by
each person known by Nettaxi to own beneficially more than five percent of our
common stock; (iii) by Nettaxi's executive officers; and (iv) by all directors
and executive officers of Nettaxi as a group both before and after the Merger.
The percentages of total shares of common stock set forth below assume that only
the indicated person or group has exercised options and warrants which are
exercisable within 60 days of February 12, 2002, and do not reflect the
percentage of common stock which would be calculated if all other holders of
currently exercisable options or warrants had exercised their securities.
Unless otherwise indicated in the paragraphs following the table, the
following individuals have sole voting and sole investment control with respect
to the shares they beneficially own. Unless otherwise indicated, the address for
Nettaxi's executive officers, directors, and five percent stockholders is c/o
Nettaxi.com, 1875 S. Bascom Ave., No. 116, Campbell, California 95008. Unless
otherwise noted, the address for RAE's executive officers and directors is: c/o
RAE Systems Inc., 1339 Moffett Park Drive, Sunnyvale, CA 94089.
21
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP OF
OF COMMON STOCK OF COMMON STOCK OF
NETTAXI PRIOR TO THE NETTAXI IMMEDIATELY
MERGER AFTER THE MERGER(1)
- ------------------------------------------ ------------------------ ------------------------
EXECUTIVE OFFICERS AND DIRECTORS OF NUMBER OF NUMBER OF
NETTAXI: SHARES PERCENT SHARES PERCENT
BENEFICIALLY OF CLASS BENEFICIALLY OF CLASS
OWNED (2) OWNED (2) (3)
- ------------------------------------------ ------------- --------- ------------- ---------
Robert A. Rositano, Jr., Chief Executive 1,736,078(4) 4.0% 373,206(6) 0.8%
Officer, Secretary and Director
- ------------------------------------------ ------------- --------- ------------- ---------
Dean Rositano, President, Chief 2,097,134(5) 4.8% 436,885(7) 1.0%
Operating Officer, Interim Chief
Financial Officer and Director
- ------------------------------------------ ------------- --------- ------------- ---------
Andrew Garroni, Director (8) 225,000 * 39,683 *
- ------------------------------------------ ------------- --------- ------------- ---------
TOTAL: 4,058,210 8.8% 849,774 1.8%
- ------------------------------------------ ============= ========= ============= =========
EXECUTIVE OFFICERS AND DIRECTORS OF * *
RAE:
- ------------------------------------------ ------------- --------- ------------- ---------
Robert Chen (9) -- -- 17,194,100 39.9%
- ------------------------------------------ ------------- --------- ------------- ---------
Joseph Ng (10) -- -- 363,862 *
- ------------------------------------------ ------------- --------- ------------- ---------
Peter Hsi -- -- 4,150,300 9.6%
- ------------------------------------------ ------------- --------- ------------- ---------
Robert Henderson (11) -- -- 107,717 *
- ------------------------------------------ ------------- --------- ------------- ---------
Hong Tao Sun (12) -- -- 57,950
- ------------------------------------------ ------------- --------- ------------- ---------
Philip Sheridan -- -- 2,964,500 6.9%
- ------------------------------------------ ------------- --------- ------------- ---------
Neil Flanzraich -- -- 503,965 1.1%
- ------------------------------------------ ------------- --------- ------------- ---------
Edward Ross -- -- 59,290 *
- ------------------------------------------ ------------- --------- ------------- ---------
Lyle Feisel -- -- 59,290 *
- ------------------------------------------ ------------- --------- ------------- ---------
All directors, director nominees and 4,058,210 8.8% 25,460,974 57.5%
executive officers as a group (3 persons ============= ========= ============= =========
prior to the consummation of the Merger
and 8 persons following the
consummation of the Merger)
- ------------------------------------------ ------------- --------- ------------- ---------
OTHER 5% STOCKHOLDERS:
- ------------------------------------------ ------------- --------- ------------- ---------
Michael Gardner (13) 2,914,600(13) 6.5% 3,224,309(14) 7.2%
- ------------------------------------------ ------------- --------- ------------- ---------
HBK Investments L. P. (15) 3,000,000 6.5% 529,101 1.2%
- ------------------------------------------ ------------- --------- ------------- ---------
* Less than one percent.
(1) Upon consummation of the Merger, each share of RAE common stock will be
automatically converted into the right to receive the Exchange Ratio as
described elsewhere in this proxy statement. Nettaxi and RAE anticipate
that the Exchange Ratio will be approximately 1.482 shares of Nettaxi
common stock, although such number is not fixed and could change prior to
the consummation of the Merger. As such, Nettaxi and RAE anticipate that
there will be 43,091,835 shares outstanding upon the consummation of the
Merger and the transactions contemplated thereby.
(2) Beneficial ownership is determined in accordance with rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of common stock and options on exercisable within 60 days of
February 12, 2002 are deemed outstanding. Such shares, however, are not
deemed outstanding for the purposes of computing the percentage ownership
of each other person.
(3) Calculated on the basis of 43,124,586 shares, the number of shares Nettaxi
and RAE anticipate will be outstanding upon the consummation of the Merger
and the transactions contemplated thereby, except that shares of common
stock underlying options exercisable within sixty days of December 31, 2001
in the case of RAE's executive officers and directors, and February 12,
2002, in the case of Nettaxi's executive officers, directors and five
percent holders, are deemed outstanding for purposes of calculating the
beneficial ownership of common stock of the holders of such options.
22
(4) The number of shares shown for Robert A. Rositano, Jr. prior to the Merger
includes 365,000 shares of common stock subject to options that are
currently exercisable within 60 days of February 12, 2002. Robert A. and
Dean Rositano are brothers.
(5) The number of shares shown for Dean Rositano prior to the Merger includes
365,000 shares of common stock subject to options that are exercisable
within 60 days of February 12, 2002. Robert A. and Dean Rositano are
brothers.
(6) The number of shares shown for Robert A. Rositano, Jr. immediately after
the Merger includes 270,000 shares of common stock subject to options that
are currently exercisable within 60 days of February 12, 2002, if the
Merger is consummated. Robert A. and Dean Rositano are brothers.
(7) The number of shares shown for Dean Rositano immediately after the Merger
includes 270,000 shares of common stock subject to options that will be
exercisable within 60 days of February 12, 2002, if the Merger is
consummated. Robert A. and Dean Rositano are brothers.
(8) The number of shares shown for Andrew Garroni includes 150,000 shares of
common stock subject to options that are currently exercisable.
(9) Includes 2,964,500 shares to be held by Mr. Chen, 4,224,412 shares to be
held by Mr. Chen as trustee of the Robert I. Chen 2001 Annuity Trust UTA
dated December 19, 2001, 2,964,500 shares to be held by Lien Chen, the wife
of Robert Chen, and 4,222,412 shares to be held by Mrs. Chen as trustee of
the Lien Q.C. Chen 2001 Annuity Trust UTA dated December 19, 2001.
(10) Includes 67,411 shares of common stock to be issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days after December 31, 2001.
(11) Includes 107,716 shares of common stock to be issuable upon exercise of
options that are currently exercisable or will become exercisable within 60
days after December 31, 2001.
(12) Includes 57,950 shares of common stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days
after December 31, 2001.
(13) The shares shown for Mr. Gardner prior to the Merger include 1,429,800
shares of common stock subject to warrants that are currently exercisable.
Mr. Gardner's address is care of Baytree Capital Associates, LLC, 40 Wall
Street, 58th Floor, New York, NY 10005. The Company obtained this
information from Mr. Gardner's public filings on Schedule 13D.
(14) The shares shown for Mr. Gardner immediately following the Merger include
252,170 shares of common stock subject to warrants that are currently
exercisable and 1,750,000 shares of common stock subject to warrants that
will be issued to Mr. Gardner in connection with the provision of ongoing
services to Nettaxi-Delaware following the Merger.
(15) The number of shares shown for HBK Investments L.P. includes 3,000,000
shares of common stock subject to warrants that are currently exercisable.
The shares shown for HBK Investments L.P. are held in the name of Montrose
Investments, Ltd. HBK Investments L.P. has sole voting and dispositive
23
power over these shares pursuant to an Investment Management Agreement with
Montrose Investments, Ltd. Accordingly, Montrose has no beneficial
ownership of such shares. The address for HBK Investments L.P. is 300
Crescent Ct. Ste 700, Dallas, Texas 75201. Nettaxi obtained this
information from HBK Investments L.P.'s public filings on Schedule 13G.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF RAE SYSTEMS INC.
The following table sets forth the beneficial ownership of RAE's common
stock as of December 31, 2001 by each director, RAE's chief executive officer
and four other most highly compensated officers, all current directors and
executive officers as a group, and each person known to RAE who beneficially
owns 5% or more of the outstanding shares of its common stock. The number and
percentage of shares beneficially owned is determined under rules of the SEC,
and the information is not necessarily indicative of beneficial ownership for
any other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual has sole or shared voting power or investment power and
also any shares which the individual has the right to acquire within sixty days
after December 31, 2001 through the exercise of any stock option or other right.
To RAE's knowledge, the persons named in the following table have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where applicable
and the information contained in the footnotes to this table.
SHARES
BENEFICIALLY
OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER (1) NUMBER (2) PERCENT (3)
- --------------------------------------------------------------- ----------- -----------
NAMED EXECUTIVE OFFICERS AND DIRECTORS
Robert Chen (4) . . . . . . . . . . . . . . . . . . . . . . . . 11,600,000 49.8%
Joseph Ng (5) . . . . . . . . . . . . . . . . . . . . . . . . . 245,479 1.0%
Peter Hsi . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800,000 12.0%
Robert Henderson (6). . . . . . . . . . . . . . . . . . . . . . 72,671 *
Hong Tao Sun (7). . . . . . . . . . . . . . . . . . . . . . . . 39,096 *
Philip Sheridan . . . . . . . . . . . . . . . . . . . . . . . . 2,000,000 8.6%
Neil Flanzraich . . . . . . . . . . . . . . . . . . . . . . . . 340,000 1.5%
Edward Ross . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 *
Lyle Feisel . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000 *
All executive officers and directors as a group (7
persons) (8). . . . . . . . . . . . . . . . . . . . . . . . . . 64.8%
- -------------------------
* Less than 1%
(1) Except as otherwise indicated, RAE believes that the persons named in this
table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community
property laws where applicable and to the information contained in the
footnotes to this table. The address for RAE's executive officers and
directors is: c/o RAE Systems Inc., 1339 Moffett Park Drive, Sunnyvale, CA
94089.
(2) Upon consummation of the Merger, each share of RAE common stock will be
automatically converted into the right to receive the Exchange Ratio as
described elsewhere in this proxy statement. Nettaxi and RAE anticipate
that the Exchange Ratio will be approximately 1.482 shares of Nettaxi
common stock, although such number is not fixed and could change prior to
the consummation of the Merger.
24
(3) Calculated on the basis of 23,292,960 shares of common stock outstanding as
of December 31, 2001. For purposes of computing the percentage of
outstanding shares held by each person or group or persons named above on a
given date, shares which such person or group has the right to acquire
within sixty days of December 31, 2001 are deemed outstanding, but are not
deemed outstanding for purposes of calculating the percentage ownership of
common stock of any other person.
(4) Includes 2,000,000 shares held by Mr. Chen, 2,850,000 shares held by Mr.
Chen as trustee of the Robert I. Chen 2001 Annuity Trust UTA dated December
19, 2001, and 2,000,000 shares held by Lien Chen, the wife of Robert Chen
and 2,850,000 shares held by Mrs. Chen as trustee of the Lien Q.C. Chen
2001 Annuity Trust UTA dated December 19, 2001.
(5) Includes 200,000 shares of common stock subject to a contingent right of
repurchase, and 45,479 shares issuable upon exercise of options that are
currently exercisable or will become exercisable within 60 days after
December 31, 2001.
(6) Includes 72,671 shares of common stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days
after December 31, 2001.
(7) Includes 39,096 shares of common stock issuable upon exercise of options
that are currently exercisable or will become exercisable within 60 days
after December 31, 2001.
(8) Includes 9,338,150 shares of common stock and 23,411,110 shares of common
stock issuable upon exercise of options that are currently exercisable or
will become exercisable within 60 days after December 31, 2001.
MARKET PRICE AND DIVIDEND INFORMATION
Market For Nettaxi's Common Stock And Related Stockholder Matters
Nettaxi's common stock has been traded on the NASD O-T-C Market Bulletin
Board under the trading symbol "NTXY" since October 12, 1998. Prior to that
date, Nettaxi's common stock was not actively traded in the public market.
After consummation of the merger, Nettaxi anticipates that such common stock
will continue to trade in the over-the-counter market. The following table sets
forth, for the periods indicated, the high and low bid prices for Nettaxi's
common stock as reported by various Bulletin Board market makers. The
quotations do not reflect adjustments for retail mark-ups, mark-downs, or
commissions and may not necessarily represent actual transactions.
Period Low Bid High Bid
- ----------------------------------------------- -------- ---------
FISCAL YEAR ENDED DECEMBER 31, 1998:
Fourth Quarter (October 12 - December 31, 1998) $ 4.375 $ 8.875
FISCAL YEAR ENDED DECEMBER 31, 1999:
First Quarter (January 1 - March 31, 1999 $ 6.187 $ 18.750
Second Quarter (April 1 - June 30, 1999) $ 11.500 $ 34.500
Third Quarter (July 1 - September 30, 1999) $ 7.375 $ 16.500
Fourth Quarter (October 1 - December 31, 1999) $ 1.843 $ 7.875
25
FISCAL YEAR ENDED DECEMBER 31, 2000:
First Quarter (January 1 - March 31, 2000) $ 1.406 $ 9.062
Second Quarter (April 1 - June 30, 2000) $ 0.940 $ 5.968
Third Quarter (July 1 - September 30, 2000) $ 0.420 $ 1.420
Fourth Quarter (October 1 - December 31, 2000) $ 0.125 $ 0.520
FISCAL YEAR ENDED DECEMBER 31, 2001
First Quarter (January 1 - March 31, 2001) $ 0.125 $ 0.295
Second Quarter (April 1 - June 30, 2001) $ 0.095 $ 0.495
Third Quarter (July 1 - September 30, 2001) $ 0.080 $ 0.360
Fourth Quarter (October 1 - December 31, 2001) $ 0.190 $ 0.085
FISCAL YEAR ENDING DECEMBER 31, 2002
First Quarter (January 1 - February 12, 2001) $ 0.280 $ 0.110
On February 12, 2002, the high and low bid prices per share for our common
stock on the Bulletin Board were $0.225 and $0.200, respectively. As of
February 12, 2002, there were 386 stockholders of record who held shares of our
common stock.
DIVIDEND POLICY
To date, no dividends have been declared or paid on any of our capital
stock. Nettaxi currently intends to retain earnings, if any, to fund the
development and growth of Nettaxi's business and do not anticipate paying cash
dividends in the foreseeable future. Payment of future dividends, if any, will
be at the discretion of Nettaxi's Board of Directors after taking into account
various factors, including Nettaxi financial condition, operating results,
current and anticipated cash needs and plans for expansion.
26
- --------------------------------------------------------------------------------
PROPOSAL NO. 1
THE MERGER
- --------------------------------------------------------------------------------
GENERAL
The following is a summary of the important aspects of the proposed Merger
and the material terms of the Merger Agreement, and may not contain all of the
information that is important to Nettaxi stockholders. As such, the following
discussion is qualified in its entirety by reference to the Merger Agreement,
attached hereto as Appendix A and incorporated by reference herein, which, along
----------
with the other annexes to this proxy statement, Nettaxi stockholders are urged
to read carefully and in their entirety.
GENERAL DESCRIPTION OF THE MERGER
The number of shares of common stock of Nettaxi-Delaware to be issued for
each share of RAE common stock is not fixed and will be adjusted based upon the
exchange ratio which is defined in the Merger Agreement (the "Exchange Ratio").
Although the parties anticipate that Nettaxi-Delaware will issue approximately
1.48 shares of common stock for each outstanding share of RAE common stock, the
final Exchange Ratio will not be determined until immediately prior to the
Effective Time of the Merger. The following discussion summarizes certain terms
of the Exchange Ratio and is not intended to be a complete description of the
Exchange Ratio. RAE shareholders are encouraged to carefully review the
description of the Exchange Ratio in the Merger Agreement and section of this
proxy statement entitled "Manner and Basis of Converting Shares" on page 46.
The number of shares to be issued to RAE shareholders by Nettaxi-Delaware
in connection with the Merger varies depending upon Nettaxi-Delaware's value per
share at the effective time of the Merger (the "Effective Time"). For purposes
of determining the Exchange Ratio, Nettaxi-Delaware's value per share will equal
(i) one hundred thousand dollars ($100,000) plus net cash and cash equivalents,
minus its payables and other fixed obligations (excluding certain listed
liabilities) and minus an appropriate reserve for payables and other
contingencies divided by (ii) the number of issued and outstanding
Nettaxi-Delaware common stock immediately prior to the Effective Time. If
Nettaxi-Delaware's net cash at the Effective Time of the Merger is equal to
seven million five hundred thousand dollars ($7,500,000), then RAE shareholders
will have the right to receive 1.48225 shares of Nettaxi-Delaware common stock
for each share of RAE common stock they own. Nettaxi-Delaware will issue shares
representing approximately 80.12% of the combined company to stockholders of RAE
and approximately 2.23% of the combined company to Baytree Capital Associates,
which acted as a financial advisor in connection with the Merger. Stockholders
of Nettaxi-Delaware would retain shares representing approximately 17.65% of the
combined company.
THERE CAN BE NO ASSURANCE THAT THE FINAL EXCHANGE RATIO WILL RESULT IN RAE
SHAREHOLDERS RECEIVING THE NUMBER OF SHARES OF NETTAXI-DELAWARE COMMON STOCK
DESCRIBED ABOVE. FURTHER, THERE CAN BE NO ASSURANCE THAT THE PERCENTAGE
OWNERSHIP OF THE COMBINED COMPANY WILL RESULT AS DESCRIBED ABOVE. IF
NETTAXI-DELAWARE'S NET CASH WERE TO DROP BELOW SEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE TIME OF THE MERGER,
NETTAXI-DELAWARE WOULD HAVE TO ISSUE ADDITIONAL SHARES IN CONNECTION WITH THE
27
MERGER AND STOCKHOLDERS OF NETTAXI-DELAWARE WOULD OWN LESS THAN 17.65% OF THE
COMBINED COMPANY. ADDITIONALLY, IF NETTAXI-DELAWARE'S NET CASH WERE TO DROP
BELOW SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE
TIME OF THE MERGER, RAE WOULD NOT BE OBLIGATED TO CONSUMMATE THE MERGER.
BACKGROUND
Nettaxi.com is an Internet marketing portal that provides a range of
content and Internet based services for consumers and businesses. Nettaxi's web
site at www.nettaxi.com serves as a gathering place for people with shared
topics of interest, as well as an entry point, referred to as a portal, to the
Internet. Through its web site, Nettaxi provides content addressing a number of
targeted categories. Subscribers to Nettaxi's web site are also provided with
access to enhanced content such as broadband video clips and email accounts. In
1999, Nettaxi developed a diversified revenue model under which it provided
subscribers with access to web site hosting services and a broad range of
content, and Nettaxi provided affiliated businesses with access to a large
population of Internet users for advertising and promotional purposes. Nettaxi
also provided web site hosting and Internet connectivity services for corporate
customers.
In 2001, Nettaxi faced the challenges of an overall downturn in the
Internet industry and the economy in general. The bankruptcy and liquidation of
many of its Internet based customers and suppliers caused Nettaxi to re-evaluate
its business model. Since the Internet infrastructure is unstable and customer
base financially weak, Nettaxi took corrective action to significantly decrease
its cash burn and determine the best course of action to maintain and enhance
the value of the Company. In this regard, Nettaxi implemented an acquisition
strategy pursuant to which it sought to identify an appropriate entity with
which to merge, acquire or restructure its current business. Since the
announcement of Nettaxi's acquisition strategy in May 2001, Nettaxi has
evaluated a number of potential merger candidates in a wide variety of
industries.
On May 7, 2001 Nettaxi entered into an agreement with Baytree under which
Baytree identified and evaluated acquisition candidates, conducted due diligence
and otherwise advised the company with respect to the structuring of a
transaction with an acquisition candidate.
Nettaxi had previously worked with Baytree in 1998 in connection with the
reorganization of Nettaxi Online Communities, Inc., a Delaware corporation
("NOL"), with Nettaxi, formerly known as Swan Valley Snowmobiles, Inc., a
non-operating public company. At that time a Baytree affiliate loaned $1,000,000
to NOL. The loan was converted into stock of Nettaxi following the
regorganization. Additionally, in October 2000, Nettaxi entered into a
consulting agreement with Michael Gardner, a principal of Baytree pursuant to
which Mr. Gardner provide business development services for Nettaxi.
During the period from May 2001 until December 2001, Nettaxi evaluated
various potential business in diverse industries, but, with the exception of
RAE, did not deem any to be suitable acquisition candidates. In June 2001
Nettaxi entered into a non-binding letter of intent to merge with Vaultus, Inc.,
a Delaware corporation. However, discussions with Vaultus were terminated when
the parties could not agree upon mutually acceptable terms to a merger
agreement.
In evaluating each potential operating business, Nettaxi and its
representatives and the Board of Directors considered all or a majority of the
following factors (collectively, "acquisition criteria"):
- strength of the operating business model;
- growth potential of the operating business and the industry in which
it operates;
28
- costs associated with effecting a merger;
- equity interest in the proforma combined company;
- financial strength as displayed by historical and projected margins;
- scalability of the business;
- capital requirements of the operating business;
- competitive position of the operating business;
- stage of development of the product, process or service of the
operating business;
- degree of current or potential market acceptance of the product,
process or service of the operating business; and
- proprietary features and degree of intellectual property or other
protection of the product, process or service of the operating business.
On August 1, 2001, Nettaxi entered into a new agreement with Baytree which
superceded and replaced the May 7, 2001 agreement and required Baytree to
provide substantially similar services for an extended period of time. In August
2001, Baytree received and reviewed a business plan submitted by RAE. In
November 2001, Baytree had an extensive telephone conference with RAE. The
conference call was followed by a meeting the following week on November 20,
2001 with RAE at Baytree's offices in New York, New York. At this meeting RAE
management gave a presentation about RAE. The meeting lasted over five hours and
included an extensive question and answer session attended by Baytree's analysts
and consultants. Present at that meeting were Robert Chen and Joseph Ng, the
Chairman and Chief Financial Officer of RAE, respectively.
Over the next few days, Baytree Capital Associates reported to the Nettaxi
Board members about RAE's business presentation. After reflecting upon the
report, reviewing the above acquisition criteria and noting the absence of any
other operating business as a potential Merger partner or acquisition candidate
for Nettaxi, the Board members of Nettaxi concluded that Nettaxi should explore
the feasibility of a possible combination of Nettaxi and RAE.
Several meetings and telephonic discussions were held during the next
several weeks among Baytree Capital Associates and representatives of Nettaxi
and RAE to explore the potential of a merger between the two parties. Following
these discussions, Nettaxi, with assistance from its outside legal counsel,
prepared and circulated a non-binding letter of intent. The parties spent the
next several days negotiating the terms of the letter of intent. The parties
executed the letter of intent on December 7, 2001.
On December 7, 2001, due diligence request lists were exchanged and the
executive officers of both companies, along with their respective outside legal
counsel and financial advisors, exchanged various telephone calls with a view
toward preparing for subsequent due diligence meetings.
On December 10, 2001, outside legal counsel to Nettaxi delivered a first
draft of a Merger Agreement to outside legal counsel to RAE. Representatives of
Nettaxi and representatives of RAE and the respective outside legal counsel and
financial advisors to Nettaxi and RAE held numerous meetings and telephone
conferences over the next few weeks during which the Merger Agreement and
various related agreements were discussed and negotiated.
29
On December 20, 2001, the Board of Directors of RAE held a telephonic
meeting to discuss the proposed Merger with Nettaxi. The Board of Directors of
RAE discussed, among other issues, valuation, the potential synergies of the
proposed combination, the provisions contained in the proposed Merger Agreement
and the status of due diligence efforts. Representatives of RAE and its outside
legal counsel also participated in this meeting. RAE's Board of Directors
concluded that the Merger Agreement was fair to RAE shareholders and that the
proposed Merger was in the best interests of RAE and its shareholders.
Accordingly, the RAE Board of Directors approved the Merger and the Merger
Agreement and related documents and authorized management to proceed with the
execution of the Merger documents.
On January 7, 2002, the Nettaxi Board of Directors met via conference call
to discuss the proposed Merger with RAE. The Nettaxi Board of Directors
discussed, among other issues, valuation, the potential synergies of the
proposed combination, the provisions contained in the proposed Merger Agreement
and the status of due diligence efforts. Representatives of Nettaxi outside
legal counsel and financial advisor participated in this meeting. The Nettaxi
Board of Directors concluded that the Merger Agreement was fair to Nettaxi
stockholders and that the proposed Merger was in the best interests of Nettaxi
and its stockholders. The Board of Directors of Nettaxi voted unanimously to
approve the Merger Agreement, the related agreements and the transactions
contemplated by the Merger Agreement and the related agreements and authorized
the officers of Nettaxi to finalize and execute the Merger Agreement and related
agreements.
On January 9, 2002, the last remaining items of due diligence were
completed by both parties and their respective legal counsel, independent
auditors and financial advisors. The Merger Agreement and related agreements
were executed and delivered by the parties late on January 9, 2002. On January
10, 2002, Nettaxi issued a press release announcing the execution of the Merger
Agreement.
REASONS FOR THE MERGER
The following discussion of the parties' reasons for the Merger contains a
number of forward-looking statements that reflect the current views of Nettaxi
and/or RAE with respect to future events that may have an effect on their future
financial performance. Forward-looking statements are subject to risks and
uncertainties. Actual results and outcomes may differ materially from the
results and outcomes discussed in the forward-looking statements. Cautionary
statements that identify important factors that could cause or contribute to
differences in results and outcomes include those discussed in "Summary --
Forward-Looking Information" and "Risk Factors."
NETTAXI'S REASONS FOR THE MERGER
In its evaluation of the Merger, the Board of Directors of Nettaxi reviewed
several factors, including:
- Nettaxi's future financial outlook and possible alternatives to the
proposed merger, including the advantages, challenges and risks associated with
continuing as an independent company. In this regard, the Nettaxi Board
considered the amount and range of acquisition consideration most likely to be
offered by other prospective acquisition candidates, the likelihood of realizing
those values, the likelihood of receiving a better financial offer from another
potential acquirer and the view of Nettaxi's management that the merger
represented the best strategic alternative available to Nettaxi under the
circumstances. The Nettaxi Board also considered the prospects of remaining as
an independent company, including Nettaxi's prospects for the success of its
30
business of providing complex information technology solutions in the area of
knowledge management and the information technology services industry generally.
- The substantial decline in the market price of Nettaxi's common stock
in the past and the view of Nettaxi's Board of Directors and management that it
could take a long time for the market price of Nettaxi's common stock to return
to previous levels, if at all;
- The potential of Nettaxi, under its current business model, to
achieve profitability;
- historical information concerning RAE's business, operations,
financial condition, results of operations, technology, management, competitive
positions, current customers, customer pipeline and prospects;
- reports from Nettaxi's representatives as to the results of their due
diligence investigations of RAE;
- the current and historical economic and market condition and business
environment in the information technology services market catering to the
financial services and insurance industries;
- the percentage ownership of the combined company of Nettaxi's
stockholders;
- the lack of other available prospective merger candidates; and
- the potential risks that could be incurred by Nettaxi if it failed to
complete a Merger or other business transaction.
The Nettaxi board also identified and considered a number of potentially
negative factors in its deliberations concerning the merger, including:
- the potential disruption of Nettaxi's business that could result from
the announcement of the merger;
- the uncertain current and prospective market environment for RAE
products and services;
- the need for Nettaxi to have $7,500,000 in net cash, as defined in
the Merger Agreement, at the closing of the merger.
- the dilutive effect of the Merger on Nettaxi's stockholders;
- the risk that if the Merger is not completed, Nettaxi would have
incurred significant costs and further reduced its financial position;
- the potential effect of the exclusivity covenants and termination fee
negotiated by RAE in deterring other potential merger prospects for Nettaxi;
- risks related to pending litigation involving RAE; and
- the other risks described under "Risk Factors" beginning on page 9;
31
In addition, Nettaxi's Board of Directors considered the interest that
certain affiliates and directors may have with respect to the Merger in addition
to their interests as Nettaxi stockholders. See "Interests of Nettaxi Officers
and Directors in the Merger" that begins on page 35 of this proxy statement.
The Nettaxi Board determined that, on balance, the potential benefits to
Nettaxi and its stockholders of the Merger outweighed the risks associated with
the Merger.
The discussion of the information and factors considered by Nettaxi's Board
is not intended to be exhaustive. In view of the number and wide variety of
factors considered in connection with its evaluation of the Merger, and the
complexity of these matters, Nettaxi's board did not find it useful to, nor did
it attempt to, quantify, rank or otherwise assign relative weights to the
specific factors it considered. In addition, the Nettaxi Board did not undertake
to make any specific determination as to whether any particular factor was
favorable or unfavorable to the Board of Directors' ultimate determination or
assign any particular weight to any factor, but rather conducted an overall
analysis of the factors described above, including thorough discussions with and
questioning of Nettaxi's representatives. In considering the factors described
above, individual members of the Board of Directors may have given different
weight to different factors. Nettaxi's Board of Directors considered all these
factors as a whole, and overall considered the factors to be favorable to, and
to support, its determination.
For the reasons set forth above, the Nettaxi Board has determined that the
Merger is fair and in the best interests of Nettaxi and the Nettaxi
stockholders. Consequently, the Nettaxi board has approved and adopted the
Merger Agreement and recommends that the Nettaxi stockholders vote FOR approval
and adoption of the Merger, the proposed reverse stock split and the
reincorporation of Nettaxi.
THERE CAN BE NO ASSURANCE THAT THE BENEFITS OR OPPORTUNITIES CONSIDERED BY
THE BOARD OF DIRECTORS OF NETTAXI WILL BE ACHIEVED THROUGH CONSUMMATION OF THE
MERGER. SEE "RISK FACTORS" BEGINNING ON PAGE 9.
NO FAIRNESS OPINION
The Nevada General Corporation Law does not require us to obtain a fairness
opinion in connection with the Merger, and Nettaxi has not obtained one. The
terms and conditions of the Merger were negotiated at arm's-length between the
managements of Nettaxi and RAE and were the result of a number of factors,
including but not limited to the factors listed above in "Nettaxi's Reasons for
the Merger".
The Board of Directors did not feel that an investment banker's opinion was
beneficial or necessary given the Board of Directors' knowledge of Nettaxi and
its business, nor did the Board of Directors believe that obtaining such an
opinion would be an appropriate use of corporate funds. The Board of Directors
believes that the acquisition of such an opinion would require a substantial
amount of capital and time. Given Nettaxi's limited resources, the fact that
Nettaxi is essentially being valued at an amount equal to its net cash, and the
need to complete the Merger in a timely manner, the Board of Directors did not
believe it was in the best interests of Nettaxi to incur the cost of a fairness
opinion.
Based on Nettaxi's current operating performance and prospects, including
the decline in such performance, and RAE's strong interest in the Merger, the
Board of Directors felt that significantly better terms and conditions could not
be obtained in the foreseeable future.
Accordingly, there can be no assurance that consummation of the Merger will
be fair from a financial point of view to the stockholders of Nettaxi.
32
RAE'S REASONS FOR THE MERGER
GENERAL
The Board of Directors of RAE approved the Merger Agreement and resolved to
recommend that RAE's shareholders vote in favor of the Merger Proposal.
In reaching its decision, RAE's Board consulted with its senior management
and legal advisors and considered a number of factors. In view of the complexity
and wide variety of information and factors, both positive and negative,
considered by the Board, it did not find it practical to qualify, rank or
otherwise assign any relative or specific weights to the factors it considered.
In addition, the Board did not reach any specific conclusion with respect to
each of the factors it considered, or any aspect of any particular factor.
Instead, the Board conducted an overall analysis of the factors it considered.
In considering those factors, individual members of the Board may have given
weight to different factors. The Board considered all of those factors as a
whole and believed that those factors supported its decision.
RAE's Board identified a number of potential material benefits that it
expects will result from the Merger, as well as a number of risks affecting RAE
in connection with the Merger and certain other considerations. These benefits,
risks and other considerations are described immediately below.
RAE'S REASONS FOR THE MERGER
RAE's Board considered the following potential benefits from merging RAE
with Nettaxi:
- Funding for Growth. The cash provided by the Merger will enable RAE to
grow its business faster in light of the opportunity afforded by the
emerging gas monitoring detection business.
- Stature as a Public Company. As RAE's business grows in the coming
years, its status as a public company could provide RAE with a better
image and greater stature in its industry.
- Increased Liquidity. Subject to the limitations of Rule 144, including
applicable holding periods, RAE's shareholders will be afforded
substantially increased trading liquidity for their investment.
- Public Stock for Acquisitions. As a publicly-traded company, RAE's
stock will be more attractive as consideration for potential
acquisitions.
- Facilitate Future Fundraising. RAE will be in a better position to
raise funds through future financings as a public company.
RAE's Board also identified and considered a number of potentially
negative factors in its deliberations concerning the Merger, including the
following:
- Risks and potential liability related to two pending lawsuits in which
Nettaxi is a party: Lahey v. Nettaxi and Envision Media v. Nettaxi
---------------- -------------------------
- The ongoing risk to the combined company of protecting Nettaxi's
former directors and officers from potential lawsuits stemming from
the drop in the trading price of Nettaxi's common stock
- Risk related to undisclosed contractual or other liabilities
33
RAE's board of directors concluded that, on balance, the potential benefits
of the merger to RAE and its shareholders outweighed the risks associated with
the merger. The discussion of the information and factors considered by RAE's
board of directors is not intended to be exhaustive.
RECOMMENDATION OF RAE'S BOARD
FOR THE REASONS DISCUSSED ABOVE, RAE'S BOARD OF DIRECTORS HAS APPROVED THE
MERGER AGREEMENT AND RECOMMENDS THAT THE SHAREHOLDERS OF RAE VOTE IN FAVOR OF
THE MERGER PROPOSAL.
MANAGEMENT OF RAE FOLLOWING THE MERGER
The following table sets forth the current directors, executive officers,
and other key employees of RAE, their ages and the positions currently held by
them. Nettaxi and RAE intend for each of the following individuals to assume
similar positions with the combined company following the Merger.
NAME AGE POSITION
- ------------------- --- ---------------------------------------------
Robert I. Chen 54 President, Chairman, Chief Executive Officer,
Director
Joseph Ng 53 Vice President, Business Development; Chief
Financial Officer
Peter H. His 52 Vice President, Chief Technology Officer,
Secretary, Director
Robert E. Henderson 49 Vice President, Marketing
Lyle D. Feisel 66 Director
Neil W. Flanzraich 58 Director
Edward C. Ross 60 Director
ROBERT I. CHEN co-founded RAE in 1991 and has served as President, Chief
Executive Officer, and as a member of the board of directors since RAE's
inception. From 1981 to 1990, Mr. Chen served as President and Chief Executive
Officer of Applied Optoelectronic Technology Corporation, a manufacturer of
computer-aided test systems, a company he founded and subsequently sold to
Hewlett Packard. Mr. Chen currently serves on the board of directors for the
Shanghai Ericsson Simtek Electronics Company, Limited, a telecommunications and
electronics company. Mr. Chen received a B.S.E.E. from Taiwan National Cheng
Kung University, a M.S.E.E. from South Dakota School of Mines and Technology,
and graduated from the Harvard Owner/President program.
JOSEPH NG has served as RAE's Vice President of Business Development and Chief
Financial Officer since February 2001. From 1999 to 2001, Mr. Ng was the
Marketing Manager for the E-Services Division of Hewlett-Packard, and from 1997
to 1999, the Controller for the Computer Division of Hewlett-Packard-Japan.
From 1995 to 1997, Mr. Ng was the Controller for the Personal Computer and
Printer Division of Hewlett-Packard, and from 1988 to 1990, the Chief Financial
Officer for Applied Optoelectronic Technology Corporation. Mr. Ng received a
B.S. in Accounting from Baruch College, and a M.A. in History from Stanford
University. Mr. Ng is a certified public accountant in the State of California.
PETER H. HSI co-founded RAE in 1991 and has served as its Vice President, Chief
Technology Officer, and as a member of the board of directors since RAE's
inception. Prior to co-founding RAE, Dr. Hsi worked at Applied Optoelectronic
Technology Corporation as the chief architect for semiconductor test systems.
34
Mr. Hsi holds ten (10) patents, of which 7 have been granted and 3 are pending.
Dr. Hsi received a B.S.E.E. from the National Chiao-Tung University, and a M.S.
and Ph.D. in Electrical Engineering from Syracuse University.
ROBERT E. HENDERSON has served as RAE's Vice President of Marketing since
September 1999. From 1992 to 1999, he was the marketing and technical director
of the Biosystems Division of Bacou USA, a consolidated safety equipment
manufacturer. From 1987 to 1991, the National Manager of the Allied Safety
Division of W.W. Grainger, a distributor of industrial supplies and safety
equipment. From 1982 to 1986, Mr. Henderson was the Western Regional Manager of
Biosystems, Inc., a supplier of gas detection, air-purification and respiratory
testing equipment. From 1978 to 1982, the Senior Biologist and Vice President of
Sales for the Pacific Bio Marine Laboratories, a marine biology consulting and
research laboratory. Mr. Henderson is a past chair of both the American
Industrial Hygiene Association Confined Space Committee, and the Instrument
Products Group of the Industrial Safety Equipment Association. Mr. Henderson
received a B.S. in Biological Science from Connecticut State College and a
M.B.A. from the Rensselaer Polytecnic Institute.
NEIL W. FLANZRAICH has served as a member of RAE's board of directors since
December 2000. Since May 1998, he served as Vice Chairman and President of IVAX
Corporation, a pharmaceutical company. From 1995 to May 1998, Mr. Flanzraich
served as Chairman of the Life Sciences Legal Practice Group of Heller Ehrman
White and McAuliffe, and from 1981 to 1994, Senior Vice President and member of
the corporate Operating Committee at Syntex Corporation, a pharmaceutical
company. Mr. Flanzraich is Chairman of the Board of Directors of North American
Vaccine, Inc. and is a director of the Whitman Education Group, Inc. He also
serves as Chairman of the Israel America Foundation. Mr. Flanzraich received an
A.B. from Harvard College and a J.D. from Harvard Law School.
EDWARD C. ROSS has served as a member of RAE's board of directors since March
2001, and is currently the President of TSMC North America. From 1998 to 2000,
Dr. Ross served as Senior Vice President of the Professional Services Group of
Synopsys, Inc., a computer-aided design company, where he was responsible for
developing and executing Synopsys' consulting business practices. From 1995 to
1998, Dr. Ross was the President of the Technology and Manufacturing Group of
Cirrus Logic, a semiconductor company. Dr. Ross received a B.S.E.E from Drexel
University, and a M.S.E.E., M.A, and Ph.D. from Princeton University.
LYLE D. FEISEL has served as a member of RAE's board of directors since March
2001. In 2001, he retired as the Dean of the Thomas J. Watson School of
Engineering and Applied Science, and Professor of Electrical Engineering at the
State University of New York at Binghamton. Dr. Feisel joined the faculty of
SUNY Binghamton in 1983. Dr. Feisel is a Life Fellow of the Institute of
Electrical and Electronics Engineers and of the American Society for Engineering
Education, and currently serves as Vice President of the Educational Activities
of the IEEE. Dr. Feisel received his B.S., M.S. and Ph.D. degrees in Electrical
Engineering from Iowa State University.
INTERESTS OF NETTAXI OFFICERS, DIRECTORS IN THE MERGER
In considering the recommendation of the Nettaxi Board of Directors with
respect to approving the Merger, stockholders should be aware that certain
members of the Board of Directors and management of Nettaxi have interests in
the Merger that are in addition to the interests of stockholders of Nettaxi
generally. The Nettaxi Board of Directors was aware of these interests and
considered them, among other matters, in approving the principal terms of the
Merger and the Merger Agreement.
INDEMNIFICATION AND INSURANCE
35
The Merger Agreement provides for the survival after the Merger of all
indemnification rights of the members of the Board of Directors and officers of
Nettaxi for acts and omissions occurring before the Merger, as their rights
existed as of January 9, 2002, in the Nettaxi articles of incorporation, bylaws
and in indemnification agreements with Nettaxi. RAE will guarantee that the
surviving company observes all of these indemnification rights to the fullest
extent permitted by applicable law following the Merger. In addition, for a
period of three years after the Merger, the surviving company will maintain a
directors' and officers' liability insurance policy covering those persons who
are currently covered by Nettaxi's directors' and officers' liability insurance
policy with coverage in the amount of five million dollars ($5,000,000).
AUTOMATIC ACCELERATION OF STOCK OPTIONS; SEVERANCE PAYMENTS.
In August 1998, Nettaxi entered into executive employment agreements
containing change in control provisions with Robert A. Rositano, Jr., Nettaxi's
Chief Executive Officer, Secretary and a Director and Dean Rositano, Nettaxi's
President, Chief Operating Officer, Interim Chief Financial Officer and a
Director (the "Nettaxi Executives"). These arrangements provide for benefits if
there is a change in control of Nettaxi. The Merger is a change in control for
this purpose. Under their employment agreements, the executives were entitled to
receive severance payments in the amount of more than one million dollars
($1,000,000) each. In light of management's desire to complete the Merger with
RAE, management requested that the Compensation Committee of the Board of
Directors review the executive employment arrangements and recommend an
alternative severance package. In this regard, the Compensation Committee,
composed of Andrew Garroni, reviewed the following factors:
- the terms and conditions of the executive employment agreements;
- the responsibilities of the executives prior to and following the
execution of the Merger Agreement;
- the performance of the executives compared with similar executives in
comparable companies; and
- Nettaxi's experience with severance payments to other executives who
have departed from Nettaxi.
Upon the evaluation of all of these factors, the Compensation Committee
recommended the following severance arrangements, which have been accepted by
the Nettaxi Executives. In lieu of severance payments payable pursuant to the
executive employment agreements and any accrued minimum bonus payable
thereunder, or any other payments due, and in exchange for complete releases of
employment liability to Nettaxi, each Nettaxi Executive will receive the
following:
- a cash payment of $150,000;
- accelerated vesting on outstanding options to purchase 67,020 shares
of common stock of Nettaxi (after taking into account the reverse stock split
described in Proposal 2), having an exercise price of $0.737 per share, and a
cash bonus of an amount necessary to exercise the options;
- warrants to purchase up to 176,366 shares of common stock of Nettaxi
(after taking into account the reverse stock split described in Proposal 2),
having an exercise price per share of $1.134.
The executives will assume Nettaxi's lease for its current facilities,
consisting of 1,790 square feet and having an ascribed value equal to the amount
of rent which has been prepaid by Nettaxi as of the Effective Time of the
36
Merger. Nettaxi has paid its rent through May 31, 2002. Thus, it the Effective
Time of the Merger were to be March 31, 2002, the value of the lease transferred
would equal approximately $9,500, the cost of two months rent. Nettaxi will also
transfer to the executives title to furniture, fixtures and equipment having a
value of approximately $76,000. Additionally, Nettaxi will assign the domain
name "nettaxi.com" to the executives. Additionally, each executive will receive
a payment equal to the amount necessary for them to purchase continued health
and medical benefits until January 2003.
The shares underlying the warrants issued in connection with the above
arrangement will be registered with the Securities and Exchange Commission by
Nettaxi on a registration statement on Form S-8. Shares underlying options
issued pursuant to Nettaxi's 1998 and 1999 stock option plans are registered
with the Securities and Exchange Commission.
The Board of Directors of Nettaxi has determined that the Internet
marketing portal business model employed by Nettaxi has been unsuccessful and
that the Merger is in the best interests of Nettaxi's stockholders. If the
Merger is consummated, the Internet marketing portal business currently
conducted by Nettaxi will cease and the surviving company will adopt and conduct
the business model of RAE. Mergers involve numerous risks and uncertainties and
there can be no assurance that the Merger with RAE will prove to enhance the
value of Nettaxi or be successful. Additionally, there can be no assurance that
the departing executive officers of Nettaxi will not operate an Internet
marketing portal substantially similar to the business historically operated by
Nettaxi and, if the Merger is consummated, the current stockholders of Nettaxi
will have no ownership interest in such a business.
INTERESTS OF CERTAIN RAE PERSONS IN THE MERGER
When considering the recommendation of RAE's board of directors, RAE
shareholders should be aware that certain of RAE's directors, officers and other
affiliated parties have interests in the Merger that are different from, or are
in addition to, RAE's shareholders' interests. RAE's board of directors was
aware of these potential conflicts and considered them in making its
recommendation.
In August 2001, RAE engaged Neil Flanzraich, Philip Frost and Joseph Ng to
identify and evaluate potential publicly-listed merger partners acceptable to
RAE. In connection with such engagement, RAE sold in December 2001, at a
purchase price of $.125 per share, 300,000 shares of its common stock to Mr.
Flanzraich and 200,000 shares of its common stock to each of Dr. Frost and Mr.
Ng. The shares were sold pursuant to restricted stock purchase agreements.
Pursuant to the agreements, if the Merger is not consummated by September 30,
2002, RAE shall have the right to repurchase any shares sold to Messrs.
Flanzraich, Frost and Ng upon the termination of the Merger Agreement entered
into between RAE and Nettaxi, if such termination occurs after March 31, 2002.
If the Merger Agreement is terminated prior to March 31, 2002, and RAE has not
entered into a qualifying transaction with a different merger partner on or
before such date, then RAE shall have the right to repurchase the shares. In
the event the Merger is not consummated, Mr. Flanzraich and Dr. Frost shall be
entitled to retain fifty percent of the shares if RAE enters into a qualifying
transaction within six months of the date of the Merger Agreement, and the
Merger Agreement is successfully used by RAE in a sale, exchange, merger or
transfer to obtain terms more advantageous to RAE than would otherwise have been
obtainable without the Merger Agreement.
INTERESTS OF OTHER PARTIES IN THE MERGER
BAYTREE CAPITAL ASSOCIATES
37
Baytree Capital Associates has acted as a financial adviser to Nettaxi in
connection with the Merger. As compensation for its services, at the effective
time of the Merger, the surviving company shall issue to Baytree 960,000 shares
of its common stock. Additionally, Baytree will continue to provide consulting
services on behalf of the surviving entity in exchange for warrants to purchase
1,750,000 shares of common stock, after giving effect to the reverse stock split
contemplated Proposal 2, having an exercise price of $1.19 per share. Michael
Gardner is a principal member of Baytree.
HARTER FINANCIAL, INC.
Harter Financial, Inc. has acted as a financial advisor to RAE in
connection with the Merger. As compensation for its services, RAE has paid
Harter a one-time, non-refundable engagement fee of $10,000. If and when the
Merger is consummated, RAE shall pay Harter an additional and final fee of
$415,000 for the services rendered by Harter to RAE in effecting the Merger.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion summarizes the material U.S. federal income tax
considerations of the Merger that are expected to apply generally to
stockholders of Nettaxi and RAE in connection with the merger. This summary is
based upon current provisions of the Code, existing regulations under the Code
and current administrative rulings and court decisions, all of which are subject
to change. Any change, which may or may not be retroactive, could alter the tax
consequences to Nettaxi, RAE or the stockholders of Netttaxi and RAE as
described in this summary. No attempt has been made to comment on all federal
income tax consequences of the Merger that may be relevant to particular
stockholders, including stockholders:
- who are subject to special tax rules such as dealers in securities,
foreign persons, mutual funds, insurance companies, tax-exempt entities;
- who are subject to the alternative minimum tax provisions of the
Code;
- who acquired their shares in connection with stock option or stock
purchase plans or in other compensatory transactions;
- who hold their shares as a hedge or as part of a hedging, straddle or
other risk reduction strategy; or
- who do not hold their shares as capital assets.
In addition, the following discussion does not address the tax consequences
of the Merger under state, local and foreign tax laws. Furthermore, the
following discussion does not address (i) the tax consequences of transactions
effectuated before, after or at the same time as the Merger, whether or not they
are in connection with the Merger, including, without limitation, transactions
in which RAE shares are acquired or Nettaxi-Delaware shares are disposed of,
(ii) the tax consequences to holders of options issued by RAE which are assumed,
exercised or converted, as the case may be, in connection with the merger, (iii)
the tax consequences of the receipt of Nettaxi shares other than in exchange for
RAE shares, or (iv) the tax implications of a failure of the Merger to qualify
as a reorganization. Accordingly, stockholders are advised and expected to
consult their own tax advisers regarding the federal income tax consequences of
the Merger in light of their personal circumstances and the consequences under
state, local and foreign tax laws.
38
No ruling from the Internal Revenue Service has been or will be requested
in connection with the Merger. No tax opinion has been or will be requested in
connection with the Merger.
The Merger is intended to qualify as a tax-free reorganization under
Section 368(a) of the Code. As a result, provided it does so qualify, in
general:
- Nettaxi, RSAC and RAE will not recognize any gain or loss as a result
of the Merger;
- a holder of Nettaxi common stock will not recognize any gain or loss
as a result of the Merger;
- shareholders of RAE will not recognize any gain or loss upon the
receipt of Nettaxi-Delaware common stock in exchange for their RAE common stock,
other than with respect to cash received in lieu of fractional shares of
Nettaxi-Delaware common stock;
- the aggregate tax basis of the shares of Nettaxi-Delaware common
stock received by RAE shareholders in the Merger (including any fractional share
deemed received) will be the same as the aggregate basis of the shares of RAE
common stock surrendered in exchange therefor;
- the holding period of the Nettaxi-Delaware common stock received by
RAE shareholders in the Merger will include the period during which the RAE
stock surrendered in exchange therefore was held, provided that the RAE stock so
surrendered is held as a capital asset at the time of the Merger; and
- a shareholder of RAE who receives cash in lieu of a fractional share
will recognize capital gain or loss equal to the difference, if any, between
such shareholder's basis in the fractional share and the amount of cash
received.
RAE shareholders will be required to attach a statement to their federal
income tax returns for the year of the Merger that contains the information
listed in Treasury Regulation Section 1.368-3(b). Such statement must include
the shareholder's tax basis in the shareholder's RAE common stock and a
description of the Nettaxi-Delaware common stock received.
Irrespective of the Merger's status as a reorganization, a RAE shareholder
will recognize gain to the extent shares of Nettaxi-Delaware common stock
received in the Merger are treated as received in exchange for services or
property other than solely RAE common stock. All or a portion of any such gain
could be taxable as ordinary income. Gain also will be recognized to the extent
a RAE shareholder is treated as receiving (directly or indirectly) consideration
other than Nettaxi-Delaware common stock in exchange for RAE common stock or to
the extent the RAE common stock surrendered in the Merger is not equal in value
to the Nettaxi-Delaware common stock received in exchange therefor.
ANTICIPATED ACCOUNTING TREATMENT
The Merger, if consummated as proposed, will for accounting and financial
reporting purposes, be treated as a reverse acquisition as the former
shareholders of RAE will control Nettaxi after the Merger. Under this accounting
treatment, RAE is deemed for accounting purposes to be the acquirer and Nettaxi
the acquired entity. Under these accounting principles, the post merger company
financial statements will represent RAE on a historical basis consolidated with
the results of operations of Nettaxi from the effective date of the Merger. As
Nettaxi has not pursued any revenue generating activities in the last six months
and will abandon its portal based business model with effect from the
consummation of the merger, the reverse merger will be treated as a
recapitalization of RAE, with no goodwill recorded.
APPRAISAL AND DISSENTERS' RIGHTS
NETTAXI-DELAWARE STOCKHOLDERS. If the merger is consummated, holders of
our common stock who follow the procedures set forth below will be entitled to
dissenters' rights under Section 262 of the DGCL, a copy of which is attached
hereto as Appendix D. Additionally, pursuant to Section 2115 of the California
----------
General Corporation Law, stockholders may be entitled to dissenters' rights
under Chapter 13 of the California General Corporation Law, a copy of which is
attached hereto as Appendix E, although it is unclear whether a court would
----------
39
conclude that such stockholders would be entitled to exercise dissenters' rights
under California law.
Stockholders who perfect their dissenters' rights and follow certain
procedures in the manner prescribed by the DGCL (and if applicable, the
California General Corporation Law) will be entitled to have their shares
repurchased by Nettaxi-Delaware for cash.
SUMMARY OF DELAWARE APPRAISAL RIGHTS
If the merger is consummated, stockholders who do not vote "FOR" the
adoption of the Merger Agreement, who hold shares of common stock of record on
the date of making a written demand for appraisal as described below, who
continuously hold shares of common stock through the closing of the merger, and
who otherwise comply fully with Section 262 of the DGCL, referred to as the
"Delaware Law," will be entitled to a judicial determination of the fair value
of their shares of common stock exclusive of any element of value arising from
the accomplishment of the merger in connection with the provisions of Section
262 and to receive from Nettaxi-Delaware payment of such fair value in cash
together with a fair rate of interest, if any, as determined by such court.
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the Delaware Law, and is qualified in its entirety by
the full text of Section 262, which is provided in its entirety as Appendix D to
----------
this proxy statement. All references in Section 262 and in this summary to a
"stockholder" are to the record holder of the shares of common stock as to which
appraisal rights are asserted.
A person having a beneficial interest in shares of common stock held of
record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to timely follow the steps required by
Delaware law to perfect appraisal rights.
Under Section 262, where a proposed merger is to be submitted for approval
and adoption at a meeting of stockholders, as in the case of the special
meeting, the corporation, not less than 20 days before the meeting, must notify
each of its stockholders entitled to appraisal rights that appraisal rights are
available and include in that notice a copy of Section 262. This proxy statement
constitutes that notice to the holders of common stock, and the applicable
statutory provisions of the Delaware law are attached to this proxy statement as
Appendix D. Any stockholder who wishes to exercise appraisal rights or who
- ----------
wishes to preserve that right should review carefully the following discussion
and Appendix D to this proxy statement. Moreover, because of the complexity of
----------
the procedures for exercising the right to seek appraisal of the common stock,
stockholders who consider exercising such appraisal rights should seek the
advice of counsel, which counsel or other appraisal services will not be paid
for by Nettaxi-Delaware. Failure to comply with the procedures specified in
Section 262 timely and properly will result in the loss of appraisal rights.
Filing written objection. Any holder of common stock wishing to exercise
the right to demand appraisal under Section 262 of the Delaware Law must satisfy
each of the following conditions:
- as more fully described below, the holder must deliver to
Nettaxi-Delaware a written demand for appraisal of the holder's shares before
the vote on the merger agreement and the merger at the special meeting, which
demand must reasonably inform Nettaxi-Delaware of the identity of the holder and
that the holder intends to demand the appraisal of the holder's shares;
- the holder must not vote the holder's shares of common stock in favor
of the merger agreement and the merger at the special meeting nor consent
thereto in writing pursuant to Section 228 of the Delaware law; and, as a
40
result, a stockholder who submits a proxy and wishes to exercise appraisal
rights must vote against the merger agreement and the merger or abstain from
voting on the merger agreement and the merger; and
- the holder must continuously hold the shares from the date of making
the demand through the effective time of the merger; a stockholder who is the
record holder of shares of common stock on the date the written demand for
appraisal is made, but who thereafter transfers those shares before the
effective time of the merger, will lose any right to appraisal in respect of
those shares. The written demand for appraisal must be in addition to and
separate from any proxy or vote. Voting (in person or by proxy) against,
abstaining from voting or failing to vote on the proposed merger agreement and
the merger will not constitute a written demand for appraisal within the meaning
of Section 262.
Only a holder of record of shares of common stock issued and outstanding
through the effective time of the merger is entitled to assert appraisal rights
for the shares of common stock registered in that holder's name. A demand for
appraisal should be executed by or on behalf of the stockholder of record, fully
and correctly, as the stockholder's name appears on the applicable stock
certificates, should specify the stockholder's name and mailing address, the
number of shares of common stock owned and that the stockholder intends to
demand appraisal of the stockholder's common stock. If the shares are owned of
record in a fiduciary capacity, such as by a trustee, guardian or custodian,
execution of the demand should be made in that capacity.
If the shares are owned of record by more than one person, as in a joint
tenancy or tenancy in common, the demand should be executed by or on behalf of
all owners. An authorized agent, including one or more joint owners, may execute
a demand for appraisal on behalf of a stockholder; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is acting as agent for such owner or owners. A
record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares held
for one or more other beneficial owners while not exercising appraisal rights
with respect to the shares held for one or more beneficial owners; in such case,
the written demand should set forth the number of shares as to which appraisal
is sought, and where no number of shares is expressly mentioned, the demand will
be presumed to cover all shares held in the name of the record owner. If a
stockholder holds shares of common stock through a broker which in turn holds
the shares through a central securities depository nominee such as Cede & Co., a
demand for appraisal of such shares must be made by or on behalf of the
depository nominee and must identify the depository nominee as record holder.
Beneficial owners who are not record owners and who intend to exercise
appraisal rights should instruct the record owner to comply strictly with the
statutory requirements with respect to the delivery of written demand for
appraisal. A demand for appraisal submitted by a beneficial owner who is not the
record owner will not be honored.
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, from and after the effective time of the merger, be
entitled to vote or consent by written action the shares subject to that demand
for any purpose or be entitled to the payment of dividends or other
distributions on those shares (except dividends or other distributions payable
to holders of record of shares as of a record date before the effective time of
the merger).
Any stockholder may withdraw its demand for appraisal and remain a
stockholder of Nettaxi-Delaware by delivering to us a written withdrawal of the
stockholder's demand for appraisal. However, any such attempt to withdraw made
more than 60 days after the effective date of the merger will require written
approval of the surviving corporation. No appraisal proceeding in the Delaware
Court of Chancery will be dismissed as to any stockholder without the approval
41
of the Court of Chancery, and such approval may be conditioned upon such terms
as the Court of Chancery deems just. If the surviving corporation does not
approve a stockholder's request to withdraw a demand for appraisal when that
approval is required, or if the Court of Chancery does not approve the dismissal
of an appraisal proceeding, the stockholder will be entitled to receive only the
appraised value determined in any such appraisal proceeding.
A stockholder who elects to exercise appraisal rights under Section 262
should mail or deliver a written demand to Nettaxi-Delaware at 1339 Moffett Park
Drive, Sunnyvale, California 94089 Attn: Chief Financial Officer.
Notice by Nettaxi-Delaware. If the Merger Agreement and the Merger are
approved and adopted at the special meeting, then within 10 days after the
Effective Time of the merger, the surviving corporation must send a notice as to
the effectiveness of the merger to each stockholder who (1) has made a written
demand for appraisal in accordance with Section 262 and (2) has not voted to
approve and adopt, nor consented to, the merger agreement and the merger.
Under the Merger Agreement, Nettaxi has agreed to give RAE prompt notice of
any demands for appraisal received by us. RAE has the right to participate in
all negotiations and proceedings with respect to demands for appraisal.
Nettaxi-Delaware will not, except with the prior written consent of RAE, make
any payment with respect to any demands for appraisal, or offer to settle, or
settle, any such demands.
Within 120 days after the Effective Time of the Merger, any stockholder who
has demanded an appraisal and who has not withdrawn such demand in accordance
with Section 262 will be entitled to receive from the surviving corporation,
upon written request, a statement setting forth the aggregate number of shares
not voted in favor of the merger agreement and the merger and with respect to
which demands for appraisal have been received and the aggregate number of
holders of such shares. The surviving corporation must mail that statement to
the stockholder within 10 days of receipt of the request or within 10 days after
expiration of the period for delivery of demands for appraisals under Section
262, whichever is later.
Filing a petition for appraisal. Within 120 days after the effective date
of the merger, either the surviving corporation or any stockholder who has
demanded an appraisal and who has not withdrawn such demand in accordance with
the requirements of Section 262 may file a petition with the Court of Chancery
demanding a determination of the value of the shares of common stock held by all
such stockholders. Nettaxi-Delaware is under no obligation, and has no present
intent, to file a petition for appraisal, and stockholders seeking to exercise
appraisal rights should not assume that the surviving corporation will file such
a petition or that it will initiate any negotiations with respect to the fair
value of the shares. Accordingly, stockholders who desire to have their shares
appraised should initiate any petitions necessary for the perfection of their
appraisal rights within the time and the manner prescribed in Section 262.
Inasmuch as Nettaxi-Delaware has no obligation to file such a petition, the
failure of a stockholder to do so within the time specified could nullify the
stockholder's previous written demand for appraisal. If, within the 120-day
period following the effective time of the merger, no petition shall have been
filed as provided above, all rights to appraisal will cease and all dissenting
stockholders who owned shares of common stock will remain stockholders of
Nettaxi-Delaware.
A stockholder timely filing a petition for appraisal with the Court of
Chancery must deliver a copy to the surviving corporation, which will then be
obligated within 20 days to provide the Register in Chancery with a duly
verified list containing the names and addresses of all stockholders who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the surviving corporation. After notice to
those stockholders, the Court of Chancery may conduct a hearing on the petition
42
to determine which stockholders have become entitled to appraisal rights. The
Court of Chancery may require stockholders who have demanded an appraisal of
their shares and who hold stock represented by certificates to submit their
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings. If any stockholder fails to comply with the
requirement, the Court of Chancery may dismiss the proceedings as to that
stockholder.
DETERMINATION OF FAIR VALUE. After determining the stockholders entitled to
an appraisal, the Court of Chancery will appraise the shares of common stock
owned by the dissenting stockholders, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of the
merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value.
Stockholders considering seeking appraisal should be aware that the fair
value of their shares as determined under Section 262 could be more than, the
same as or less than the value per share of the shares of the surviving
company's stock following the Merger.
In determining fair value and, if applicable, a fair rate of interest, the
Court of Chancery is to take into account all relevant factors. In Weinberger v.
UOP, Inc., the Delaware Supreme Court discussed the factors that could be
considered in determining fair value in an appraisal proceeding, stating that
"proof of value by any techniques or methods which are generally considered
acceptable in the financial community and otherwise admissible in court" should
be considered and that "fair price obviously requires consideration of all
relevant factors involving the value of a company." The Delaware Supreme Court
stated that, in making this determination of fair value, the court must consider
"market value, asset value, dividends, earnings prospects, the nature of the
enterprise and any other facts which were known or which could be ascertained as
of the date of the merger and which throw any light on future prospects of the
merged corporation." Furthermore, the court may consider "elements of future
value, including the nature of the enterprise, which are known or susceptible of
proof as of the date of the merger and not the product of speculation." The
Delaware Supreme Court noted that Section 262 provides that fair value is to be
determined "exclusive of any element of value arising from the accomplishment or
expectation of the merger." The costs of the action may be determined by the
Court of Chancery and taxed upon the parties as the Court of Chancery deems
equitable. Upon application of a dissenting stockholder, the Court of Chancery
may also order that all or a portion of the expenses incurred by any stockholder
in connection with the appraisal proceeding, including, without limitation,
reasonable attorneys' fees and the fees and expenses of experts, be charged pro
rata against the value of all of the shares entitled to appraisal. Any
stockholder wishing to exercise appraisal rights is urged to consult legal
counsel before attempting to exercise appraisal rights. Failure to comply
strictly with all of the procedures set forth in Section 262 of the Delaware law
may result in the loss of a stockholder's statutory appraisal rights.
SUMMARY OF CALIFORNIA DISSENTERS' RIGHTS.
There is no guarantee that a court would conclude that a stockholder may
exercise dissenters' rights under California law. Assuming such rights are
available, pursuant to Chapter 13 of the California General Corporation Law,
referred to as the "California law," the holders of our common stock have the
right to dissent from the merger and, if the merger is consummated, to receive
cash compensation equal to the fair market value of their shares. The fair
market value of any dissenting shares will be determined as of the day before
the first announcement of the terms of the proposed merger, excluding any
appreciation or depreciation as a result of the merger, but adjusted for any
stock split, reverse stock split, or share dividend which become effective
thereafter. In such event, the dissenting stockholders will have the rights and
duties and must follow the procedures set forth in Chapter 13 of the California
law in order to perfect such rights. A brief summary of Chapter 13 of the
California law is set forth below.
43
The following discussion is not a complete statement of the law pertaining
to appraisal rights under the California law, and is qualified in its entirety
by the full text of Chapter 13 of the California law, which is provided in its
entirety as Appendix E to this proxy statement. All references in Chapter 13 and
in this summary to a "stockholder" are to the record holder of the shares of
common stock as to which dissenters' rights are asserted or such holder's
transferee of record. Failure to comply with the procedures specified in
California law timely and properly will result in the loss of dissenters'
rights.
A person having a beneficial interest in shares of common stock held of
record in the name of another person, such as a broker or nominee, must act
promptly to cause the record holder to follow the steps summarized below
properly and in a timely manner to perfect dissenter rights.
To exercise dissenters' rights under the California law, a stockholder
must:
Not vote in favor of the merger any of the shares of our common stock the
stockholder wishes to be dissenting shares;
Demand that Nettaxi-Delaware purchase the dissenting shares at fair market
value; and
Submit certificates representing the dissenting shares for endorsement.
In order to not vote in favor of the merger agreement, a stockholder must:
not return a proxy and not vote in person in favor of adoption of the
merger agreement;
return a proxy card with the "AGAINST" or "ABSTAIN" box checked;
vote in person against the adoption of the merger agreement; or
register in person an abstention from the proposal to adopt the merger
agreement.
The general process of exercising dissenters rights under California law is
set forth in more detail below.
Demand for Purchase. Not later than 30 days after the date on which the
notice of approval (described below) of the merger by the outstanding shares was
mailed, a dissenting stockholder must make written demand upon the surviving
corporation for the purchase of the dissenting shares and payment to the
stockholder of their fair market value in cash. The demand shall state the
number and class of the shares held of record by the stockholder which the
stockholder demands that Nettaxi-Delaware purchase and shall contain a statement
of what such stockholder claims to be the fair market value of those shares as
of the day before announcement of the merger. The statement of the fair market
value constitutes an offer by the stockholder to sell the shares at such price.
Endorsement of Shares. Within 30 days after the date on which the notice of
approval (described below) of the merger by stockholders is mailed, a dissenting
stockholder must submit the certificates representing any shares in regard to
which demand for purchase is being made at Nettaxi-Delaware's principal office
or the office of Nettaxi-Delaware's transfer agent to be stamped or endorsed
with a statement that the shares are dissenting shares or to be exchanged for
certificates of appropriate denomination so stamped or endorsed.
Notice of Approval of Merger. Within 10 days after the date of the approval
of the merger, we will mail a notice of the approval of the merger accompanied
by a copy of Sections 1300, 1301, 1302, 1303, and 1304 of Chapter 13 of the
44
California law to each stockholder who has not returned a written proxy
approving the merger or was present at the special meeting and did not vote in
favor of the merger, together with a brief description of the procedure to be
followed if the stockholder wishes to exercise its dissenter's rights and a
statement of the price determined by us to represent the fair market value of
the dissenting shares. If we and the stockholder agree upon the price and agree
that the shares are dissenting shares, the dissenting stockholder will be
entitled to the agreed on price plus the legal rate on judgments from the date
of such agreement. If we and the stockholder fail to agree upon the fair market
value of the shares or whether the shares are dissenting shares, the stockholder
may file a complaint with the California Superior Court within six months after
the date on which notice of the approval of the merger is mailed to stockholders
requesting that the court determine the fair market value of the shares and/or
whether the shares are dissenting shares.
Termination of Dissenting Stockholder Status. Dissenting shares lose their
status as dissenting shares and the holders thereof lose the right to require
Nettaxi-Delaware to purchase their shares if, among other things, any of the
following events occur:
Nettaxi-Delaware abandons the merger. Upon abandonment of the merger,
Nettaxi-Delaware will pay on demand to any dissenting stockholder who has
initiated proceedings in good faith under Chapter 13 of the California law all
necessary expenses incurred in such proceedings and reasonable attorneys' fees;
The dissenting shares are transferred prior to their submission for
endorsement as explained above;
Nettaxi-Delaware and the dissenting stockholder do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares and neither files a complaint or intervenes in a pending legal action
within six months after the date on which notice of the approval by the
outstanding shares was mailed to the stockholder; or
The dissenting stockholder, with Nettaxi-Delaware's consent, withdraws the
demand for purchase of the dissenting shares.
Purchases Which Would Result in Insolvency. To the extent that the
provisions of Chapter 5 of the California law prevent the payment to any holders
of dissenting shares of their fair market value, such stockholders will become
creditors of the surviving corporation for the amount that they otherwise would
have received in repurchase of their dissenting shares, plus interest at the
legal rate on judgments until the date of payment, but subordinate to all other
creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5 of the California law.
GOVERNMENTAL APPROVALS
Nettaxi and RAE are not aware of any license or regulatory permit which is
material to the business of either company and which is likely to be adversely
affected by the Merger, or of any approval or other action by any state, federal
or foreign government or governmental agency that would be required prior to the
Merger, other than compliance with any applicable state securities laws.
RESTRICTIONS ON RESALES
The shares of Nettaxi-Delaware common stock to be issued to RAE
shareholders in the Merger will be restricted securities and may only be sold
45
pursuant to an effective registration statement under the Securities Act or an
exemption therefrom. The restricted securities and any shares of capital stock
received in respect thereof, whether by reason of a stock split, share
reclassification or stock dividend, shall not be transferable except upon the
conditions specified herein.
Each certificate for the Nettaxi common stock issued in the Merger and any
shares of capital stock received in respect thereof, and each certificate for
any such securities issued to subsequent transferees of any such certificate
shall contain a legend to the effect that:
"The Restricted Securities covered by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not be sold,
offered for sale, assigned, transferred or otherwise disposed of, unless
registered pursuant to the provisions of that Act or an opinion of counsel to
Nettaxi is obtained stating that such disposition is in compliance with an
available exemption from such registration."
THE MERGER AGREEMENT
The following is a summary of the material provisions of the Merger
Agreement. This summary may not contain all of the information that is
important to the stockholders of Nettaxi and RAE and thus this description is
qualified in its entirety by reference to the Merger Agreement attached as
Appendix A hereto and which is incorporated by reference herein, which you are
urged to read carefully and in its entirety. This summary is qualified in its
entirety by reference to the full text of the Merger Agreement.
THE MERGER
The Merger Agreement provides that at the Effective Time of the Merger, RAE
will be merged with and into RSAC. Upon completion of the Merger, RAE will
continue as the surviving corporation and will be a wholly-owned subsidiary of
Nettaxi-Delaware.
EFFECTIVE TIME OF THE MERGER
If all of the conditions precedent to the obligations of the parties to the
Merger Agreement have been met or waived, the Merger shall become effective upon
the filing of an agreement of merger with the Secretary of State of California.
MANNER AND BASIS OF CONVERTING SHARES
At the Effective Time, each share of RAE common stock will automatically be
converted into shares of Nettaxi-Delaware common stock pursuant to the Exchange
Ratio. The Exchange Ratio will be calculated based on the respective net values
of the respective companies, in accordance with the following formula:
The Exchange Ratio is equal to the Value Per Share of RAE divided by the
Value Per Share of Nettaxi-Delaware.
For purposes of the formula the Value Per Share of RAE is equal to 1.48113.
The Value Per Share of Nettaxi-Delaware is equal to Nettaxi-Delaware's Net
Value plus $100,000 divided by 7,605,747, the number of shares of
Nettaxi-Delaware's common stock outstanding following the reverse stock split
contemplated in Proposal 2. Nettaxi-Delaware's Net Value is equal to its cash
plus cash equivalents minus its payables and fixed obligations (excluding
46
certain listed liabilities) and minus an appropriate reserve for contingent
liabilities, each calculated as of the Effective Time of the Merger. However,
Nettaxi-Delaware's Net Value may not exceed $7,500,000.
For illustrative purposes only, if the Net Value of Nettaxi-Delaware were
$7,500,000 at the Effective Time, 34,526,088 shares of Nettaxi-Delaware common
stock, constituting 80.12% of the outstanding shares of Nettaxi-Delaware common
stock at the Effective Time, would be issued to the stockholders of RAE in the
Merger and stockholders of Nettaxi-Delaware would retain 7,605,747 shares of
Nettaxi-Delaware common stock, constituting 17.65% of the outstanding shares of
Nettaxi-Delaware common stock at the Effective Time. Additionally, 960,000
shares of Nettaxi-Delaware common stock, constituting 2.23% of the outstanding
shares of Nettaxi-Delaware common stock at the Effective Time, would be held by
Baytree Capital Associates.
THERE CAN BE NO ASSURANCE THAT THE PERCENTAGE OWNERSHIP OF THE COMBINED
COMPANY WILL RESULT AS DESCRIBED ABOVE. IF NETTAXI-DELAWARE'S NET VALUE WERE TO
DROP BELOW SEVEN MILLION FIVE HUNDRED THOUSAND DOLLARS ($7,500,000) AT THE
EFFECTIVE TIME OF THE MERGER, NETTAXI-DELAWARE WOULD HAVE TO ISSUE ADDITIONAL
SHARES IN CONNECTION WITH THE MERGER AND STOCKHOLDERS OF NETTAXI-DELAWARE WOULD
OWN LESS THAN 17.65% OF THE COMBINED COMPANY. ADDITIONALLY, IF
NETTAXI-DELAWARE'S NET VALUE WERE TO DROP BELOW SEVEN MILLION FIVE HUNDRED
THOUSAND DOLLARS ($7,500,000) AT THE EFFECTIVE TIME OF THE MERGER, RAE WOULD NOT
BE OBLIGATED TO CONSUMMATE THE MERGER.
If RAE or Nettaxi were to issue any shares of its capital stock between the
date on which the Merger Agreement was signed and the Effective Time (other than
shares of RAE common stock issued with respect to the conversion of its
preferred stock), the Exchange Ratio would be adjusted appropriately.
As soon as practicable following the Effective Time, Nettaxi-Delaware will
issue, (1) certificates representing the shares of Nettaxi-Delaware common stock
issuable under the Merger Agreement and (2) a sufficient amount of cash to
provide for cash payments in lieu of fractional shares to the holders of RAE
common stock.
RAE STOCK OPTIONS AND WARRANTS
At the Effective Time, each option to purchase RAE common stock ("RAE
Option"), whether vested or unvested, will be assumed by Nettaxi-Delaware and
shall be subject to the same terms and conditions governing the option
immediately prior to the Effective Time, except that:
(a) the option will be exercisable for that number of whole shares
of Nettaxi-Delaware common stock equal to the product of the number of shares of
RAE common stock that were issuable upon exercise of such option immediately
prior to the Effective Time multiplied by the Exchange Ratio and rounded down to
the nearest whole number of shares of Nettaxi-Delaware common stock;
(b) the per share exercise price for the shares of
Nettaxi-Delaware common stock issuable upon exercise of such assumed option will
be equal to the quotient determined by dividing the exercise price per share of
RAE common stock at which such option was exercisable immediately prior to the
Effective Time by the Exchange Ratio, rounded up to the nearest whole tenth of a
cent; and
(c) any restriction on the exercisability of such RAE System
Option shall continue in full force and effect, and the term, exercisability,
vesting schedule and other provisions of such RAE System Option shall remain
unchanged.
REPRESENTATIONS AND WARRANTIES
47
The Merger Agreement contains customary representations and warranties of
RAE and Nettaxi including those related to:
- each company's organization and standing;
- each company's capitalization;
- each company's corporate authority to enter into the Merger Agreement;
- each company's ownership of assets;
- the status of each company's material contracts and commitments;
- the status of pending litigation involving each company;
- the payment of taxes by each company;
- each company's compliance with laws and regulations;
- employment matters involving each company;
- the accuracy of Nettaxi's SEC dislcosures;
The Merger Agreement includes additional representations and warranties relating
to, among other things, certain aspects of the respective businesses and assets
of the parties and other matters. You are encouraged to carefully review the
representations and warranties, as they are set forth in the Merger Agreement.
The representations and warranties expire at the Effective Time.
COVENANTS; CONDUCT OF BUSINESS PRIOR TO THE MERGER
RAE has agreed to operate its business in the usual and ordinary course
until the Effective Time, but that it will use its commercially reasonable
efforts, consistent with past practice and policy, to:
- keep available the services of its present employees and agents;
- complete or maintain all existing material arrangements in accordance
with their material terms;
- maintain the integrity of all of its confidential information;
- comply in all material respects with all applicable laws; and
- preserve the goodwill of its business and contractual relationships
with suppliers, customers and others having business relation with RAE.
- call and hold a meeting of its common stockholders to vote upon the
adoption and approval of the Merger Agreement and the Merger.
Negative Covenants of the Parties. Both Nettaxi and RAE have agreed that
before the Effective Time, without the prior written consent of the other party,
they will not and will not agree to:
- sell or transfer any of their respective assets or property;
- make any distribution, whether by dividend or otherwise, to any of
their respective shareholders or employees except for compensation to employees
and payments to associated companies for goods and services, in the usual and
ordinary course of business;
- declare any dividend or other distribution;
48
- redeem or otherwise acquire any shares of their respective capital
stock or other securities; or
- incur any material debt or other obligation.
Immediately prior to the Effective Time of the Merger, except for certain
contemplated liabilities, Nettaxi is to be a clean public shell with no
liabilities. Additionally, prior to the Effective Time of the Merger, all
business assets, other than cash and cash equivalents, and material liabilities
must be transferred out of Nettaxi.
EXCLUSIVITY
Without the other's prior written consent, both Nettaxi and RAE have agreed
that, at any time before the earlier of the termination of the Merger Agreement
or the Effective Time, neither party will merge with another entity or solicit
potential transactions with other entities. Nevertheless, if an unsolicited
offer is received by the Board of Directors of either Nettaxi or RAE, the Board
of Directors receiving the offer may review and approve the offer consistent
with the fiduciary obligations the Board of Directors owes to its stockholders.
Should the foregoing occur, and the Merger not be consummated, the party
receiving the unsolicited offer may be required to pay a fee of $250,000 to the
other party.
CONDITIONS TO THE MERGER
CONDITIONS TO THE OBLIGATION OF NETTAXI. The obligation of Nettaxi to
complete the Merger is subject to the satisfaction of the following conditions:
- the representations and warranties made by RAE in the Merger
Agreement shall be accurate in all material respects as of the date of the
Merger Agreement, and accurate in all respects at and as of the closing date;
- RAE shall have performed and complied in all material respects with
all agreements and conditions required to be performed or complied with by it
under the Merger Agreement at or prior to the closing date;
- Subject to specific limitations set forth in the Merger Agreement, no
material adverse change shall have occurred subsequent to September 30, 2001 in
the financial position, results of operations, assets, liabilities, or prospects
of RAE;
- No litigation, temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal or regulatory restraint seeking to enjoin the transactions contemplated by
the Merger Agreement or to obtain damages on account of the Merger Agreement
shall be pending or, to Nettaxi's knowledge, threatened.
- RAE shall have delivered to Nettaxi all documents and instruments
required to be delivered under the Merger Agreement;
- The Merger Agreement shall have been duly adopted and approved, and
the Merger shall have been duly approved, by the shareholders of RAE.
- The holders of not more than 10% of the shares of RAE's common stock
shall have exercised dissenters' rights pursuant to the California Law.
49
- Nettaxi shall have received the approval of a majority of its
shareholders of the transactions contemplated by the Merger Agreement.
- RAE shall have provided Nettaxi with financial statements and other
information satisfactory in all respects to allow Nettaxi to comply with any and
all applicable requirements under the Securities Act of 1993 and the Securities
Exchange Act of 1934.
- With respect to that certain pending litigation known as Lanell
Owens, Individually and as the representative of the estate of Virgil Johnson,
deceased, Wilma Johnson, Bobby Johnson, Steven Johnson, Roger Johnson and Virgil
Johnson, Jr. v. RAE, Inc. Total Safety, Inc. Global Intermodal Systems pending
in the District Court of Harris County Texas (2001-54565), RAE shall have
received a letter from its insurance carrier either (i) accepting the obligation
to insure RAE against the claim; or (ii) reserving its rights with respect to
the claim.
- All other authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations of waiting periods imposed by, any
governmental entity the failure to obtain or comply with which would be
reasonably likely to have a material adverse effect on Nettaxi or a material
adverse effect on the consummation of the transactions contemplated by the
Merger Agreement shall have been filed, occurred or been obtained.
CONDITIONS TO THE OBLIGATION OF RAE. The obligation of RAE to complete the
Merger is subject to the satisfaction of the following conditions, any of which
it may waive in its sole discretion:
- the representations and warranties made by Nettaxi in the Merger
Agreement shall be accurate in all material respects at and as of on the closing
date;
- Nettaxi shall have performed and complied in all material respects
with all agreements and conditions required to be performed or complied with by
it under the Merger Agreement at or prior to the closing date;
- All present directors of Nettaxi shall have tendered their
resignations effective upon the closing;
- Subject to specific limitations set forth in the Merger Agreement, no
material adverse change shall have occurred subsequent to September 30, 2001 in
the financial position, results of operations, assets, liabilities, or prospects
of Nettaxi or its subsidiaries;
- No litigation, temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or other
legal or regulatory restraint seeking to enjoin the transactions contemplated by
the Merger Agreement or to obtain damages on account of the Merger Agreement
shall be pending or threatened.
- Nettaxi shall have delivered to RAE all documents and instruments
required to be delivered under the Merger Agreement;
- The Merger Agreement shall have been approved by a majority of the
shareholders of RAE.
- Nettaxi Net Cash: Nettaxi's net cash, as described in the section of
this proxy statement entitled "Manner and Basis for Converting Shares", shall be
50
at least seven million five hundred thousand dollars ($7,500,000); provided
however, that if the Closing takes place between March 15, 2002 and April 1,
2002 Nettaxi's net cash shall be at least seven million four hundred seventy
five thousand dollars ($7,475,000).
- RAE shall have received executed Lock-Up Agreements from identified
executive officers and affiliates of Nettaxi;
- Nettaxi shall have effectuated a reincorporation as described in
Proposal 3.
- All other authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations of waiting periods imposed by, any
governmental entity the failure to obtain or comply with which would be
reasonably likely to have a material adverse effect on RAE or a material adverse
effect on the consummation of the transactions contemplated hereby shall have
been filed, occurred or been obtained.
TERMINATION OF THE MERGER AGREEMENT
Either party may terminate the Merger Agreement if the closing has not
occurred by April 1, 2002 (the "Termination Date"), subject to the limitation
described below, unless the terminating party has willfully or materially
breached any of the terms and conditions of the Merger Agreement. If the
closing of the Merger is delayed beyond April 1, 2002 due to a review of this
proxy statement by the Commission, the Termination Date shall be automatically
extended until the date thirty (30) business days following the date on which
the Commission advises Nettaxi that it has no further comments with respect to
such proxy statement.
Additionally, prior to the Termination Date, either party may terminate the
Merger Agreement following the insolvency or bankruptcy of the other party
hereto, or if any one or more of the conditions to the Merger shall become
incapable of fulfillment or there shall have occurred a breach of the Merger
Agreement which breach would reasonably be expected to have a material adverse
effect on the other party hereto and either such condition or breach shall not
have been waived by the party for whose benefit the condition, representation or
warranty was established, then either RAE (in the case of a condition to RAE's
obligation to close) or Nettaxi (in the case of a condition to Nettaxi's
obligation to close) may terminate the Merger.
BREAK-UP FEE. If Nettaxi's stockholders do not approve Proposals 1, 2 and
3 of this proxy statement and the Merger Agreement is terminated, Nettaxi shall
pay to RAE, within five days of the date of the termination, an amount equal to
two hundred and fifty thousand dollars ($250,000).
EXPENSES
All expenses incurred in connection with the Merger will be paid by the
party incurring them, whether or not the Merger is consummated.
COVENANTS OF NETTAXI AND RAE FOLLOWING THE EFFECTIVE TIME
CHANGES IN REPRESENTATIONS AND WARRANTIES. Nettaxi and RAE have agreed to
provide prompt notice of any facts or occurrences which have a material impact
on each party's representations and warranties made in the Merger Agreement.
51
REGISTRATION STATEMENTS. The Merger Agreement requires Nettaxi-Delaware to
use commercially reasonable efforts to update registration statements which have
been filed by Nettaxi as of the Effective Time.
STOCK OPTION PLANS AND WARRANTS. The Merger Agreement requires
Nettaxi-Delaware to maintain its 1998 and 1999 Stock Option Plans for a period
of at least four years following the Effective Time of the Merger.
Additionally, Nettaxi-Delaware is obligated to continue to honor the terms of
the options and warrants of Nettaxi-Delaware which are outstanding as of the
Effective Time.
FINANCIAL ADVISORS
The Merger Agreement provides that Baytree and Harter Financial, Inc. will
receive a fee upon the consummation of the Merger in connection with their
financial advisory services provided in connection with the Merger.
Baytree Capital Associates has acted as a financial adviser to Nettaxi in
connection with the Merger. As compensation for its services, at the effective
time of the Merger, the surviving company shall issue to Baytree 960,000 shares
of its common stock. Additionally, Baytree will continue to provide consulting
services on behalf of the surviving company in exchange for warrants to purchase
1,750,000 shares of common stock, after giving effect to the reverse stock split
contemplated Proposal 2, having an exercise price of $1.19 per share. Michael
Gardner is the principal member of Baytree.
Harter Financial, Inc. has acted as a financial advisor to RAE in
connection with the Merger. As compensation for its services, RAE has paid
Harter a one-time, non-refundable engagement fee of $10,000. If and when the
Merger is consummated, RAE shall pay Harter an additional and final fee of
$415,000 for the services rendered by Harter to RAE in effecting the Merger.
INDEMNIFICATION
The Merger Agreement provides for the survival after the Merger of all
indemnification rights of the members of the Board of Directors and officers of
Nettaxi for acts and omissions occurring before the Merger, as their rights
existed as of January 9, 2002, in the Nettaxi articles of incorporation, bylaws
and in indemnification agreements with Nettaxi. RAE will guarantee that the
surviving company observes all of these indemnification rights to the fullest
extent permitted by applicable law following the Merger. In addition, for a
period of three years after the Merger, the surviving company will maintain a
directors' and officers' liability insurance policy covering those persons who
are currently covered by Nettaxi's directors' and officers' liability insurance
policy with coverage in the amount of five million dollars ($5,000,000).
TERMINATION OF REPRESENTATIONS AND WARRANTIES.
All representations, warranties, and covenants made by RAE or Nettaxi in
the Merger Agreement, or pursuant hereto, shall terminate at the Closing.
VOTING AGREEMENTS
In connection with the Merger, certain parties have entered into voting
agreements. The following description describes the material terms of the
voting agreements. Forms of voting agreements are attached as Appendix B to this
proxy statement and are incorporated herein by reference. The Company encourages
its stockholders to read the entire forms of voting agreements.
52
VOTING AGREEMENTS RELATING TO NETTAXI SHARES. Robert A. Rositano, Jr. and
Dean Rositano, each executive officers and directors of Nettaxi and Michael
Gardner, a principal of Baytree Capital Associates, the financial advisor of
Nettaxi in connection with the Merger, have each entered into voting agreements
dated January 9, 2002 with RAE. They have agreed to vote all shares of Nettaxi
common stock owned by them as of the record date in favor of the approval and
adoption of the Merger Agreement and approval of the Merger. Approximately
4,588,012 shares, or 10.6% of the Nettaxi common stock outstanding on the record
date, are subject to these voting agreements.
VOTING AGREEMENTS RELATING TO RAE SHARES. Robert I. Chen and Peter H. Hsi,
Lien Q.C. Chen, T.Z. Chu and Philip J. Sheridan, each as either an officer,
director or other affiliate of RAE,have each entered into voting agreements
dated January 9, 2002 with Nettaxi. They have agreed to vote all shares of RAE
capital stock owned by them as of the record date in favor of the approval and
adoption of the Merger Agreement and approval of the Merger. Approximately
17,380,000 shares on an as-converted basis, or approximately 76% of the RAE
common stock outstanding on as converted basis on the record date, are subject
to these voting agreements.
LOCK-UP AGREEMENTS
Robert A. Rositano, Jr. and Dean Rositano, each executive officers and
directors of Nettaxi as well as Criag Sukekane, Nettaxi's controller, have
entered into Lock-Up Agreements with RAE dated January 9, 2002. Under the
agreements, for a period of one year following the closing of the merger, such
executive officers may not offer, sell, contract to sell, pledge or otherwise
dispose of more than 25% of their shares of Nettaxi common stock in any three
month period.
53
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
NETTAXI.COM AND RAE SYSTEMS, INC.
On January 9, 2002, Nettaxi.com entered into a definitive merger agreement
with RAE Systems, Inc. ("RAE") whereby RAE will merge with and into RAES
Acquisition Corporation, a wholly-owned subsidiary of Nettaxi.com, with RAE
being the surviving corporation and existing as a wholly-owned subsidiary of
Nettaxi.com. Under the terms of the merger agreement, the outstanding common and
preferred shares of RAE will be converted into common shares of Nettaxi.com
under an exchange ratio that will result in the former shareholders of RAE
holding approximately 80% of the outstanding shares of Nettaxi.com immediately
after the effective time of the merger.
As the former shareholders of RAE will control Nettaxi.com after the
transaction, the proposed merger will be accounted for as a reverse acquisition
under which, for accounting purposes, RAE is deemed to be the acquiror and
Nettaxi.com is deemed to be the acquired entity. Under these accounting
principles the post merger company financial statements will represent RAE on a
historical basis consolidated with the results of operations of Nettaxi.com from
the effective date of the merger. As Nettaxi.com has not pursued any revenue
generating activities in the last six months and will abandon its business model
with effect from the consummation of the Merger, the reverse merger will be
treated as a recapitalization of RAE, with no goodwill recorded.
The unaudited pro forma condensed financial statements of Nettaxi.com are
based upon the historical financial statements of Nettaxi.com and RAE, after
giving effect to the proposed 5.67 for 1 reverse stock split and the proposed
merger with RAE. These unaudited pro forma condensed financial statements are
not necessarily indicative of the financial position and results of operations
that would have been attained had the transactions actually taken place at the
date indicated and do not purport to be indicative of the effects that may be
expected to occur in the future.
The accompanying unaudited pro forma condensed financial statements
illustrate the effect of the proposed merger on Nettaxi.com's financial position
and results of operations. The unaudited pro forma condensed balance sheet as of
December 31, 2001 is based on the historical balance sheets of Nettaxi.com and
RAE and assumes the proposed merger took place on that date. The unaudited pro
forma condensed statements of operations for the year ended December 31, 2001
are based on the historical statements of operations of Nettaxi.com and RAE for
the same periods and assume the proposed merger occurred as of January 1, 2000.
As there are effectively no operations of Nettaxi.com on a pro forma basis, the
pro forma financial statements reflect RAE historical financial statements for
the year ended December 31, 2001.
NETTAXI.COM
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 2001
(UNAUDITED)
PRO FORMA
PRO FORMA CONSOLIDATED
RAE NETTAXI.COM ADJUSTMENTS NETTAXI.COM
12/31/01 12/31/01 (SEE NOTES) 12/31/01
----------- -------------- -------------- -------------
ASSETS
CURRENT ASSETS: [c] (415,000)
Cash and Cash Equivalents $ 3,742,600 $ 8,586,800 [a] (933,900) $ 10,980,500
Restricted Cash 3,000,000 - - 3,000,000
Accounts Receivable 2,398,100 - - 2,398,100
Inventories 3,715,800 - - 3,715,800
Prepaid Expenses 267,100 122,300 [a] (122,300) 267,100
Deferred Tax Assets 500,800 - - 500,800
----------- -------------- -------------- -------------
TOTAL CURRENT ASSETS 13,624,400 8,709,100 (1,471,200) 20,862,300
Property & Equipment 1,202,300 77,000 [a] (77,000) 1,202,300
Deposits and Pre-Merger Costs 216,500 5,600 [a] (5,600) 106,500
[c] (110,000)
----------- -------------- -------------- -------------
TOTAL ASSETS $15,043,200 $ 8,791,700 $ (1,663,800) $ 22,171,100
=========== ============== ============== =============
54
NETTAXI.COM
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (CONTINUED)
DECEMBER 31, 2001
(UNAUDITED)
PRO FORMA
PRO FORMA CONSOLIDATE
RAE NETTAXI.COM ADJUSTMENTS NETTAXI.COM
12/31/01 12/31/01 (SEE NOTES) 12/31/01
---------------- ------------- ---------------- -------------
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes Payable and Lines of Credit $ 4,425,800 $ - $ - $ 4,425,800
Accounts Payable 842,200 49,200 [a] (49,200) 842,200
Accrued Expenses 1,234,800 134,700 [a] (134,700) 1,234,800
Income Taxes Payable 1,670,200 - - 1,670,200
Deferred Revenue - Current 248,900 - - 248,900
Capital Lease Obligations - Current 96,600 - - 96,600
---------------- ------------- ---------------- -------------
TOTAL CURRENT LIABILITIES 8,518,500 183,900 (183,900) 8,518,500
Deferred Revenue - L/T $ 149,900 - - 149,900
Capital Lease Obligations - L/T 51,300 - - 51,300
Deferred Income Taxes 443,100 - - 443,100
Minority Interest in Cons. Sub. 1,141,900 - - 299,139
---------------- ------------- ---------------- -------------
TOTAL LIABILITIES 10,304,700 183,900 (183,900) 10,304,700
---------------- ------------- ---------------- -------------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE REDEEMABLE
PREFERRED STOCK;
Series A - $0.01 par value;
700,000 shares authorized,
issued and outstanding;
$0.40/share redemption value; 300,000 - [b] (300,000) -
Series B - $0.01 par value;
1,000,000 shares authorized,
issued and outstanding;
$1.00/share redemption value; 1,000,000 - [b] (1,000,000) -
---------------- ------------- ---------------- -------------
1,300,000 - (1,300,000) -
---------------- ------------- ---------------- -------------
SHAREHOLDERS' EQUITY
Common Stock:
RAE - $0.01 par value;
40,000,000 shares authorized;
16,492,960 shares issued and
outstanding (historical); 164,900 - [b] (164,900) -
Nettaxi.com - $0.001 par value;
200,000 000 shares authorized;
43,124,586 shares issued and
outstanding historical);
7,605,747 (post reverse stock
split);[43,091,835](post merger) - 43,100 - 43,100
Common Stock Subscribed - (95,000) [b] 95,000 -
Additional Paid-In Capital 1,161,600 44,897,900 [b](35,823,200 10,461,300
[c] (525,000
[c] 750,000
Deferred Compensation (717,800) - - (717,800)
Retained Earnings 2,829,800 - [c] (750,000) 2,079,800
(Accumulated Deficit) - (36,238,200) [a] (954,900) -
[b] 37,193,100
---------------- ------------- ---------------- -------------
TOTAL SHAREHOLDERS' EQUITY 3,438,500 8,607,800 (179,900) 11,866,400
---------------- ------------- ---------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 15,043,200 $ 8,791,700 $ (1,663,800) $ 22,171,100
================ ============= ================ =============
NOTE: The above pro forma adjustments give effect to the proposed
merger of Nettaxi.com and RAE and the recapitalization of the
surviving entity. Nettaxi.com has been adjusted to include the assets,
liabilities and operations of RAE as if the merger had taken effect on
December 31, 2001.
[a] Elimination of Nettaxi.com's assets (exclusive of cash) and
liabilities, including anticipated costs to effect the merger
relating to severance ($400,000); legal and professional
($250,000); other ($100,000).
[b] Adjustments to give effect to the merger;
[c] Adjustments to reflect RAE's direct merger costs;
55
NETTAXI.COM
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31,2001
(UNAUDITED)
FOR THE YEAR ENDED
DECEMBER 31, 2001
------------------
NET SALES $ 19,013,600
COST OF SALES 7,041,900
------------------
GROSS MARGIN 11,971,700
------------------
OPERATING EXPENSES
Sales and marketing 4,486,700
Research and development 3,289,300
General and administrative 3,055,900
Legal fees and settlement costs 1,237,000
------------------
TOTAL OPERATING EXPENSES 12,068,900
------------------
OPERATING LOSS (97,200)
OTHER INCOME (EXPENSE):
Interest income 136,100
Interest expense (294,200)
Other, net (9,000)
Minority interest in loss
of consolidated subsidiary 455,200
------------------
INCOME BEFORE INCOME TAXES 190,900
INCOME TAX EXPENSE 54,100
------------------
NET INCOME $ 136,800
==================
NOTE: The Pro Forma Condensed Consolidated Statement of Income presented
herein reflects the result of the operations of RAE for the year
ended December 31, 2001. Nettaxi.com has, in effect, no operations
for the year ended December 31, 2001 for the purposes of the
Pro Forma Condensed Consolidated Statement of Income presented herein.
56
SELECTED FINANCIAL DATA OF NETTAXI
Summary Financial Data
Set forth below are summary statements of operations data for the period
from October 23, 1997, the date of incorporation to December 31, 1997, the years
ended December 31, 1998, 1999, 2000 and 2001, and summary balance sheet data as
of December 31, 1997, 1998, 1999, 2000 and 2001. This information should be
read in conjunction with the Consolidated Financial Statements and Notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations", appearing elsewhere in this Form.
1997 1998 1999 2000 2001
----------- ------------ ------------ ------------- ------------
STATEMENT OF OPERATIONS DATA:
Net revenues $ 144,900 $ 258,000 $ 5,032,800 $ 9,418,400 $ 2,069,500
Gross profit $ 57,500 $ 18,200 $ 1,029,000 $ 2,110,700 $(2,188,600)
Loss from operations $ (142,100) $(3,082,300) $(9,402,500) $(10,367,900) $(8,986,500)
Net loss $ (159,700) $(3,113,600) $(9,880,400) $(14,351,400) $(8,550,400)
Net loss available to common $ (327,200) $(3,127,900) $(9,880,400) $(14,351,400) $(8,550,400)
shareholders
Basic loss per share $ (0.06) $ (0.32) $ (0.46) $ (0.36) $ (0.20)
Diluted loss per share $ (0.06) $ (0.32) $ (0.46) $ (0.36) $ (0.20)
WEIGHTED-AVERAGE COMMON
SHARES:
Basic outstanding shares 5,483,500 9,724,781 21,274,203 39,381,211 43,124,586
Diluted outstanding shares 5,483,500 9,724,781 21,274,203 39,381,211 43,124,586
Balance Sheet Data:
Working capital (Deficiency) $ (222,900) $ 300,400 $(2,053,000) $ 14,144,500 $ 8,525,200
Total Assets $2,082,300 $ 1,652,700 $ 6,031,200 $ 18,123,600 $ 8,791,700
Long-term Liabilities $ 773,500 $ 5,400 $ 3,200,000 $ 0 $ 0
Total stockholders' equity $ 973,400 $ 1,332,100 $(2,000,300) $ 16,563,300 $ 8,607,800
(Deficiency)
57
NETTAXI'S MANAGEMENT'S OF 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
NETTAXI'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 US ON THE DATE HEREOF AND SPEAK ONLY AS OF THE
DATE HEREOF. THE FACTORS DISCUSSED ABOVE UNDER "RISK FACTORS" AND ELSEWHERE IN
THIS PROXY STATEMENT ARE AMONG THOSE FACTORS THAT IN SOME CASES HAVE AFFECTED
NETTAXI'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
Nettaxi.com is an Internet marketing portal that provides content and
Internet based services for consumers and businesses. Nettaxi's web site at
www.nettaxi.com serves as a gathering place for people with shared topics of
interest, as well as an entry point, referred to as a portal, to the Internet.
Through its web site, Nettaxi provides content addressing a number of targeted
categories. Subscribers to Nettaxi's web site are also provided with access to
enhanced content such as broadband video clips and email accounts. In 1999,
Nettaxi developed a diversified revenue model under which it provided
subscribers with access to web site hosting services and a broad range of
content, and Nettaxi provided affiliated businesses with access to a large
population of Internet users for advertising and promotional purposes.
In 2001, Nettaxi faced the challenges of an overall downturn in the
Internet industry and the economy in general. As of December 31, 2001, Nettaxi
had incurred losses of approximately $36.2 million. The bankruptcy and
liquidation of many of its Internet based customers and suppliers caused Nettaxi
to re-evaluate its business model. Since the Internet infrastructure is unstable
and customer base financially weak, Nettaxi took corrective action to
significantly decrease its cash burn and determine the best course of action to
maintain and enhance the value of its company. In this regard, Nettaxi
implemented an acquisition strategy pursuant to which it sought to identify an
appropriate entity with which to merge, acquire or restructure its current
business. Since the announcement of its acquisition strategy in May 2001,
Nettaxi has evaluated a number of potential Merger candidates in a wide variety
of industries. Of all of these companies, Nettaxi believes RAE presents the best
fit for its shareholders. Nettaxi believes the Merger with RAE is the fruit of
its acquisition strategy and that the Merger will provide it with a new
direction that avoids the pitfalls that have crippled so many Internet
businesses.
In 2001, Nettaxi reduced its overhead and burn rate by reducing the
salaries of its employees and reducing the number of personnel, marketing
expenses and costs associated with its hosting activities. Nettaxi's current
management team, consisting of finance and administrative employees is in place
to maintain its operations and consummate the proposed Merger with RAE.
Nettaxi continues to operate its website however, Nettaxi has focused its
energies on its acquisition strategy and therefore has not pursued any revenue
generating activities in the last six months of 2001.
58
Prior to June 2001, Nettaxi provided web site hosting and Internet
connectivity services for corporate customers. Nettaxi's services were delivered
through a state-of-the-art Internet data center located in Southern California
using a high-performance Internet backbone network. Customers paid monthly fees
for the professional services utilized, one-time installation fees, and
connectivity charges. These "hosting" revenues were recognized in the period the
services were provided. Hosting revenues were variable, based upon bandwidth
usage and services used, and resulted in operating losses from time to time. In
June 2001, Nettaxi terminated its significant co-hosting customer contracts
effective July 7, 2001. In connection with this, Nettaxi also discontinued the
purchase of bandwidth and premium services from its third party provider,
further reducing monthly expenditures. The terminations have reduced its
operating expenses, and materially affected its revenues beginning in the third
quarter of 2001.
Mergers involve numerous risks and uncertainties and there can be no
assurance that the Merger with RAE will prove to enhance the value of Nettaxi or
be successful.
RESULTS OF OPERATIONS; COMPARISON OF THE TWELVE MONTHS ENDED DECEMBER 31, 2001
AND 2000
NET REVENUES. Net revenues for the twelve months ended December 31, 2001
were $2.1 million compared with $9.4 million for the twelve months in 2000. The
significant decrease is primarily the result of the substantial reduction of
Nettaxi's operating activities and expenditures in connection with the adoption
of Nettaxi's acquisition strategy and the current economic climate in the
Internet industry. In June 2001, Nettaxi terminated its significant co-hosting
customer contracts effective July 7, 2001, which materially decreased its
revenues beginning in the third quarter of 2001. The substantial decrease was
also the result of significantly lower advertising revenues recognized in the
twelve months ended December 31, 2001
For the twelve months ended December 31, 2001, three customers each
accounted for greater than 10% of total net revenues for a total of
approximately $1.9 million or 90% of the total revenues. These customers,
Babenet, Whitesand Communications, and Whitehorn Ventures Limited, accounted for
47%, 19%, and 25%, respectively of Nettaxi's total revenues. All three of these
customers were co-hosting customers. For the twelve months ended December 31,
2000, four customers, Babenet, Whitesand Communications, Hearme.com,
Spinrecords.com, each accounted for greater than 10% of total net revenues for a
total of approximately $5.1 million or 54% of the total revenues. In June 2001,
Nettaxi terminated its significant co-hosting customer contracts effective July
7, 2001, which has materially affected revenues beginning in the third quarter
of 2001.
ADVERTISING REVENUES. Advertising revenues for the twelve months ended
December 31, 2001 and 2000 were approximately $0.2 million and approximately
$5.7 million, respectively, which represented 10% and 60%, respectively, of
total net revenues. The decline in absolute dollars resulted from the
substantial reduction of Nettaxi's operating activities and expenditures in
connection with the adoption of its acquisition strategy and the current
economic climate in the Internet industry. The decline was also attributable to
the discontinued use of reciprocal advertising transactions and decreases in the
number of advertisers and the decrease in the average rate paid by these
advertisers. As a result of the increased bankruptcy and liquidation trend in
the marketplace, Nettaxi further tightened its credit terms which lead to the
loss many of its customers. Also, Nettaxi initiated several cost savings
strategies in the first quarter of 2001, which resulted in cancellation of
advertising arrangements by our customers that decided that these new strategies
did not meet their criteria for advertising promotions. Also, in the first
quarter of 2001, Nettaxi terminated its free hosting arrangements for its
citizens, which resulted in decreased page views and therefore decreased the
number of banner advertisements served. Nettaxi believes that the revenues from
the sale of banner advertisements can no longer justify the cost of purchasing
bandwidth. Reciprocal advertising arrangements accounted for approximately 0%
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and 28% of total revenues for the twelve months ended December 31, 2001 and
2000, respectively. Reciprocal arrangements were used in Nettaxi's strategy in
developing strategic relationships with other advertisers or service providers
for non-cash media advertising. Nettaxi no longer utilizes these agreements as
the return on investment for these agreements no longer benefits Nettaxi.
HOSTING REVENUES. Nettaxi's hosting revenues were approximately $1.9
million and $3.7 million for the twelve months ended December 31, 2001 and 2000,
which represented 90% and 40%, of total net revenues, respectively. The decline
in absolute dollars resulted from the substantial reduction of Nettaxi's
operating activities and expenditures in connection with the adoption of its
acquisition strategy and the current economic climate in the Internet industry.
For the twelve months ended December 31, 2001, hosting revenues were a higher
percentage of total net revenue as advertising revenues significantly decreased
in the twelve months ended December 31, 2001. Nettaxi's services are delivered
through a state-of-the-art Internet data center located in Southern California
using a high-performance Internet backbone network. Customers pay monthly fees
for the professional services utilized, one-time installation fees, and monthly
connectivity charges. These hosting revenues were recognized in the period the
services were provided. Nettaxi did not receive any one-time installation fees
in the twelve months ended December 31, 2001 and 2000, respectively. In June
2001, Nettaxi terminated its significant co-hosting customer contracts effective
July 7, 2001, which materially affected revenues beginning in the third quarter
of 2001.
COST OF OPERATIONS. Cost of operations were approximately $4.3 million and
$7.3 million for the twelve months ended December 31, 2001 and 2000,
respectively. Cost of operations decreased as a result of the substantial
reduction of Nettaxi's operating activities and expenditures in connection with
the adoption of its acquisition strategy. The decline was also attributable to
the termination of Nettaxi's co-hosting customer contracts which required its
purchasing of bandwidth and services from a third party provider. Nettaxi has
also experienced a substantial decrease in traffic to its website which resulted
in the offset to the cost of purchasing bandwidth. Beginning in February 2001
Nettaxi changed its web hosting provider to Alchemy Communications, a carrier in
Southern California. This new provider provides similar services but at
substantial cost saving to Nettaxi. Nettaxi entered into traffic directive
arrangements whereas selected web traffic or page views are diverted to interest
specific areas of its website and advertisements. These arrangements require
special tools and costs to third parties. Nettaxi began these new arrangements
in the fourth quarter of 2000, but as result of its acquisition strategy Nettaxi
terminated these arrangements in July 2001. There were no similar costs in the
twelve months ended December 31, 2001.
SALES AND MARKETING EXPENSES. Sales and marketing expenses were
approximately $0.9 million and $5.9 million for the twelve months ended December
31, 2001 and 2000, respectively. The decline in sales and marketing expenses was
attributable to the substantial reduction of Nettaxi's operating activities and
expenditures in connection with the adoption of its acquisition strategy. The
decline was also attributable to the discontinued use of reciprocal online
advertising arrangements to increase brand awareness and traditional print and
media marketing advertising. Nettaxi recorded reciprocal advertising expenses
in relation to the reciprocal advertising revenues of approximately $2.2 million
for the twelve months ended December 31, 2000. There were no similar expenses in
2001.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
approximately $0.4 million and $1.6 million for the twelve months ended December
31, 2001 and 2000, respectively. The decline in expense was primarily
attributable to the decrease in salaries expense for personnel as the result of
decreased personnel. Nettaxi terminated all research and development personnel
in the beginning of the second quarter 2001. Currently, Nettaxi has no hiring
plan in effect for replacement of these individuals. Nettaxi plans to utilize
consultants for any technical projects. As of October 2001, Nettaxi has engaged
two technical consultants for short-term projects.
60
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were approximately $5.5 million and $5.0 million for the twelve months ended
December 31, 2001 and 2000, 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. In addition to the above Nettaxi recognized in 2001 a
write-down of approximately $823,000 due to impairment of equipment, purchased
technology and other intangibles and a loss on disposal of certain equipment of
$327,600 related to its move to smaller facilities in the June 2001. Due to the
market conditions, Nettaxi was unable to sell the capital equipment and the
costs for storage and moving the equipment would have exceeded any gain realized
on the sale. In June 2001 Nettaxi negotiated an early termination of its
facilities lease and recognized a one-time charge of approximately $94,000,
which included the forfeited deposit. This fee was necessary as a result of the
market conditions in the San Francisco Bay Area. Nettaxi entered into a
facilities lease of smaller space in Campbell, California. Nettaxi believes that
this space will be sufficient to conduct its current activities. Nettaxi also
recognized approximately $141,000 in one-time costs associated with the
termination of its intended acquisition with LookupGuide.com. The above
additional expenses were offset with decreases in personnel costs as a result of
termination of personnel in the first and second quarter of 2001.
INTEREST INCOME. Interest income was approximately $447,900 and $703,800
for the twelve months ended December 31, 2001 and 2000, respectively. The higher
average cash balance in the twelve months ended December 31, 2000, was the
result of the issuance of common stock in a private placement offering in
February 2000 for which cash proceeds became available in March 2000.
INTEREST EXPENSE. Interest expense was approximately $9,400 and $4.7
million for the twelve months ended December 31, 2001 and 2000, respectively.
For the year 2000 period, the interest expense was primarily the result of
non-cash deemed interest expense related to the implied beneficial conversion
feature and the value of warrants issued in connection with the settlement
agreement that Nettaxi reached with the holder of the convertible debentures
issued on March 31, 1999. The convertible note was fully converted in the second
quarter of 2000 and therefore no interest expense was recorded on this note in
2001.
INCOME TAXES. The provision for income taxes for the years ended December
31, 2001 and 2000 consisted of minimum state taxes of $2,400 and $1,600,
respectively. At December 31, 2001, Nettaxi had net operating loss
carryforwards available to reduce future taxable income that aggregate
approximately $26.7 million for Federal income tax purposes. These benefits
begin to expire in 2017. Nettaxi also had California net operation loss
carryforwards in the amount of $14.2 million, which may be applied to future
taxable income until these benefits begin to expire in 2002. Nettaxi's ability
to utilize the net operating loss carryforwards is dependent upon its ability to
generate taxable income in future periods and may be limited due to restrictions
imposed under Federal and state laws upon change in ownership. If Nettaxi
completes an acquisition consistent with its acquisition strategy, Nettaxi may
be unable to apply these net operating loss carryforwards at all.
RESULTS OF OPERATIONS; COMPARISON OF THE TWELVE MONTHS ENDED DECEMBER 31, 2000
AND 1999
NET REVENUES. Net revenues for the year ended December 31, 2000 increased
87% to approximately $9.4 million from $5.0 million for the year ended December
31, 1999. The absolute dollar increase is the result of an increase in revenues
from the corporate web hosting and the increase in advertising revenues.
Advertising revenues included third party revenues from both traditional and
internet related advertisers which also includes reciprocal arrangements. For
the year ended December 31, 2000, four customers each accounted for greater than
10% of total net revenues for a total of approximately $5.1 million or 54% of
the total revenues. These customers, Babenet, SpinRecords.com, Whitesand
61
Communications, and Hearme.com, accounted for 20%, 13%, 11% and 10%,
respectively of our total revenues. For the year ended December 31, 1999, one
customer, Whitesand Communications, accounted for greater than 10% of total net
revenues. The loss of any one of all of these customers could have a material
adverse affect on Nettaxi's revenue.
ADVERTISING REVENUES. Advertising revenues for the year ended December 31,
2000 and 1999 were approximately $5.7 million and approximately $2.7 million,
respectively, which represented 60% and 53%, respectively, of total net
revenues. The year over year increase in absolute dollars resulted from an
increase in reciprocal advertising transactions and increases in the number of
advertisers as well as the increase in average contract commitments of these
advertisers as a result of increased web traffic to Nettaxi's web site.
Reciprocal advertising arrangements are exchanges of similar services between
the Company and the advertisers. These arrangements accounted for approximately
28% and 7% of total revenues for the twelve months ended December 31, 2000 and
1999, respectively. Reciprocal arrangements for the twelve months ended December
31, 2000 are the result of Nettaxi's strategy in developing strategic
relationships with other advertisers or service providers for non-cash media
advertising.
TRANSACTION PROCESSING FEES. There were no transaction processing fees for
the year ended December 31, 2000. Transaction processing fees were approximately
$1.29 million for the year ended December 31, 1999, which represented 26%, of
total net revenues. Transactions fees consisted 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 May 1999.
The contract through which these fees have been derived terminated in December,
1999 and Nettaxi does not expect revenues of this type to be significant in
future periods.
HOSTING REVENUES. Nettaxi's hosting revenues were approximately $3.7
million and $945,000 for the years ended December 31, 2000 and 1999,
respectively, which represented 40% and 19%, of total net revenues,
respectively. For the year ended December 31, 2000, Nettaxi recognized hosting
revenues for the twelve months as compared to only six months in the year ended
December 31, 1999. In the third quarter of 1999, Nettaxi began providing
internet hosting and connectivity services for corporate customers. Nettaxi's
services are delivered through a state-of-the-art Internet data center located
in Southern California using a high-performance Internet backbone network.
Customers pay monthly fees for the professional services utilized, one-time
installation fees, and monthly connectivity charges. These "hosting" revenues
were recognized in the period the services were provided. Nettaxi 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 Nettaxi will sustain profitability from this business segment.
Additionally, Nettaxi 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
twelve months ended December 31, 2000.
COST OF OPERATIONS. Cost of operations were approximately $7.3 million and
$4.0 million for the years ended December 31, 2000 and 1999, respectively. Cost
of operations increased 83%. Approximately 85% of the increase is the result of
additional expenses related to costs for co-location (Internet connection
charges) expenses. In the third quarter of 1999, Nettaxi began providing
Internet connectivity services to corporate customers and required purchases of
additional bandwidth to service these customers. These costs are expected to
continue to increase as Nettaxi's web traffic increases and its corporate
customer require additional bandwidth for Nettaxi's "citizens". For the year
ended December 31, 2000, the Company recognized hosting expenses for twelve
months as compared to only six months in the year ended December 31, 1999.
Approximately 6% of the increase is related to increased depreciation expense
for capital purchased in 1999. Approximately 6% of the increase is related to
the costs for consultants to improve Nettaxi's website. Separately, during the
62
third quarter ended September 30, 2000, Nettaxi 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 cost savings to Nettaxi in the third and fourth quarter of
year 2000. Nettaxi 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
approximately $5.9 million and $4.8 million for the twelve month periods ended
December 31, 2000 and 1999, respectively. Sales and marketing expenses
consisted primarily of advertising, including co-branding and reciprocal,
salaries of Nettaxi's sales and marketing personnel and related costs,
marketing, and promotion costs. Approximately $1.9 million of the net increase
is the result of the redirected marketing approach for brand awareness
implemented in the third quarter of 2000. This consisted of using reciprocal
online advertising arrangements to increase brand awareness rather than the
traditional print and media marketing approach. Nettaxi recorded reciprocal
advertising expenses in relation to the reciprocal advertising revenues of $2.2
million for the year ended December 31, 2000 compared to approximately $0.3
million for the year ended December 31, 1999. Nettaxi utilizes reciprocal
advertising arrangements as an inexpensive advertising media for increasing
brand awareness. There can be no assurance that these increased expenditures
will result in increased visitors to Nettaxi's web site or additional revenues
in the future. This increase was offset by a reduction of approximately $0.8
million reduction in spending on traditional marketing media expenditures.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses were
$1.6 million and $2.2 million for the twelve months ended December 31, 2000 and
1999, respectively. The 28% decrease was primarily attributable to the lower
utilization of consultants by Nettaxi and decrease in average number of
technical personnel during the year 2000. Approximately $0.6 million of the
decrease was related to the lower utilization of consultants and $0.2 million of
the decrease was related to the decrease in recruiting fees paid to hire new
employees. The above two costs were offset by an approximately $0.3 million
increase which was related to increased depreciation expense for capital
equipment. Nettaxi has experienced a difficulty in its ability to recruit and
retain technical personnel as a result of the current economic prosperity and
high cost of living in Silicon Valley and expects this condition to have a
continuous impact on the ability of Nettaxi to retain and hire additional
technical personnel.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
were $5.0 million and $3.5 million for the twelve months ended December 31, 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.
Approximately $0.6 million of the increase in general and administrative
expenses were primarily attributable to amortization of deferred compensation
expense related to stock, warrants and options granted during the year to
various consultants for the services. Approximately $0.4 million of the
increase was the result of additional salaries and personnel costs.
Approximately $0.4 million of the increase is related to higher insurance 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. Nettaxi also recorded approximately $500,000 provision for
uncollectible accounts receivable. Nettaxi expects that due to the highly
volatile market conditions for internet related and other advertising companies,
the provision for bad debt may be higher in the future. The above increases
were offset by the decrease in expenditures related to the Merger with Plus Net,
Inc. in 1999.
INTEREST EXPENSE. Net interest expense was $4.0 million and $0.4 million
for the years ended December 31, 2000 and 1999, respectively. For the year 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
63
related to warrants issued in conjunction with the convertible promissory note,
offset by interest income. For the year 2000 period, the net interest expense
was primarily the result of deemed interest expense related to the convertible
debenture issued on March 31, 1999. Nettaxi 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
Nettaxi reached with the holder of the convertible debenture.
INCOME TAXES. The provision for income taxes for the year ended December
31, 2000 consisted of minimum state taxes. For the year ended December 31, 1999
Nettaxi recorded a tax provision which related to earnings made by PlusNet, Inc.
during its fiscal period before its merger. At December 31, 2000, Nettaxi had
net operating loss carryforwards available to reduce future taxable income that
aggregate approximately $25.1 million for Federal income tax purposes. These
benefits begin to expire in 2017. Nettaxi also had a California net operation
loss carryforwards in the amount of $13.4 million which may be applied to future
taxable income until these benefits begin to expire in 2002. Nettaxi's ability
to utilize the net operating loss carryforwards are dependent upon its ability
to generate taxable income in future periods and may be limited due to
restrictions imposed under Federal and state laws upon change in ownership.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, Nettaxi had cash and cash equivalents of
approximately $8.6 million, compared to approximately $13.9 million at December
31, 2000. Net cash used in operating activities equaled approximately $5.3
million and $8.4 million for the twelve month periods ended December 31, 2001
and 2000, respectively. The decline in cash used was related to the decrease of
approximately $6.4 million in net loss for the twelve months ended December 31,
2001 compared to the same twelve months ended December 31, 2000. However, in
2000 Nettaxi incurred approximately $4.6 million of non-cash interest expense
relating to a settlement agreement and issuance of warrants. Net adjustment
related to customer receivables amounted to approximately $1.7 million.
Net cash used in investing activities was approximately $26,400 and
$744,100 for the twelve months ended December 31, 2001 and 2000, respectively.
Substantially all of the cash used in investing activities for both periods was
primarily related to the purchase of capital equipment.
Net cash provided by financing activities was approximately $0 and $22.0
million for the twelve months period ended December 31, 2001 and 2000,
respectively. Net cash provided by financing activities in 2000 consisted
primarily of net proceeds from the issuance of our common stock.
Nettaxi incurred net losses of approximately $8.6 million and $11.4 million
for the twelve months ended December 31, 2001, and 2000, respectively. At
December 31, 2001, Nettaxi had an accumulated deficit of approximately $36.2
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. Beginning in the fourth quarter of 2000, Nettaxi initiated cost
reductions in all areas of operations. Nettaxi is continuing to review and
reduce all non-essential expenditures while it pursues its acquisition strategy.
Nettaxi does not have any long-term commitments that currently require a
specified capital budget other than normal operations. Nettaxi believes that
current cash, and cash equivalents would be sufficient to meet our anticipated
operating cash needs for at least the next 12 months if the Merger with RAE were
not to take place. The obligations of RAE to close the Merger are subject to,
among other things, Nettaxi's net cash being at least $7,500,000. If Nettaxi
does not have $7,500,000 it may be forced to seek additional capital from
64
outside sources. There can be no assurance that financing will be available in
amounts or on terms acceptable to us, if at all. The sale of additional equity
or convertible debt securities could result in additional dilution to our
stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin No. 101, "Revenue Recognition". Staff
Accounting Bulletin No. 101 provides the SEC staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. Staff
Accounting Bulletin No. 101 is effective for the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. Nettaxi believes its current revenue
recognition policies comply with the provisions of Staff Accounting Bulletin No.
101.
In March 2000, the Financial Accounting Standards Board issued
Interpretation (Interpretation) No. 44, "Accounting for Certain Transactions
involving Stock Compensation, an Interpretation of ABP Opinion No. 25", which
became effective July 1, 2000. Interpretation No. 44 clarifies (a) the
definition of employee for purposes of applying Opinion 25, (b) the criteria for
determining whether a stock compensation plan qualifies as a noncompensatory
plan, (c) the accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. Adoption of the
provisions of the Interpretation had no significant impact on our financial
statements.
In June 1999, the FASB issued SFAS No. 137, Accounting for Derivative
Instrument and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133, which amends SFAS No. 133 to be effective for all fiscal
years beginning after June 15, 2000. In June 2000, SFAS No. 133 was amended by
SFAS No. 138, Accounting for Certain Derivative Instruments and Hedging
Activities, which amended or modified certain issues discussed in SFAS No. 133.
SFAS No. 138 is also effective for all fiscal years beginning after June 15,
2000. SFAS No. 133 and SFAS No. 138 establish accounting and reporting standards
requiring that every derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The statements also
require that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Nettaxi does not
engage in derivative instruments or hedging activities. Accordingly, there was
no impact on Nettaxi's financial statements from the adoption of SFAS No. 133
and SFAS No. 138.
In July 2001, the FASB issued SFAS No. 141 (SFAS 141), Business
Combinations, which supersedes Accounting Principles Board (APB) Opinion No. 16,
Business Combinations. SFAS 141 eliminates the pooling-of-interests method of
accounting for business combinations and modifies the application of the
purchase accounting method. The elimination of the pooling-of-interests method
is effective for transactions initiated after June 30, 2001. The remaining
provision of SFAS 141 will be effective for transactions accounted for using the
purchase method that are completed after June 30, 2001.
In July 2001, the FASB also issued SFAS No. 142 (SFAS 142), Goodwill and
Intangible Assets, which supersedes APB Opinion No. 17, Intangible Assets. Under
SFAS 142, goodwill and intangible assets with indefinite lives are not amortized
but are tested for impairment annually using the fair value approach, except in
certain circumstances, and whether there is an impairment indicator, other
intangible assets will continue to be valued and amortized over their estimated
lives; in-process research and development will continue to be written off
immediately; all acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting and existing goodwill will
no longer be subject to amortization. The provisions of SFAS No. 142 are
required to be applied starting with fiscal years beginning after December 15,
2001.
65
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) Accounting for
Obligations Associated with the Retirement of Long-Lived Assets. SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost asset and classify the accrued
amount as a liability in the balance sheet. The asset retirement liability is
then accreted to the ultimate payout as interest expense. The initial
measurement of the liability would be subsequently updated for revised estimates
of the discounted cash outflows. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. Nettaxi has not yet determined the effect SFAS
143 will have on its financial position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes the SFAS No.
121 by requiring that one accounting model to be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired, and
by broadening the presentation of discontinued operation to include more
disposal transactions. SFAS 144 will be effective for fiscal years beginning
after December 15, 2001. Nettaxi has not yet determined the effect SFAS 144
will have on its financial position, results of operations, or cash flows.
66
BUSINESS OF NETTAXI
Nettaxi.com is an Internet marketing portal that provides content and
Internet based services for consumers and businesses. Its web site at
www.nettaxi.com serves as a gathering place for people with shared topics of
interest, as well as an entry point, referred to as a portal, to the Internet.
Through its web site, Nettaxi provides content addressing a number of affinity
categories such as news, sports, entertainment, health, politics, finances,
lifestyle, and other areas of interest. Visitors to Nettaxi's web site are
provided with information and content. Subscribers to Nettaxi's web site are
also provided with access to enhanced content such as broadband video clips,
email accounts and personal web pages. Our original revenue model included
access to web site hosting services and a broad range of content for individual
subscribers and access to a population of Internet users for affiliated business
for advertising and promotional purposes.
During the year 2000, Nettaxi focused its efforts on improving the quality
of content available on its web site, implementing its web site hosting
services and reducing its operating costs by eliminating many of its services
which were not profitable. Nettaxi devoted significant resources to developing
its content and its services, including developing an infrastructure and
building a management team. Nettaxi also focused on developing consumer loyalty
and subsequently increasing its overall level of traffic and citizenship.
In 2001, Nettaxi faced the challenges of an overall downturn in the
Internet industry and the economy in general. As of December 31, 2001, Nettaxi
had incurred losses of approximately $36.2 million. The bankruptcy and
liquidation of many of its Internet based customers and suppliers caused it to
re-evaluate its business model. Since the Internet infrastructure is unstable
and customer base financially weak, Nettaxi took corrective action to
significantly decrease its cash burn and determine the best course of action to
maintain and enhance the value of Nettaxi. In this regard, Nettaxi implemented
an acquisition strategy pursuant to which it sought to identify an appropriate
entity with which to merge, acquire or restructure its current business. Since
the announcement of Nettaxi's acquisition strategy in May, 2001, the Company
have evaluated a number of potential Merger candidates in a wide variety of
industries. Of all of these companies, Nettaxi believes RAE presents the best
fit for its shareholders. Nettaxi believes the Merger with RAE is the fruit of
its acquisition strategy and that the Merger will provide Nettaxi with a new
direction that avoids the pitfalls that have crippled so many Internet
businesses.
In 2001, Nettaxi reduced its overhead and burn rate by reducing the
salaries of its employees and reducing the number of personnel, marketing
expenses and costs associated with its hosting activities. Nettaxi's current
management team, consisting of finance and administrative employees is in place
to maintain its operations and consummate the proposed Merger with RAE.
Nettaxi continues to operate its website however, it has focused its
energies on its acquisition strategy and therefore has not pursued any revenue
generating activities in the last six months of 2001.
Prior to June 2001, Nettaxi provided web site hosting and Internet
connectivity services for corporate customers. The Company services were
delivered through a state-of-the-art Internet data center located in Southern
California using a high-performance Internet backbone network. Customers paid
monthly fees for the professional services utilized, one-time installation fees,
and connectivity charges. These "hosting" revenues were recognized in the
period the services were provided. Hosting revenues were variable, based upon
bandwidth usage and services used, and resulted in operating losses from time to
time. In June 2001, Nettaxi terminated its significant co-hosting customer
67
contracts effective July 7, 2001. In connection with this, Nettaxi also
discontinued the purchase of bandwidth and premium services from Nettaxi's third
party provider, further reducing monthly expenditures. The terminations have
reduced its operating expenses, and materially affected its revenues beginning
in the third quarter of 2001. In spite of the above, there can be no assurance
that Nettaxi's operating losses will not increase in the future.
The Board of Directors of Nettaxi has determined that the Internet
marketing portal business model employed by Nettaxi has been unsuccessful and
that the Merger is in the best interests of Nettaxi's stockholders. If the
Merger is consummated, the Internet marketing portal business currently
conducted by Nettaxi will cease and the surviving company will adopt and conduct
the business model of RAE. Mergers involve numerous risks and uncertainties and
there can be no assurance that the Merger with RAE will prove to enhance the
value of Nettaxi or be successful. Additionally, there can be no assurance that
the departing executive officers of Nettaxi will not operate an Internet
marketing portal substantially similar to the business historically operated by
Nettaxi and, if the Merger is consummated, the current stockholders of Nettaxi
will have no ownership interest in such a business.
PROPERTIES
Nettaxi's headquarters are currently located in a leased facility in
Campbell, California, consisting of approximately 1,700 square feet of office
space to accommodate management, operations, and research and development
functions, which is under a lease that expires at the end of May 2002. Nettaxi
believes that its current facilities are appropriate to carry out is acquisition
strategy and maintain is limited operations.
LEGAL PROCEEDINGS
Nettaxi previously announced that, on May 1, 2001, seven shareholders of
Nettaxi filed an action against Nettaxi in the United States District Court for
the Central District of California (Case No. SACV 01-459 AHS). The complaint
also names Robert Rositano, Jr. its Chief Executive Officer, Dean Rositano, its
President, and Glenn Goelz its former Chief Financial Officer as additional
defendants. The complaint alleged that Nettaxi violated securities laws in
connection with its February 2000 private placement. Six of the plaintiffs
purchased shares of Nettaxi common stock in the February 2000 private placement.
Prior to filing the complaint, the plaintiffs demanded the refund of all of the
money invested in Nettaxi and demanded that the exercise price of the warrants
issued in the private placement be reduced from $4.00 to $0.25 per share.
Additionally, prior to the filing the complaint, Nettaxi was asked to invest
capital in a company affiliated with one of the plaintiffs. In the complaint,
the plaintiffs seek compensatory damages, injunctive relief and fees and
interest. Due to factual misrepresentations in the complaint, Nettaxi
anticipated that an amended complaint would be filed. The complaint was amended
on May 23, 2001. The amended added three new plaintiffs to the lawsuit. Shortly
after filing the amended complaint, Nettaxi, pursuant to the rules of the
District Court, met with plaintiffs and pointed out further factual inaccuracies
and deficiencies. Plaintiffs then chose to attempt to amend their complaint for
a second time. On October 1, 2001 Nettaxi filed a motion to dismiss the
complaint filed by Plaintiffs. In response, Plaintiffs have filed an opposition
to Nettaxi's motion to dismiss and have sought leave to amend their complaint
for a third time. The District Court has informed the parties that it will rule
on the papers, and there will be no hearing.
The Company believes that the allegations made in the complaint are
completely without merit and that this law suit reflects shareholder frustration
over the recent downturn in the stock market. Nettaxi will defend the action
vigorously.
68
On July 31, 2001 Envision Media filed suit against Nettaxi in the Superior
Court of California, Santa Cruz County (Case No. CV-141408). The complaint
alleges breach of contract and misrepresentation in connection with a Stock
Option and Release Agreement entered into between the parties on January 31,
2000. Under the Stock Option and Release Agreement, Envision Media was given the
option to convert approximately $900,000 in receivables due from Nettaxi into
stock valued at $2.00 per share and also to receive warrants to purchase stock
having an exercise price of $2.76. The agreement provided that Nettaxi was to
file a registration statement in connection with the shares issuable under the
agreement within 15 days of the execution of the agreement. The agreement also
provided that each party would release the other from any claims arising out of
or in connection with the conversion of Nettaxi's debt and that the portion of
the debt converted was to be deemed paid in full. Nettaxi was unable to file the
registration statement before February 15, 2000. Nevertheless, on March 31, 2000
Envision Media converted the entire balance of the amount due into shares and
warrants. On May 12, 2000 Nettaxi filed a registration statement on Form S-1
(File No. 333-36826) which included shares and warrants held by Envision Media.
Nettaxi filed its answer to the complaint on September 17, 2001. Nettaxi
believes that the allegations made in the complaint are completely without merit
and intends to defend its position vigorously.
From time to time, Nettaxi is involved in legal proceedings incidental to
its business. The Company believes that these pending actions, individually and
in the aggregate, will not have a material adverse effect on its financial
condition, and that adequate provision has been made for the resolution of such
actions and proceedings.
EMPLOYEES
As of December 31, 2001, Nettaxi had four employees, all of whom were
involved in administration and finance. If the Merger is consummated, all of
Nettaxi's employees will resign or be terminated prior to the Effective Time of
the Merger. Technical assistance with Nettaxi's limited web site operations have
been provided by consultants. Nettaxi has never had a work stoppage, and no
employees are represented under collective bargaining agreements. Nettaxi
considers its relations with its employees to be good.
69
SELECTED FINANCIAL DATA OF RAE SYSTEMS
Summary Financial Data
Set forth below are summary statements of operations data for the years
ended December 31, 1997, 1998, 1999, 2000 and 2001, and summary balance sheet
data as of December 31, 1997, 1998, 1999, 2000 and 2001. The summary financial
data as of December 31, 2000 and 2001 and for the years ended December 31, 1999,
2000, and 2001 are derived from RAE's audited consolidated financial statements
included elsewhere in this proxy statement. The summary financial data as of
December 31, 1999 are derived from RAE's audited consolidated financial
statements not included in this proxy statement. The summary financial data as
of December 31, 1997 and 1998 and for the years ended December 31, 1997 and
1998, has been derived from the unaudited consolidated financial statements of
RAE and has been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of management, contains all
adjustments, consisting only of normal recurring adjustments, necessary for the
fair presentation of the financial data as of these dates and for these periods.
This information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations", appearing elsewhere in this
proxy statement.
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- ------------
STATEMENT OF OPERATIONS DATA(1):
- --------------------------------
Net revenues $ 6,611,200 $ 9,436,300 $10,832,900 $18,194,100 $19,013,600
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Gross profit $ 4,583,500 $ 6,629,100 $ 7,702,600 $11,615,100 $11,971,700
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Income (loss) from operations $ 1,169,500 $ 2,116,000 $ 822,300 $ 1,281,700 $ (97,200)
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Net income $ 776,900 $ 1,397,200 $ 505,900 $ 829,200 $ 136,800
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Basic income per share $ 0.05 $ 0.10 $ 0.03 $ 0.06 $ 0.01
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Diluted income per share $ 0.04 $ 0.07 $ 0.02 $ 0.04 $ 0.01
- -------------------------------- ----------- ----------- ----------- ----------- ------------
WEIGHTED-AVERAGE COMMON
SHARES:
- --------------------------------
Basic outstanding shares 14,400,000 14,459,050 14,575,856 14,763,896 15,596,922
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Diluted outstanding shares 21,200,000 21,259,050 22,601,412 22,881,410 23,934,985
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Balance Sheet Data:
- --------------------------------
Working capital $ 1,355,900 $ 2,665,400 $ 1,280,000 $ 4,528,900 $ 5,105,900
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Total Assets $ 4,201,500 $ 5,546,100 $ 8,804,600 $12,706,400 $15,043,200
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Long-term Liabilities $ 75,600 $ 39,800 $ 450,600 $ 819,100 $ 644,300
- -------------------------------- ----------- ----------- ----------- ----------- ------------
Total stockholders' equity $ 2,321,400 $ 3,267,900 $ 2,034,000 $ 2,954,800 $ 3,438,500
- -------------------------------- ----------- ----------- ----------- ----------- ------------
70
RAE'S MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS
AND UNCERTAINTIES. RAE'S ACTUAL RESULTS COULD DIFFER SUBSTANTIALLY FROM THOSE
ANTICIPATED IN THESE FORWARD-LOOKING STATEMENTS AS A RESULT OF MANY FACTORS,
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THIS PROXY
STATEMENT. THE FOLLOWING DISCUSSION SHOULD BE READ TOGETHER WITH OUR FINANCIAL
STATEMENTS AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS PROXY STATEMENT.
OVERVIEW
RAE Systems Inc. was incorporated in 1991. From its founding through the
launch of its initial product in 1993, RAE was primarily involved in research
and development activities, raising capital and building its infrastructure. In
1996, RAE commenced its international operations in Jiading, Shanghai, where it
manufactures approximately 25% of its components and products. In 1998, RAE
established its Hong Kong sales office.
RAE generates revenue from the sale of its gas monitoring devices and
wireless systems, as well as through the service and repair of its equipment.
RAE sells its products through a network of approximately 140 distributors,
which account for approximately 90 percent of its sales. RAE's customer base is
varied, spanning a variety of industries, including government, airlines, oil,
industrial, aerospace, chemical and shipping. In 2001, approximately 74 percent
of RAE's sales were made to customers in North America, with the remaining 26
percent to customers in Europe and Asia.
RAE's research and development expenses consist primarily of compensation
and related costs for personnel associated with RAE's product development
activities. These costs are expensed as incurred. RAE believes that continued
investment in product development is essential to its future success, especially
in the area of wireless systems development. As such, RAE expects that research
and development expenses will increase in future periods as additional personnel
are hired.
In 2000, RAE organized Renex Technology Ltd., or REnex, a Hong Kong
corporation that performs research and development activities relating
principally to the development of a wireless platform for detection and
monitoring. At December 31, 2001, RAE owned 47% of the common shares of REnex.
However, RAE holds approximately 90% of the voting shares of REnex and exercises
managerial control over REnex's day-to-day activities. Accordingly, REnex has
been consolidated in the accompanying financial statements.
Sales and marketing expenses consist primarily of salaries, benefits,
commissions and travel expenses related to its sales personnel; commissions paid
to distributors; and costs related to trade shows, promotional materials and
direct mailings. RAE's sales and marketing expenses will increase in 2002 as a
result of the implementation of a customer relations management system that it
believes will facilitate the sales and marketing effort and enhance its service
capability.
General and administrative expenses consist primarily of salaries and
related costs for finance, accounting, and other administrative personnel, in
addition to professional fees, provisions for doubtful accounts and other
general corporate expenses. RAE expects that general and administrative
71
expenses will increase in the future as additional personnel are needed to
support additional costs related to the growth of RAE's business and to meet the
reporting requirements of a public company.
In connection with the grant of certain stock options to employees and
consultants, RAE recorded non-cash stock-based compensation charges of $22,100,
$62,100 and $200,100 for the years ended December 31 1999, 2000 and 2001,
respectively. These compensation charges represent the difference between the
exercise price of options granted and the fair value of RAE's common stock as of
the date of such grant. These amounts are being amortized over the respective
vesting periods of the options. As of December 31, 2001, the Company had
$717,800 of remaining deferred compensation relating to the issuance of stock
options, which is expected to be amortized as compensation expense in future
periods through 2005. The actual amount of stock-based compensation expenses to
be recognized in future periods could decrease if the options for which accrued
compensation has been recorded are terminated before they vest.
In December 2001, the Company issued 700,000 non-plan stock purchase
rights, which vested and were exercised immediately, to an officer, a director
and a consultant at an exercise price of $0.125 per share. The fair value of
the underlying shares of common stock on the date of issuance was approximately
$700,000. Under the terms of the stock purchase agreement with these
individuals, the shares were placed in escrow and are earned contingent upon the
consummation of the Merger with Nettaxi.com. If and when the Merger occurs, the
Company will be required to record a non-cash compensation charge, based on the
intrinsic or fair value of the respective equity instruments, as applicable, on
the effective date of the Merger.
As discussed elsewhere in this proxy statement, RAE is currently involved
in various legal proceedings. RAE expects to incur substantial legal fees and
expenses in connection with these lawsuits, and, regardless of the eventual
outcome, such litigation will likely be costly and time consuming, and may
result in the diversion of RAE's internal resources. Each lawsuit is in a
preliminary stage, therefore the eventual outcome of each is difficult to
determine. Any adverse result in either of the lawsuits could materially affect
RAE's results of operations and financial position.
RESULTS OF OPERATIONS
COMPARISON OF YEARS ENDED DECEMBER 31, 2000 AND 2001
Net Revenue. Net revenue increased from $18.2 million for the year ended
December 31, 2000 to $19.0 million for the year ended December 31, 2001, an
increase of 4.5%. Revenues for the year ended December 31, 2000 included the
recognition of $3.8 million from a single contract, the proceeds of which were
recognized entirely in 2000. Excluding revenue derived from the contract, RAE's
net revenue increased by $4.6 million, or 31.9%, for the year ended December 31,
2001 as compared to the year ended December 31, 2000. The increase in net
revenue was due to an increase in the amount of sales of RAE's products,
including sales in the tube market.
Cost of Sales. Cost of sales increased from $6.6 million for the year ended
December 31, 2000 to $7.0 million for the year ended December 31, 2001. The
increase was due primarily to an increase in revenues. Gross margins decreased
from 63.8% for the year ended December 31, 2000 to 63.0% for the year ended
December 31, 2001. The decrease in gross margins was primarily the result of
decreases in the prices of certain products in order to remain competitive in
the market place. This decrease was offset by the introduction of new products
with higher gross margins.
72
Sales and Marketing. Sales and marketing expenses decreased from $4.6 million
for the year ended December 31, 2000 to $4.5 million for the year ended December
31, 2001. The decrease was due primarily to a decrease in trade show expenses.
Research and Development. Research and development expenses increased from $3.2
million for the year ended December 31, 2000 to $3.3 million for the year ended
December 31, 2001. The completion of the development of various products
resulted in a reduction of approximately $500,000 in research and development
expenses in 2001 as personnel costs, consulting fees and raw materials costs
associated with such development were eliminated. The reclassification of five
employees from research and development to manufacturing resulted in a decrease
of $176,000 of research and development expenses in 2001. The consolidation of
REnex, RAE's 47% owned subsidiary resulted in an increase of research and
development expenses of $792,000 for the year ended December 31, 2001.
General and Administrative. General and administrative expenses increased from
$2.2 million for the year ended December 31, 2000 to $3.1 million for the year
ended December 31, 2001. The increase was primarily due to additional personnel
and personnel related expenses as well as an increase in bad debt and
miscellaneous reserves. Also, in connection with various stock option grants to
employees and consultants, RAE incurred non-cash compensation charges of
$201,000 for the year ended December 31, 2001 as compared to $62,000 for the
year ended December 31, 2000.
Legal Fees and Settlement Costs. Legal fees and settlement costs increased from
$291,000 for the year ended December 31, 2000 to $1.2 million for the year ended
December 31, 2001. The increase was primarily due to costs associated with the
settlement and litigation of various lawsuits.
Other Income (Expense). Other income (expense) increased from ($33,900) for the
year ended December 31, 2000 to $288,100 for the year ended December 31, 2001.
The increase was primarily attributable to the effects of the $427,300 increase
in the minority interest's share in the losses of REnex.
Net income. Net income decreased from $829,000 for the year ended December 31,
2000 to $136,800 for the year ended December 31, 2001. The decrease in net
income was primarily the result of an increase in legal fees and settlement
cost, general and administrative expenses, and the increased research and
development activity at REnex, which was partially offset by the minority
interest's share in the losses of REnex and by lower research and development
activity at RAE.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 2000
Net Revenue. Net revenue increased from $10.8 million for the year ended
December 31, 1999 to $18.2 million for the year ended December 31, 2000, an
increase of 68.0%. The increase in net revenue is attributable to the
recognition of $3.8 million from a single contract, the proceeds of which were
recognized entirely in 2000, as well as the introduction of several new volatile
organic compound detectors, including the MiniRAE 2000, DRAE, ppbRAE, QRAE and
QRAE+.
Cost of Sales. Cost of sales increased from $3.1 million for the year ended
December 31, 1999 to $6.6 million for the year ended December 31, 2000. The
increase was due primarily to an increase in revenues, and material costs
associated with the DRAE, ppbRAE, QRAE and QRAE+. Gross margins decreased from
71.1% for the year ended December 31, 1999 to 63.8% for the year ended December
31, 2000. The decrease in gross margins was due to a shift in the product mix,
promotions on certain product lines, as well as higher volume discounts and
competitive price reductions as a means of increasing market share.
73
Sales and Marketing. Sales and marketing expenses increased from $3.4 million
for the year ended December 31, 1999 to $4.6 million for the year ended December
31, 2000. The increase was due primarily to the increase in personnel and
personnel related expenses, as well as advertising expenses related to new
product introductions
Research and Development. Research and development expenses increased from $1.4
million for the year ended December 31, 1999 to $3.2 million for the year ended
December 31, 2000. The increase was primarily attributable to an increase in
personnel and personnel related costs, consulting services and project material
to support new product and wireless development. The consolidation of REnex,
RAE's 47% owned subsidiary resulted in an increase of research and development
expenses of $83,000 for the year ended December 31, 2000.
General and Administrative. General and administrative expenses increased from
$1.8 million for the year ended December 31, 1999 to $2.2 million for the year
ended December 31, 2000. The increase was primarily due to an increase in
general and administrative headcount to support RAE's expanding business.
Other Income (Expense). Other income (expense) decreased from $13,900 for the
year ended December 31, 1999 to ($33,900) for the year ended December 31, 2000.
The decrease was the result of an increase of $184,900 in interest expense,
which was offset by $109,200 increase in interest and other income, and further
offset by $27,900 representing the minority interest's share in the losses of
REnex.
LIQUIDITY AND CAPITAL RESOURCES
To date, RAE has financed its operations primarily through bank borrowings
and revenues from operations. RAE has two outstanding lines of credit. The
first line of credit is for $2.0 million, with approximately $500,000 available
at December 31, 2001. The first line matures in April 2002 and has a borrowing
rate of prime plus 0.250%. The second line of credit is for $3.0 million, with
approximately $1.0 million available at December 31, 2001. The second line
matures in October 2002, has a borrowing rate of 0.5% per annum below the prime
rate, subject to fluctuation at the lender's discretion. As of December 31,
2001, RAE had $6.7 million in cash and cash equivalents, of which $3.0 million
is restricted as collateral against a $3 million standby letter of credit. In
addition, approximately $900,000 of cash has been earmarked specifically for
research and development activities at REnex. At December 31, 2001, the Company
had $5.1 million of working capital (the excess of current assets over current
liabilities) and has a current ratio of 1.6 to 1.0.
In connection with the litigation described elsewhere in this proxy
statement, since January 2001, RAE has incurred approximately $1.2 million in
legal fees and related expenses. In December 2001, RAE initiated a patent
infringement lawsuit against Ion Science. Additionally, RAE has been named a
defendant in a products liability lawsuit. RAE may incur significant legal fees
and other expenses related to these lawsuits, as described elsewhere in this
proxy statement.
Net cash used in operating activities for the year ended December 31, 2001
was $947,500, as compared with net cash provided by operating activities of $2.2
million for the year ended December 31, 2000. The $3.1 million increase in net
cash used in operating activities is primarily the result of the unfavorable
effects on operating cash flows of a decrease in net income of $692,000 and an
increase in the minority interest's share in the losses at REnex of $427,000,
partially offset by changes in deferred income taxes of $353,000 and other
non-cash items of $240,000, and significant changes in the year-end balances in
operating assets and liabilities and the effects of such changes on operating
cash flows. In 2000, changes in operating assets and liabilities provided $1.3
million in operating cash flows, whereas in 2001, changes in operating assets
and liabilities used $1.3 million in operating cash flows, resulting in a net
74
increase in cash used in operating activities in 2001 of $2.6 million. The
unfavorable effects on operating cash flows of the changes in operating assets
and liabilities are primarily reflected in inventories in the amount of
$361,000, accounts payable in the amount of $263.000, accrued expenses in the
amount of $991,000, income taxes payable in the amount of $923,000, and deferred
revenue in the amount of $831,000, partially offset by accounts receivable in
the amount of $680,000 and prepaid expenses of $94,000.
Net cash used in investing activities for the year ended December 31, 2001
was $213,000, as compared with $602,000 for the year ended December 31, 2000.
Cash used in investing activities was primarily due to the acquisition of
property and equipment ($60,000 in 2001 compared to $601,000 in 2001) and
deposits and pre-merger costs ($153,000 in 2001).
Net cash provided by financing activities for the year ended December 31,
2001 was $1.9 million, as compared with net cash used in financing activities of
$1.5 million for the year ended December 31, 2000. Cash provided by financing
activities in 2001 was primarily the result of proceeds on notes payable and
lines of credit ($2.4 million) and receipt of capital ($500,000), partially
offset by an increase in restricted cash ($1.0 million). Cash used in financing
activities in 2000 was primarily the result of net pay downs on the lines of
credit ($617,000) and an increase in restricted cash ($2 million), partially
offset by receipt of capital ($1.1 million).
RAE believes that its existing balances of cash and cash equivalents,
together with cash generated from product sales and cash made available to it as
a result of its merger with Nettaxi, will be sufficient to meet its cash needs
for working capital and capital expenditures for at least the next twelve
months. RAE's future capital requirements will depend on many factors that are
difficult to predict, including the size, timing and structure of any future
acquisitions, future capital investments, and future results of operations. Any
future financing RAE may require may be unavailable on favorable terms, if at
all. Any difficulty in obtaining additional financial resources could force RAE
to curtail its operations or could prevent it from pursuing its growth strategy.
Any future funding may dilute the ownership of RAE's shareholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, SFAS No. 133 was amended by SFAS No. 138, Accounting for
Certain Derivative Instruments and Hedging Activities, which amended or modified
certain issues discussed in SFAS No. 133. SFAS No. 138 is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133 and SFAS No. 138
establish accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or liability
measured at its fair value. The statements also require that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. At this time, the Company does not engage in
derivative instruments or hedging activities. Accordingly, there was no impact
on the Company's financial statements from the adoption of SFAS No. 133 and SFAS
No. 138.
In June 2001, the Financial Accounting Standards Board finalized SFAS No.
141 (SFAS No. 141), Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires the use of the purchase method of
accounting and prohibits the use of the pooling-of-interests method of
accounting for business combinations initiated after June 30, 2001. SFAS No.
141 also requires that the Company recognize acquired intangible asserts apart
from goodwill if the acquired intangible assets meet certain criteria. SFA No.
141 applies to all business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1, 2001. It also
requires, upon adoption of SFAS No. 142, that the Company reclassify the
carrying amounts of intangible assets and goodwill base on the criteria in SFAS
No. 141.
75
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, SFAS No. 142 requires that the Company identify reporting units for
the purposes of assessing potential future impairments of goodwill, reassess the
useful lives of other existing recognized intangible assets, and cease
amortization of intangible assets with an indefinite useful life. An intangible
asset with an indefinite useful life should be tested for impairment in
accordance with the guidance in SFAS No. 142. SFAS No. 142 is required to be
applied in fiscal years beginning after December 15, 2001 to all goodwill and
other intangible assets recognized at that date, regardless of when those assets
were initially recognized. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test six months from the date of adoption. The
Company is also required to reassess the useful lives of other intangible assets
within the first interim quarter after adoption of SFAS No. 142. At this time,
the Company does not expect that the implementation of SFAS No. 142 will have
any material impact on its financial position, results of operations or cash
flows.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143) Accounting for
Obligations Associated with the Retirement of Long-Lived Assets. SFAS 143
addresses financial accounting and reporting for the retirement obligation of an
asset. SFAS 143 states that companies should recognize the asset retirement
cost, at its fair value, as part of the cost asset and classify the accrued
amount as a liability in the balance sheet. The asset retirement liability is
then accreted to the ultimate payout as interest expense. The initial
measurement of the liability would be subsequently updated for revised estimates
of the discounted cash outflows. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. At this time, the Company does not expect that
the implementation of SFAS 143 will have any material impact on its financial
position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144) Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 supersedes the SFAS No.
121 by requiring that one accounting model to be used for long-lived assets to
be disposed of by sale, whether previously held and used or newly acquired, and
by broadening the presentation of discontinued operation to include more
disposal transactions. SFAS 144 will be effective for fiscal years beginning
after December 15, 2001. At this time, the Company does not expect that the
implementation of SFAS 144 will have any material impact on its financial
position, results of operations, or cash flows.
MARKET RISK
The following discussion analyzes RAE's exposure to market risk related to
changes in interest rates and foreign currency exchange rates.
Foreign Currency Exchange Rate Risk
To date, substantially all of RAE's recognized revenue has been denominated
in U.S. dollars and generated primarily from customers in the United States, and
RAE's exposure to foreign currency exchange rates has been immaterial. RAE
expects, however, that future product and service revenue may also be derived
from international markets and may be dominated in the currency of the
applicable market. As a result, RAE's operating results may become subject to
significant fluctuations based upon changes in exchange rates of specific
currencies in relation to the U.S. dollar. Furthermore, to the extent that RAE
engages in international sales denominated in U.S. dollars, an increase in the
value of the U.S. dollar relative to foreign currencies could make RAE's
products and services less competitive in the international markets. Although
RAE will continue to monitor its exposure to currency fluctuations, and, when
appropriate, may use financial hedging techniques in the future to minimize the
76
effect of these fluctuations, RAE cannot assure you that exchange rate
fluctuations will not adversely affect its financial results in the future.
Interest Rate Risk
As of December 31, 2001, RAE had cash and cash equivalents of $6.7 million
consisting of cash and highly liquid, short-term investments, which were
partially offset by $4.4 million in notes payable and lines of credit. The
impact of interest rate fluctuations was immaterial. Declines of interest
rates over time will, however, reduce RAE's interest income from its short-term
investments.
77
BUSINESS OF RAE
RAE Systems Inc., founded in 1991, designs and manufactures portable gas
detection instruments and wireless monitoring and communications equipment. Its
products and services enable its customers to monitor gas and other volatile
organic compounds in confined spaces, and to establish a perimeter defense
around hazardous material sites and sites of weapons of mass destruction.
The market for RAE's products is diverse. Its customers operate in such
industries as safety and security, oil and gas, drug manufacturing, utilities,
food, chemical, airlines, military and hazardous material storage and disposal.
RAE's monitors are used in civilian and government atmospheric monitoring
programs in over 50 countries. RAE's products are used throughout major United
States manufacturing industries. A number of federal, state and local
governmental agencies have incorporated RAE's instruments as a part of their
standard protocol for responding to confined space and hazardous material
incidences. RAE's gas detectors are also used for jet fuel vapor monitoring
programs.
RAE's patented photoionization detector, or PID, which allows for precision
gas detection monitoring down to the parts-per-million or parts-per-billion
level, depending on the application, is at the heart of many of RAE's product
offerings. The development of the PID has enabled RAE to distinguish itself
from its competition. As a result, RAE is currently able to produce portable,
precise, and rugged detectors at a low cost.
RAE SYSTEMS CAPABILITIES
RAE's main strengths are in both sensor and measurement technology and
integrated wireless technology.
SENSOR AND MEASUREMENT TECHNOLOGY
RAE's products are based on a comprehensive line of proprietary and
patented gas and chemical sensors. RAE designs and manufactures the following
sensors:
* Photo-ionization detectors for the measurements of volatile organic
compounds, highly toxic chemical warfare agents, and toxic industrial
chemicals;
* Catalytic bead pellistors for the measurement of combustible gas;
* Non-dispersive infrared sensor for carbon dioxide, hydrocarbons; and
* Electro-mechanical sensors for toxic gases such as carbon monoxide.
Photo-ionization detectors use ultraviolet light to break up the molecules
of the substances being detected into charged fragments or "ions". This
produces a flow of electrical current proportional to the concentration of
contaminant. RAE's patented photo-ionization detector technology enables
dependable, linear, part-per-million range readings for many toxic gases and
vapors that are virtually undetectable by any other means. Photo-ionization
detection is particularly suited to the detection of the highly toxic,
long-chain, low vapor-pressure volatile organic compounds associated with many
explosives, toxic industrial chemicals, nerve agents and chemical warfare
agents.
As a result of the experience its individual members have gained at such
companies as Hewlett-Packard, Tektronix, Measurex and Honeywell, RAE's core
engineering staff has developed a deep knowledge base in instrumentation
development, measurement and control systems. RAE's core engineering staff
understands the design and manufacture of compact microprocessor-based
instruments, and has been able to integrate multiple gas sensors with advanced
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analog/digital electronics, rechargeable lithium batteries, miniature diaphragm
pumps, and liquid crystal displays, into portable devices. RAE designs it
instruments to be compact, rugged and easy-to-use, as well as aesthetically
pleasing in appearance.
INTEGRATED WIRELESS TECHNOLOGY
In 1999, anticipating the emergence of robust wireless IP networks, RAE
developed wireless capabilities for its gas monitoring instruments that enable
it to detect gas from remote locations. In May of 2001, RAE introduced the
AreaRAE, a wireless-enabled gas detector, which allows for the real-time
transmission of monitoring information from a base station located up to two
miles away from the detectors. The AreaRAE enables hazmat teams, fire fighters,
law enforcement officials, and other users to remain a safe distance away from
toxins, flames and explosives. The AreaRAE incorporates technologies such as
global positioning system and geographic information system capabilities. In
addition, the AreaRAE can be made to interface with the Internet, making its
measurements available from virtually any location with Internet access. RAE
intends to further enhance its products to include video or imaging capabilities
that will enable security monitoring.
In order to facilitate a systems solution whereby data from RAE's sensors
can be uploaded to the Internet, RAE founded REnex, a Hong Kong based, wireless
systems company. RAE owns approximately 47% of REnex and maintains control of
its management. REnex is developing an Application Specific Private Exchange
Network, or ASPEN, dedicated for use in industrial applications. An ASPEN is a
self-sufficient plug-and-play system that can be customized to meet application
specific needs and market requirements. RAE is currently collaborating with
REnex in the design of a robust wireless communications system to address the
needs of the security, petrochemical, and environmental markets, to name a few.
ASPEN will be the foundation upon which the system is built.
RAE'S STRATEGY
Since RAE's inception in 1991, RAE has focused on becoming a leader in the
development of gas detection monitoring devices. RAE intends to maintain this
focus by pursuing the following strategies:
Transform RAE from an Analytical Instrument Company to a Network Instrumentation
Company. RAE seeks to transform itself from an analytical instrument company to
a network instrumentation company by offering products that enable data to be
transmitted and analyzed from remote locations in the field to a base station
located up to two miles from site of the detector, and ultimately hosted via the
internet. RAE seeks to create a network environment in which each of its
instruments represents a node in a local area network, or LAN, and each LAN is,
in turn, made a part of a wide area network, or WAN, such as the Internet. In
such a network environment, the instruments communicate with one another and
across the Internet to provide systems solutions for various industrial and
security markets that require a low cost feedback loop, including hazmat
monitoring and homeland defense.
Expand into a Variety of Industries in Order to Achieve a Broad Customer Base.
RAE intends to leverage its core technologies across many industries in order to
achieve a broad and diverse customer base. By diversifying its customer base,
RAE hopes to become less susceptible to the economic downturns and business
cycles of any single industry.
Continue to Develop and Bring to Market Products Based on Patented Technology.
RAE intends to continue to develop products based on its patented technology
that are distinguishable from other products in the marketplace, and therefore
help provide insulation from competitive pricing pressures. Through both
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acquisitions and in-house research and development efforts, RAE intends to
develop new technologies such as Ion Mobility Spectroscopy, Gas Chromatography,
and Surface Acoustic Wave.
Fully Leverage Its Low-Cost Manufacturing Base in China. As part of its overall
strategy, RAE intends to increasingly utilize its low-cost manufacturing
facilities in China, thereby lowering its production costs and increasing the
gross margins on its products.
COMPETITIVE STRENGTHS
As an instrument manufacturer, RAE has differentiated itself from its
competition by developing specific chemical sensors, including an array of gas
detectors, photo-ionization detectors, catalytic combustion sensors,
non-dispersive infrared sensors, corona discharge ionization detectors, and
electrochemical gas sensors. These key components allow RAE to innovate and
create new product offerings that other instrument manufacturers may find
difficult to rival, especially those competitors that rely on off-the-shelf
components. RAE's technology is protected by 14 patents, six (6) of which have
been granted.
As a design and development company, RAE has many years of experience in
the industry and understands the need for microprocessor-based instruments. RAE
has successfully integrated its unique gas detection technology with advanced
analog/digital electronics, rechargeable lithium batteries, miniature diaphragm
pumps, and liquid crystal displays into a broad family of compact,
technologically advanced gas detection products. RAE's instruments are user
friendly, durable, and used by mobile industrial workers, municipal employees,
law enforcement agencies, and safety and hygiene professionals.
STRATEGIC RELATIONSHIPS
RAE has entered into a collaboration agreement with the URS Corporation, a
design/construction company, pursuant to which RAE and URS will combine their
collective engineering and application resources to market their products to
federal and state governments. The first collaborative project between RAE and
URS involves a sale of RAE's products to the McClellan Air Force Base.
SALES AND MARKETING
RAE's products are sold through a worldwide organization that includes
direct sales personnel and distributors managed through its Sunnyvale,
California and Hong Kong offices. RAE has a sales and distribution presence in
the United States, Canada, Western Europe, Mexico, Latin America and Singapore,
as well as in Beijing, Shanghai, and other petroleum-focused provinces in China.
As of December 31, 2001, RAE employed 39 people in sales and marketing and
customer support services. In addition, RAE has a total of 140 distributors
which account for approximately 90% of its revenues.
In 2001, approximately 74% of RAE's revenues were derived from sales in
North America and approximately 26% of revenues were derived from international
sales. Of the international sales, approximately 55% represent sales in Europe,
while the remainder represents sales in Asia.
RAE's products are marketed through direct mail and print advertisements,
as well as the dissemination of brochures and other marketing collateral. RAE
participates in industry trade shows and has a presence on the Internet where it
takes orders and provides information on its product offerings.
RESEARCH AND DEVELOPMENT
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RAE is in the process of expanding its product offerings to include a fixed
sensor module, a wider variation of tubes and pumps, as well as instruments that
increase selectivity in gas monitoring. As of December 31, 2001, RAE employed
33 people in research, development and engineering.
RAE's research and development process is done in collaboration with its
manufacturing department. Such collaboration ensures the manufacturability of
the product, and expedites the transition from the conceptual design phase to
actual production.
RAE is engaged in a collaborative effort with the Shanghai University in
China, which is known for its research depth in the electronics engineering,
telecommunications, and material science fields. This collaboration has allowed
for cost effective and high return research and development activities,
including instrument development and sensor technology. RAE is able to draw on
the expertise of the professors at Shanghai University, and recruit from the
talent pool that the university has to offer.
MANUFACTURING
RAE has a wholly-owned offshore manufacturing subsidiary, WaRAE, in
Shanghai, China where it manufactures approximately 25% of its components and
products. WaRAE operates two manufacturing sites in Shanghai, both of which are
leased. The facilities consists of 1,800 square meters and 4,000 square meters
of manufacturing space, respectively, and enable RAE to be cost competitive,
while maintaining high quality manufacturing standards. RAE also has a
manufacturing, integration and test site in Sunnyvale, California, where it
manufactures some of its more complex and sensitive sensors. RAE has been ISO
9001 certified since 1998, and WaRAE is ISO 9001, as well. As of December 31,
2001, RAE employed 151 people in manufacturing, of which 121 are in Shanghai,
and the remainder in the United States.
COMPETITION
Competitors in the gas monitoring industry differentiate themselves on the
basis of their technology, quality of product and service offerings, cost and
time to market. While RAE believes it competes strongly in these categories,
and thus considers itself one of the industry leaders in the design, development
and manufacture of gas monitoring devices, it faces significant competition.
Its primary competitors include Industrial Scientific Corporation, Mine Safety
Appliances Company, BW Technologies, PerkinElmer, Inc., Drager Safety Inc.,
Gastec Corporation, and Bacou-Dalloz.
The majority of RAE's competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial
and marketing resources than RAE. In addition, some of RAE's competitors may be
able to:
- Devote greater resources to marketing and promotional campaigns;
- Adopt more aggressive pricing policies; and/or
- Devote more resources to technology and systems development.
If RAE is unable to compete successfully, its business could be seriously
harmed.
FACILITIES
RAE's corporate headquarters and principal offices are located in a leased
facility in Sunnyvale, California. The Sunnyvale facility consists of
approximately 25,000 square feet for its headquarters, which includes research
and development, sales and marketing, and general and administrative operations,
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under leases expiring in May 2004. The current facility is adequate to meet the
needs of the Company's current operations.
RAE maintains a sales office in Fan Ling, Hong Kong, from which it sells
its products to Asia. The lease of the Fan Ling office has been renegotiated for
a period of three years commencing in January 2002. Through its wholly-owned
subsidiary, WaRAE, RAE leases two manufacturing sites in Jiading, Shanghai
consisting of approximately 1,800 square meters and 4,000 square meters,
respectively. The first of the two leases will expire in phases from March 2004
until March 2008. In January 2002, RAE entered into a five-year lease agreement
with an option to buy for the second of the two leases.
LEGAL PROCEEDINGS
On November 21, 2001, RAE filed a patent infringement claim in the United
States District Court of the Northern District of California against Ion Science
and its distributors. The suit alleges that Ion Science manufactures, uses,
imports into the United States, offers for sale, and sells photo-ionization
detectors, including but not limited to the "PhoCheck" line of photo-ionization
detectors. RAE alleges that Ion Science's photo-ionization detectors, including
but not limited to its "PhoCheck" line of photo-ionization detectors, infringe
patents held by RAE. RAE intends to pursue the lawsuit vigorously. RAE expect
to incur substantial legal fees and expenses in connection with the litigation,
which may also result in the diversion of RAE's internal resources. As a result,
RAE's pursuit of this litigation, regardless of its eventual outcome, could be
costly and time consuming. The litigation is in the preliminary stage, and RAE
is unable to predict its final outcome. However, an adverse outcome could
materially affect RAE's results of operations and financial position.
On October 23, 2001, the estate of Virgil Johnson filed a products
liability lawsuit against RAE in the District Court of Harris County, Texas.
The plaintiffs allege that RAE's product was defective and unsafe for its
intended purposes at the time it left its premises, and that the product was
defective in that it failed to conform to the product design and specifications
of other gas monitors. Additionally, the plaintiffs allege that the product was
defectively designed and marketed so as to render it unreasonably dangerous to
the plaintiff. Further, in the event that RAE does not have adequate insurance
coverage for the expenses it will incur defending the lawsuit, it will incur
substantial legal fees and expenses in connection with the litigation. The
litigation may also result in the diversion of RAE's internal resources. RAE's
defense of this litigation, regardless of its eventual outcome, will likely be
costly and time consuming. The litigation is in the preliminary stage, and RAE
is unable to predict its final outcome. However, an adverse outcome could
materially affect Nettaxi's results of operations and financial position.
In addition to the litigation described above, from time to time RAE may be
subject to various legal proceedings and claims that arise in the ordinary
course of business.
EMPLOYEES
As of December 31, 2001, RAE employed 251 individuals. Of those 251
individuals, 151 were in manufacturing (121 in China; 30 in the US), 33 in
Research, Development and Engineering, 39 in Sales and Marketing, and 28 in
Information Technology and Administration. RAE's employees are not covered by a
collective bargaining agreement. RAE has never experienced an
employment-related work stoppage and considers its employee relations to be
good.
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DESCRIPTION OF NETTAXI CAPITAL STOCK
The following description of Nettaxi's securities and various provisions of
the Company's articles of incorporation and its bylaws are summaries. Statements
contained in this prospectus relating to such provisions are not necessarily
complete, and reference is made to the articles of incorporation and bylaws,
copies of which have been filed as exhibits to its filings with the Commission
and provisions of applicable law. Nettaxi's authorized capital stock consists of
200,000,000 shares of common stock, par value $.001 per share, of which
43,124,586 shares were issued and outstanding as February 12, 2002, and
1,000,000 shares of preferred stock, par value $.001, of which no shares were
issued or outstanding as of February 12, 2002. As of February 12, 2002, Nettaxi
estimated that there were approximately 386 holders of record of its common
stock.
COMMON STOCK
The holders of outstanding shares of common stock are entitled to share
ratably in dividends declared out of assets legally available therefor at such
time and in such amounts as the Board of Directors may from time to time
lawfully determine. Each holder of common stock is entitled to one vote for each
share held. Cumulative voting in elections of directors and all other matters
brought before stockholders meetings, whether they be annual or special, is not
provided for under its articles of incorporation or bylaws. However, cumulative
voting rights in the election of Nettaxi's directors currently applies under
California law. California Corporations Code Section 2115 requires Nettaxi to
provide its stockholders cumulative voting rights in the election of directors
because the average of its property factor, payroll factor and sales factor
deemed to be in California during the Company's latest fiscal year was almost
100%, and over 60% of its outstanding voting securities are held of record by
persons having addresses in California, and its securities are not listed on the
New York Stock Exchange or the American Stock Exchange do not currently qualify
as a national market security on NASDAQ. California Corporations Code Section
2115 is discussed in greater detail below. The common stock is not entitled to
conversion or preemptive rights and is not subject to redemption or assessment.
Upon liquidation, dissolution or winding up of Nettaxi, any assets legally
available for distribution to stockholders as such are to be distributed ratably
among the holders of the common stock at that time outstanding. The common stock
presently outstanding is fully paid and nonassessable. As described below, the
Board of Directors is authorized, without further stockholder approval, to
issue preferred stock. Such an issuance could potentially effect the rights and
preferences of holders of common stock. Other than by the issuance of preferred
stock by the Board of Directors, the rights of security holders may not be
modified otherwise than by a vote of a majority or more of the shares
outstanding.
Currently, the Company's bylaws provide that stockholder action may be
taken at a meeting of stockholders and may be effected by a consent in writing
if such consent is signed by the holders of the majority of outstanding shares,
unless Nevada law requires a greater percentage. The Company's articles of
incorporation provide that they may be amended by the affirmative vote of a
majority of the shares entitled to vote on such an amendment. These are the only
provisions of the Company's bylaws or articles of incorporation that specify the
vote required by security holders to take action.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder
approval, to issue from time to time up to an aggregate of 1,000,000 shares of
preferred stock. The preferred stock may be issued in one or more series and the
Board of Directors may fix the rights, preferences and designations thereof. No
shares of preferred stock are currently outstanding and the Company has no
83
present plans to issue any shares of preferred stock. The issuance of preferred
stock, while providing desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, a majority of the Company's outstanding voting stock.
WARRANTS
RGC INTERNATIONAL INVESTORS. RGC International Investors holds warrants to
purchase up to 2,200,000 shares of the Company's common stock (without giving
effect to the reverse stock split contemplated by Proposal 2), having an
exercise price of $1.50 per share. These warrants may be exercised at any time
during the five-year period following their issuance. The exercise price for the
warrants is subject to adjustment for stock dividends, stock splits and
consolidations or mergers. The warrants contain provisions which limit the
number of shares of common stock into which the warrants are exercisable. Under
these provisions, the number of shares of common stock into which the warrants
are exercisable on any given date, together with any additional shares of common
stock held by RGC International Investors, will not exceed 4.9% of the Company's
then outstanding common stock. Nettaxi has registered the shares issuable upon
exercise of these warrants pursuant to its registration statement on Form S-1
(File No. 333-38538) declared effective by the Securities Exchange Commission on
June 21, 2000.
In August 1999, Nettaxi entered into an agreement with RGC International
Investors, LDC pursuant to which it exercised 150,000 warrants that were issued
to it on March 31, 1999 in connection with the issuance of convertible
debentures. In consideration for the early exercise of its warrants, the
exercise price for the warrants was decreased from $12.375 to $7.875 and Nettaxi
issued RGC warrants to purchase an additional 150,000 shares of common stock
with an exercise price of $7.875. Subsequently, due to the resolution of a
dispute with the selling stockholder with regard to the appropriate adjustment
required under the anti-dilution provisions in such warrants, Nettaxi agrees to
decrease the exercise price to $4.38 per share, resulting in an increase in the
number of shares issuable upon exercise of the warrants to 269,692 (without
giving effect to the reverse stock split contemplated by Proposal 2). Nettaxi
has registered the shares issuable upon exercise of these warrants pursuant to
its registration statement on Form S-1 (File No. 333-38538) declared effective
by the Securities Exchange Commission on June 21, 2000.
These warrants issued to RGC International Investors may be exercised at
any time during the five-year period following their issuance. The exercise
price for the warrants is subject to adjustment for stock dividends, stock
splits, recapitalizations, reclassifications, combinations, and dilutive
issuances of securities. The warrants contain provisions which limit the number
of shares of common stock in to which the warrants are exercisable. Under these
provisions, the number of shares of common stock into which the warrants are
exercisable on any given date, together with any additional shares of common
stock held by RGC International Investors, will not exceed 4.99% of the
Company's then outstanding common stock.
The foregoing has included a brief description of some of the terms of the
warrants. For a more detailed description of the rights of the holders of the
warrants, prospective investors are directed to the actual form of warrant that
has been filed as an exhibit to the registration statement on Form S-1 (File No.
333-38538).
2000 PRIVATE PLACEMENT. In connection with Nettaxi's February 2000 private
placement, the Company issued warrants to purchase approximately 15 million
shares of its common stock (without giving effect to the reverse stock split
84
contemplated by Proposal 2) exercisable at $4.00 per share. The warrants are
subject to adjustment for stock dividends, stock splits, recapitalizations,
reclassifications and similar events.
OTHER WARRANTS. There are also currently outstanding warrants to purchase
2,489,491 shares of the Company's common stock (without giving effect to the
reverse stock split contemplated by Proposal 2). These warrants have exercise
prices which range from $0.13 per share to $12.375 per share. The warrants are
subject to adjustment for stock dividends, stock splits, recapitalizations,
reclassifications and similar events.
REGISTRATION RIGHTS
RGC INTERNATIONAL INVESTORS. Nettaxi may have a continuing obligation to
maintain the registration of shares underlying the warrants issued to RGC
International Investors. The registration statement pursuant to which the
shares underlying these warrants are registered may need to be updated in order
to maintain its effectiveness. Although RAE has agreed to use its commercially
reasonable efforts to maintain the effectiveness of Nettaxi's registration
statements, and although Nettaxi-Delaware anticipates updating these
registration statements following the Merger, Nettaxi may face liability from
shareholders, if ineligible to sell without restriction under Rule 144, who are
also unable to sell their shares under the registration statements before they
are updated. Additionally, Nettaxi will not be able to control whether or not
the registration statements are kept effective following the Merger. Should
there be a lapse in effectiveness of one or all of the registration statements,
we Nettaxi could potentially face liability from stockholders who would be
unable to trade their securities due to such a lapse.
2000 PRIVATE PLACEMENT. In connection with Nettaxi's February 2000 private
placement, the Company issued warrants to purchase approximately 15 million
shares of its common stock. The warrants are subject to adjustment for stock
dividends, stock splits, recapitalizations, reclassifications and similar
events. Pursuant to the Company's Merger Agreement with RAE, the surviving
company will use commercially reasonable efforts to maintain the effectiveness
or the registration of the shares underlying these warrants.
Prior to the Effective Time of the Merger, Nettaxi intends to file a
registration statement on Form S-8 to register the shares underlying warrants
issued to the executive officers of Nettaxi in accordance with severance
payments described in the section of this proxy statement entitled "Interests of
Certain Persons in the Merger and Possible Conflicts of Interest" and the
326,280 shares underlying outstanding warrants and the warrants to be issued to
Baytree Capital Associates in connection with the ongoing services to be
provided by Baytree to the surviving company after the merger.
ANTI-TAKEOVER EFFECTS OF VARIOUS PROVISIONS OF NEVADA LAW AND NETTAXI'S ARTICLES
OF INCORPORATION AND BYLAWS
Nettaxi is incorporated under the laws of the State of Nevada and is
therefore subject to various provisions of the Nevada corporation laws which may
have the effect of delaying or deterring a change in the control or management
of Nettaxi.
Nevada's "Combination with Interested Stockholders Statute," NRS
78.411-78.444, which applies to Nevada corporations like us having at least 200
stockholders, prohibits an "interested stockholder" from entering into a
"combination" with the corporation, unless specific conditions are met. A
"combination" includes:
- any Merger with an "interested stockholder," or any other corporation
which is or after the Merger would be, an affiliate or associate of the
interested stockholder;
85
- any sale, lease, exchange, mortgage, pledge, transfer or other
disposition of assets, in one transaction or a series of transactions, to an
"interested stockholder," having:
- an aggregate market value equal to 5% or more of the aggregate
market value of the corporation's assets,
- an aggregate market value equal to 5% or more of the aggregate
market value of all outstanding shares of the corporation, or
- representing 10% or more of the earning power or net income of
the corporation;
- any issuance or transfer of shares of the corporation or its
subsidiaries, to the "interested stockholder," having an aggregate market value
equal to 5% or more of the aggregate market value of all the outstanding shares
of the corporation,
- the adoption of any plan or proposal for the liquidation or
dissolution of the corporation proposed by the "interested stockholder,"
- transactions which would have the effect of increasing the
proportionate share of outstanding shares of the corporation owned by the
"interested stockholder," or
- the receipt of benefits, except proportionately as a stockholder, of
any loans, advances or other financial benefits by an " interested stockholder."
An "interested stockholder" is a person who
- directly or indirectly owns 10% or more of the voting power of the
outstanding voting shares of the corporation;
- an affiliate or associate of the corporation which at any time
within three years before the date in question was the beneficial owner,
directly or indirectly, of 10% or more of the voting power of the then
outstanding shares of the corporation.
A corporation to which the statute applies may not engage in a
"combination" within three years after the interested stockholder acquired its
shares, unless the combination or the interested stockholder's acquisition of
shares was approved by the Board of Directors before the interested stockholder
acquired the shares. If this approval was not obtained, then after the
three-year period expires, the combination may be consummated if all the
requirements in the articles of incorporation are met and either:
- the Board of Directors of the corporation approves, prior to such
person becoming an "interested stockholder," the combination or the purchase of
shares by the "interested stockholder" or the combination is approved by the
affirmative vote of holders of a majority of voting power not beneficially owned
by the "interested stockholder" at a meeting called no earlier than three years
after the date the "interested stockholder" became such; or
- the aggregate amount of cash and the market value of consideration
other than cash to be received by holders of common shares and holders of any
other class or series of shares meets the minimum requirements set forth in
Sections 78.411 through 78.443, inclusive, and prior to the consummation of the
combination, except in limited circumstances, the "interested stockholder" will
not have become the beneficial owner of additional voting shares of the
corporation.
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Nevada's "Control Share Acquisition Statute," NRS Sections 78.378-78.379,
prohibits an acquiror, under some circumstances, from voting shares of a target
corporation's stock after crossing threshold ownership percentages, unless the
acquiror obtains the approval of the target corporation's stockholders. The
Control Share Acquisition Statute only applies to Nevada corporations with at
least 200 stockholders, including at least 100 record stockholders who are
Nevada residents, and which do business directly or indirectly in Nevada. While
Nettaxi does not currently exceed these thresholds, Nettaxi may well do so in
the near future. In addition, although the Company does not presently "do
business" in Nevada within the meaning of the Control Share Acquisition Statute,
Nettaxi may do so in the future. Therefore, it is likely that the Control Share
Acquisition Statute will apply to us in the future. The statute specifies three
thresholds: at least one-fifth but less than one-third, at least one-third but
less than a majority, and a majority or more, of all the outstanding voting
power. Once an acquiror crosses one of the above thresholds, shares which it
acquired in the transaction taking it over the threshold or within ninety days
become "Control Shares" which are deprived of the right to vote until a majority
of the disinterested stockholders restore that right. A special stockholders'
meeting may be called at the request of the acquiror to consider the voting
rights of the acquiror's shares no more than 50 days, unless the acquiror agrees
to a later date, after the delivery by the acquiror to the corporation of an
information statement which sets forth the range of voting power that the
acquiror has acquired or proposes to acquire and other information concerning
the acquiror and the proposed control share acquisition. If no such request for
a stockholders' meeting is made, consideration of the voting rights of the
acquiror's shares must be taken at the next special or annual stockholders'
meeting. If the stockholders fail to restore voting rights to the acquiror or if
the acquiror fails to timely deliver an information statement to the
corporation, then the corporation may, if so provided in its articles of
incorporation or bylaws, call some of the acquiror's shares for redemption. The
Company's articles of incorporation and bylaws do not currently permit us to
call an acquiror's shares for redemption under these circumstances. The Control
Share Acquisition Statute also provides that the stockholders who do not vote in
favor of restoring voting rights to the Control Shares may demand payment for
the "fair value" of their shares. This amount is generally equal to the highest
price paid in the transaction subjecting the stockholder to the statute.
Provisions of Nettaxi's bylaws which are summarized below may affect
potential changes in control of Nettaxi. The Board of Directors believes that
these provisions are in the best interests of stockholders because they will
encourage a potential acquiror to negotiate with the Board of Directors , which
will be able to consider the interests of all stockholders in a change in
control situation. However, the cumulative effect of these terms maybe to make
it more difficult to acquire and exercise control of Nettaxi and to make changes
in management more difficult.
The bylaws provide the number of directors of Nettaxi shall be established
by the Board of Directors , but shall be no less than one. Between stockholder
meetings, the Board of Directors may appoint new directors to fill vacancies or
newly created directorships. A director may be removed from office by the
affirmative vote of 66-2/3% of the combined voting power of the then outstanding
shares of stock entitled to vote generally in the election of directors.
As discussed above, Nettaxi's bylaws further provide that stockholder
action may be taken at a meeting of stockholders and may be effected by a
consent in writing if such consent is signed by the holders of the majority of
outstanding shares, unless Nevada law requires a greater percentage.
Nettaxi is not aware of any proposed takeover attempt or any proposed
attempt to acquire a large block of its common stock.
The provisions described above may have the effect of delaying or deterring
a change in the control or management of Nettaxi.
87
APPLICATION OF CALIFORNIA GENERAL CORPORATION LAW
Although Nettaxi is incorporated in Nevada, its headquarters is in the
State of California. Section 2115 of the California General Corporation Law
provides that provisions of the California General Corporation Law shall be
applicable to a corporation organized under the laws of another state to the
exclusion of the law of the state in which it is incorporated, if the
corporation meets tests regarding the business done in California and the number
of its California stockholders.
An entity such as Nettaxi can be subject to Section 2115 if the average of
the property factor, payroll factor and sales factor deemed to be in California
during its latest full income year is more than 50 percent and more than
one-half of its outstanding voting securities are held of record by persons
having addresses in California. Section 2115 does not apply to corporations with
outstanding securities listed on the New York or American Stock Exchange, or
with outstanding securities designated as qualified for trading on the Nasdaq
National Market. Since the average of the Company's property factor, payroll
factor and sales factor deemed to be in California during Nettaxi's latest
fiscal year was almost 100%, and over 50% of its outstanding voting securities
are held of record by persons having addresses in California, and Nettaxi's
securities do not currently trade on any of the listed exchanges, Nettaxi is
subject to Section 2115.
During the period that Nettaxi is subject to Section 2115, the provisions
of the California General Corporation Law regarding the following matters are
made applicable to the exclusion of the law of the State of Nevada:
- general provisions and definitions;
- annual election of directors;
- removal of directors without cause;
- removal of directors by court proceedings;
- filling of director vacancies where less than a majority in office
were elected by the stockholders
- directors' standard of care;
- liability of directors for unlawful distributions;
- indemnification of directors, officers and others;
- limitations on corporate distributions of cash or property;
- liability of a stockholder who receives an unlawful distribution;
- requirements for annual stockholders meetings;
- stockholders' right to cumulate votes at any election of directors;
- supermajority vote requirements;
- limitations on sales of assets;
- limitations on mergers;
- reorganizations;
- dissenters' rights in connection with reorganizations
- required records and papers;
- actions by the California Attorney General; and
- rights of inspection.
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COMPARITIVE RIGHTS OF HOLDERS OF
NETTAXI-DELAWARE COMMON STOCK
AND RAE CAPITAL STOCK
This section of the proxy statement describes material differences between the
rights of stockholders of Nettaxi-Delaware and the rights of shareholders of RAE
capital stock. The rights compared are those found in the respective companies'
charter documents and corporate law provisions for Delaware and California,
which are the states in which Nettaxi-Delaware and RAE, respectively, are
incorporated. When reading this description, please note that Delaware law
refers to holders of capital stock as "stockholders" while California law uses
the term "shareholder." The two terms mean the same thing in practice and for
all practical purposes may be used interchangeably; however, we generally use
the term "stockholder" when referring to holders of Nettaxi-Delaware capital
stock or to Delaware law and "shareholder" when referring to holders of RAE
capital stock or to California law. After completion of the merger, shareholders
of RAE capital stock will become stockholders of Nettaxi-Delaware common stock.
The rights of Nettaxi-Delaware stockholders will be governed by Delaware law,
Nettaxi-Delaware's certificate of incorporation and Nettaxi-Delaware's bylaws.
While Nettaxi-Delaware believes that this description addresses the material
differences, this summary may not contain all of the information that is
important to stockholders of Nettaxi-Delaware and shareholders of RAE.
Nettaxi-Delaware stockholders and RAE shareholders should read this entire
document and the documents referred to in this summary carefully for a more
complete understanding of the differences between the rights of Nettaxi-Delaware
stockholders, on the one hand, and RAE shareholders, on the other. This summary
is not intended to be complete and is qualified in its entirety by reference to
the relevant provisions of the certificate of incorporation and bylaws of
Nettaxi-Delaware, the articles of incorporation and bylaws of RAE, and Delaware
and California law.
SIZE OF THE BOARD OF DIRECTORS
Delaware law states that the board of directors shall consist of one or
more members with the number of directors to be fixed as provided in the bylaws
of the corporation, unless the certificate of incorporation fixes the number of
directors, in which case a change in the number of directors shall be made only
by amendment of the certificate. Nettaxi-Delaware's board of directors may
consist of such number of directors as determined by the board of directors, and
currently consists of six directors.
Under California law, as provided in the articles of incorporation or
bylaws, the minimum number of directors cannot be less than three. A bylaw
changing the number of directors may only be adopted by approval of a majority
of the outstanding shares. The RAE bylaws provide that the authorized number of
directors of RAE shall be six.
CLASSIFICATION
The Nettaxi-Delaware board of directors is divided into three classes, with
each class serving a staggered three-year term.
The RAE board of directors is not classified. Each director is up for
election every year.
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REMOVAL OF DIRECTORS
Delaware law states that any director or the entire board of directors may
be removed, with or without cause, by the holders of a majority of the shares
then entitled to vote at an election of directors. Nettaxi-Delaware's
certificate of incorporation and bylaws provide that a director can be removed
with or without cause by the vote of a majority of the voting power of the then
outstanding shares of capital stock entitled to vote.
California law provides that the board of directors may remove a director
for cause by declaring vacant the office of a director who has been declared of
unsound mind by an order of court or convicted of a felony. Further, any
director or the entire board of directors may be removed, with or without cause,
with approval of a majority of the outstanding shares entitled to vote thereon;
however, no director may be removed (unless the entire board is removed) if the
number of shares voted against the removal or not consenting in writing to the
removal would be sufficient to elect the director under cumulative voting.
Shareholders holding at least 10% of the outstanding shares in any class may sue
in superior county court to remove from office any director for fraud, dishonest
acts or gross abuse of authority or discretion. The RAE bylaws provide for the
removal of directors in accordance with California law.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
Delaware law provides that, unless otherwise provided in the certificate of
incorporation or bylaws, vacancies may be filled by a majority of the directors
then in office, although less than a quorum, or by a sole remaining director.
Further, if, at the time of filling any vacancy, the directors then in office
shall constitute less than a majority of the whole board, the Court of Chancery
may, upon application of any stockholder or stockholders holding at least 10% of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order any election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office. Nettaxi-Delaware's bylaws provide that vacancies
may be filled, subject to the rights of the holders of any series of Preferred
Stock then outstanding, only by a majority vote of the directors then in office,
though less than a quorum. Any director elected by the board of directors to
fill a vacancy or newly created directorship shall hold the office for a term
expiring at the next annual meeting of stockholders.
Under California law, any vacancy on the board of directors other than one
created by removal of a director, may be filled by the board of directors,
unless otherwise provided in the articles or bylaws. If the number of directors
is less than a quorum, a vacancy may be filled by the unanimous written consent
of the directors then in office, by the affirmative vote of a majority of the
directors at a meeting held pursuant to notice or waivers of notice or by a sole
remaining director. A vacancy created by removal of a director can only be
filled by the shareholders unless board approval is authorized by a
corporation's articles of incorporation or by a bylaw approved by the
corporation's shareholders.
CUMULATIVE VOTING
Delaware law does not require any corporation to permit cumulative voting.
California law requires that any corporation that is not a listed corporation
must permit cumulative voting in its elections for directors, provided that the
shareholder wishing to cumulate votes follow the proper procedures for doing so.
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Nettaxi-Delaware does not permit cumulative voting. RAE is required to, and
does, permit cumulative voting.
LIMITATION ON DIRECTOR LIABILITY
Delaware law and California law each provide that the charter documents of
a corporation may include provisions which limit or eliminate the liability of
directors to the corporation or its stockholders, provided such liability does
not arise from certain proscribed conduct, including, in the case of Delaware
law, for any breach of the director's duty of loyalty to the corporation or its
stockholders, acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, the payment of unlawful dividends or
expenditure of funds for unlawful stock purchases or redemptions or transactions
from which such director derived an improper personal benefit, or, in the case
of California law, intentional misconduct or knowing and culpable violation of
law, acts or omissions that a director believes to be contrary to the best
interests of the corporation or its shareholders or that involve the absence of
good faith on the part of the director, the receipt of an improper personal
benefit, acts or omissions that show reckless disregard for the director's duty
to the corporation or its shareholders, where the director in the ordinary
course of performing a director's duties should be aware of a risk of serious
injury to the corporation or its shareholders, acts or omissions that constitute
an unexcused pattern of inattention that amounts to an abdication of the
director's duty to the corporation and its shareholders, interested transactions
between the corporation and a director in which a director has a material
financial interest and liability for improper distributions, loans or
guarantees.
The Nettaxi-Delaware certificate of incorporation provides that a director
of Nettaxi-Delaware shall not be personally liable to the corporation or its
stockholders for monetary damages, except for liability (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involved intentional misconduct or
a knowing violation of law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit. The Nettaxi-Delaware certificate further provides
that, if the Delaware General Corporation Law is hereafter amended to authorize
the further limitation of the liability of a director, then the liability of a
director of the corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
The RAE articles of incorporation contain a provision limiting the
liability of its directors to the fullest extent provided by California law.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Both Delaware and California law generally permit a corporation to
indemnify its directors and officers against expenses, judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with a
third-party action, other than a derivative action, provided that there is a
determination that the individual acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the corporation.
Under Delaware law, such determination shall be made, in the case of an
individual who is a director or officer at the time of such determination: by a
majority of the disinterested directors, even though less than a quorum; by a
committee of such directors designated by a majority vote of such directors,
even though less than a quorum; by independent legal counsel, regardless of
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whether a quorum of disinterested directors exists; or by a majority vote of the
stockholders, at a meeting at which a quorum is present.
Under California law, such determination will be made by a majority vote of
a quorum consisting of directors who are not parties to the indemnification
proceeding, or, if such a quorum of directors is not obtainable, by independent
legal counsel, by approval of the shareholders, with the shares owned by the
person to be indemnified not being entitled to vote, or by the court in which
the underlying proceeding is or was pending.
AMENDMENTS TO CERTIFICATE OF INCORPORATION AND ARTICLES OF INCORPORATION
Delaware law requires a vote of the corporation's board of directors
followed by the affirmative vote of a majority of the outstanding stock of each
class entitled to vote for any amendment to the certificate of incorporation,
unless a greater level of approval is required by the certificate of
incorporation. Further, Delaware law states that if an amendment would increase
or decrease the aggregate number of authorized shares of such class, increase or
decrease the par value of shares of such class or alter or change the powers,
preferences or special rights of a particular class or series of stock so as to
affect them adversely, the class or series shall be given the power to vote as a
class notwithstanding the absence of any specifically enumerated power in the
certificate of incorporation.
Nettaxi-Delaware's certificate of incorporation provides that the
affirmative vote of the holders of at least 66 2/3% of the shares entitled to
vote in any annual election of directors, voting together as a single class, is
required to amend or repeal provisions of Nettaxi-Delaware's certificate of
incorporation relating to: the management of Nettaxi-Delaware by or under the
direction of the board of directors, stockholder action without a meeting,
number, election, term, classes of directors, adoption, amendment or repeal of
the bylaws, liability of the directors, and the amendment or repeal of the
above-described provisions of Nettaxi-Delaware's certificate of incorporation.
Unless otherwise specified in a California corporation's articles of
incorporation, an amendment to the articles of incorporation requires the
approval of the corporation's board of directors and the affirmative vote of a
majority of the outstanding shares entitled to vote thereon, either before or
after the board approval, although certain minor amendments may be adopted by
the board alone such as amendments causing stock splits (including an increase
in the authorized number of shares in proportion thereto) and amendments
changing names and addresses given in the articles. Under California law, the
holders of the outstanding shares of a class of stock are entitled to vote as a
class if a proposed amendment to the articles of incorporation would: increase
or decrease the aggregate number of authorized shares of such class; effect an
exchange, reclassification or cancellation of all or part of the shares of such
class, other than a stock split; effect an exchange, or create a right of
exchange, of all or part of the shares of another class into the shares of such
class; change the rights, preferences, privileges or restrictions of the shares
of such class; create a new class of shares having rights, preferences or
privileges prior to the shares of such class, or increase the rights,
preferences or privileges or the number of authorized shares having rights,
preference or privileges prior to the shares of such class; in the case of
preferred shares, divide the shares of any class into series having different
rights, preferences, privileges or restrictions or authorize the board of
directors to do so; or cancel or otherwise affect dividends on the shares of
such class which have accrued but have not been paid.
The RAE articles of incorporation require the approval by a majority of the
outstanding shares of Preferred Stock, if shares of Preferred Stock are
outstanding, in order for RAE to amend or repeal the RAE's articles of
incorporation or bylaws if such actions would alter or change the rights,
preferences, privileges or power of, or restrictions provided for the benefit
of, the holders of the Preferred Stock to affect the holders materially and
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adversely; create, reclassify, authorize or issue any class of stock senior to,
or on a parity with, the Preferred Stock with respect to dividends, redemption
or upon liquidation.
AMENDMENTS TO BYLAWS
Delaware law also states that the power to adopt, amend or repeal the
bylaws of a corporation shall be vested in the stockholders entitled to vote,
provided that the corporation in its certificate of incorporation may confer
such power on the board of directors in addition to the stockholders.
Nettaxi-Delaware's certificate of incorporation authorizes Nettaxi-Delaware's
board of directors to adopt, amend or repeal Nettaxi-Delaware's bylaws. The
stockholders of Nettaxi-Delaware may adopt, amend or repeal Nettaxi-Delaware's
bylaws, by the affirmative vote of the holders of at least 66 2/3% of the shares
entitled to vote in any annual election of directors, voting together as a
single class.
Under California law, a corporation's bylaws may be adopted, amended or
repealed either by the board of directors or the shareholders of the
corporation. The RAE bylaws provide that they may be amended or repealed by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote.
AUTHORIZED CAPITAL STOCK
The Nettaxi-Delaware certificate of incorporation authorizes the issuance
of up to 100,000,000 shares of Common Stock, par value one-tenth of one cent
($0.001) per share and 2,000,000 shares of Preferred Stock, par value one-tenth
of one cent ($0.001) per share. The Nettaxi-Delaware board of directors is
authorized, without further action by the stockholders, and subject to any
limitations prescribed by law, to designate and issue the preferred stock in one
or more series, and can fix the rights, preferences, and privileges of the
shares of each series and any qualifications, limitations, or restrictions on
these shares. The Nettaxi-Delaware board of directors may authorize the issuance
of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of Nettaxi-Delaware's common
stock.
Immediately after the Closing, it is anticipated that 43,091,035 shares of
Nettaxi-Delaware common stock will be issued and outstanding, and no shares of
Nettaxi-Delaware Preferred Stock were issued and outstanding.
The RAE articles of incorporation authorizes the issuance of up to
40,000,000 shares of Common Stock, par value $0.01 per share, and 2,000,000
shares of Preferred Stock, of which 700,000 shares are designated Series A
Preferred Stock, par value $0.01 per share, and 1,000,000 shares are designated
Series B Preferred Stock, par value $0.01 per share. The RAE board of directors
is authorized, without further action by the shareholders, and subject to any
limitations prescribed by law, to designate and issue the preferred stock in one
or more series, and can fix the rights, preferences, privileges and restrictions
of the shares of each series and any qualifications, limitations, or
restrictions on these shares. The RAE board of directors may authorize the
issuance of preferred stock with voting or conversion rights that could
adversely affect the voting power or other rights of the holders of RAE's common
stock.
As of January 31, 2002, approximately 16,492,960 shares of RAE Common Stock
were issued and outstanding, 700,000 shares of Series A Preferred Stock were
issued and outstanding, and 1,000,000 shares of Series B Preferred Stock were
issued and outstanding.
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DIVIDENDS
Both Delaware law and California law provide that the directors of a
corporation may declare and pay dividends on capital stock. Under Delaware law,
dividends may only be paid out of surplus, which is the excess of net assets of
the corporation over capital, or, if the corporation does not have adequate
surplus, out of net profits for the current or immediately preceding fiscal
year, unless the net assets are less than the capital of any outstanding
preferred stock. Under California law, dividends may only be paid out of
retained earnings or so long as the distribution does not render the corporation
unable to meet its liabilities as they mature.
The Nettaxi-Delaware certificate of incorporation places no additional
restrictions on its board's ability to declare dividends.
The RAE articles of incorporation require that dividends shall be paid to
the holders of Series A Preferred Stock on a non-cumulative basis, when, as and
if declared by the board of directors, at a rate equal to 6% per year on the
initial purchase price of the shares of Series A Preferred Stock and Series B
Preferred Stock, respectively.
STOCK REPURCHASES, REDEMPTIONS, AND CONVERSIONS
In general, a corporation may not purchase or redeem its own shares if its
capital is impaired or if the purchase or redemption would cause its capital to
be impaired. A corporation may, however, purchase or redeem preferred shares out
of capital if the shares will then be retired, thereby reducing the capital of
the corporation.
The Nettaxi-Delaware certificate of incorporation does not restrict
Nettaxi-Delaware's ability to repurchase or redeem its own shares.
The RAE articles of incorporation states that the shares of Common Stock
are not redeemable, but provides for the redemption of Series A Preferred Stock
and Series B Preferred Stock at $0.40 and $1.00 per share, respectively.
APPRAISAL OR DISSENTERS' RIGHTS
Under Delaware law, holders of shares of any class or series of stock, who
neither vote in favor of the merger or consolidation nor consent thereto in
writing, have the right, in certain circumstances, to dissent from a merger or
consolidation by demanding payment in cash for their shares equal to the fair
value (excluding any appreciation or depreciation as a consequence or in
expectation of the transaction) of such shares, as determined by agreement with
the corporation or by an independent appraiser appointed by a court in an action
timely brought by the corporation or the dissenters. Delaware law grants
dissenters' appraisal rights only in the case of mergers or consolidations and
not in the case of a sale or transfer of assets or a purchase of assets for
stock regardless of the number of shares being issued. Further, no appraisal
rights are available for shares of any class or series of stock listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders, unless the
agreement of merger or consolidation converts such shares into anything other
than (i) stock of the surviving corporation; (ii) stock of another corporation
which is either listed on a national securities exchange or designated as a
national market system security on an interdealer quotation system by the
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National Association of Securities Dealers, Inc. or held of record by more than
2,000 stockholders; (iii) cash in lieu of fractional shares; or (iv) some
combination of the above. In addition, dissenters' rights are not available for
any shares of the surviving corporation if the merger did not require the vote
of the stockholders of the surviving corporation.
Under California law, if the approval of the outstanding shares of the
corporation is required for a merger or reorganization, each shareholder
entitled to vote on the transaction, and who did not vote in favor of the
reorganization, may require the corporation to purchase for cash at their fair
market value the shares owned by such shareholder. No appraisal rights are
available for shares listed on any national securities exchange certified by the
Commissioner of Corporations or listed on the National Market System of the
NASDAQ Stock Market, unless there exists with respect to such shares any
restriction on transfer imposed by the corporation or by any law or regulation
or if demands for payment are filed with respect to 5% or more of the
outstanding shares of that class.
ACTION BY WRITTEN CONSENT
Under Delaware law and California law, unless otherwise provided in the
certificate or articles of incorporation, any action required to be taken or
which may be taken at an annual or special meeting of stockholders may be taken
without a meeting if a consent in writing is signed by the holders of
outstanding stock having at least the minimum number of votes required to
authorize such action. Under California law, if consent is sought for less than
all shareholders entitled to vote, notice as required shall be given. In
addition, under California law, directors may not be elected by written consent
except by unanimous written consent, other than a vacancy created by removal,
which vacancy may be filled by the consent of a majority of the shareholders, or
if the removed director is elected only by a class of shareholders, by the
consent of a majority of that class.
The Nettaxi-Delaware certificate of incorporation prohibits stockholder
action without a duly called annual or special meeting of the stockholders.
ANNUAL MEETING OF STOCKHOLDERS
Nettaxi-Delaware's annual meetings of stockholders are held on the date and
at the place fixed by its board of directors. The RAE bylaws provide that its
annual meetings of stockholders be held at 12:00 noon on the first Friday in
February at the principal executive office of RAE unless otherwise designated by
the board of directors.
SPECIAL MEETING OF STOCKHOLDERS
The Nettaxi-Delaware certificate of incorporation and bylaws provide that
special meetings of the stockholders may only be called by the board of
directors, the chairman of the board, the President or the chief executive
officer, or by one or more shareholders holding not less than 10% of the voting
power of Nettaxi-Delaware.
The RAE bylaws provide that special meetings of the shareholders may only
be called by the board of directors, the chairman of the board, the president,
or by one or more shareholders holding not less than 10% of the voting power of
RAE.
ADVANCE NOTICE REQUIREMENTS OF STOCKHOLDER NOMINATIONS
In order to nominate an individual for election to the board of directors
at an annual meeting, Nettaxi-Delaware's bylaws require a stockholder to provide
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written notice of the nomination to Nettaxi-Delaware's secretary at least 120
calendar days in advance of the date that Nettaxi-Delaware's proxy statement was
released to stockholders in connection with the previous year's annual meeting
of stockholders.
The RAE bylaws do not contain a comparable provision.
ADVANCE NOTICE REQUIREMENTS OF STOCKHOLDER BUSINESS
In order to raise business before an annual meeting, an Nettaxi-Delaware
stockholder must provide written notice of such intent to Nettaxi-Delaware not
less than 120 calendar days in advance of the date that Nettaxi-Delaware's proxy
statement was released to stockholders in connection with the previous year's
annual meeting of stockholders.
The stockholder's notice for an annual or special meeting shall set forth:
(a) a brief description of the business desired to be brought before the
annual or special meeting;
(b) the name and address, as they appear on Nettaxi-Delaware's books, of the
stockholder proposing such business;
(c) the class and number of shares of Nettaxi-Delaware which are
beneficially owned by the stockholder; and
(d) any material interest of the stockholder in such business.
Business transacted at a special meeting of stockholders shall be confined
to the purpose or purposes stated in the notice of meeting.
The RAE bylaws do not contain a comparable provision.
RIGHTS OF INSPECTION
Delaware and California law allow any stockholder to inspect the accounting
books and records and minutes of proceedings of the stockholders and the board
and to inspect the stockholders' list at any reasonable time during usual
business hours, for a purpose reasonably related to such holder's interests as a
stockholder. Additionally, California law provides for an absolute right to
inspect and copy or obtain from the transfer agent of the corporation the
corporation's shareholders list by a shareholder or shareholders holding at
least 5% in the aggregate of the corporation's outstanding voting shares, or any
shareholder or shareholders holding 1% or more of such shares who have filed a
Schedule 14A with the Commission.
TRANSACTIONS BETWEEN THE CORPORATION AND ITS DIRECTORS AND OFFICERS
Both Delaware law and California law state that any contract or transaction
between a corporation and any of its directors or officers is not void or
voidable if the material facts as to the transaction and as to the director's or
officer's interest are fully disclosed and a majority of the disinterested
shareholders represented and voting at a duly held meeting approve or ratify the
transaction in good faith. California law provides that such a contract or
transaction also is not void or voidable if either after full disclosure the
transaction is approved by the board or a committee (excluding the vote of
interested directors) in good faith and the transaction is just and reasonable
to the corporation, or the person asserting the validity of the contract or
transaction sustains the burden of proving that the contract or transaction was
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just and reasonable as to the corporation at the time it was authorized,
approved or ratified. Delaware law is similar except that the transaction must
be shown to be fair instead of just and reasonable.
REPORTING REQUIREMENTS
Nettaxi, the parent company of Nettaxi-Delaware is a publicly-traded
company and is required to submit periodic and current reports to the SEC. These
reports are accessible to the public, including its stockholders, at no charge
and contain material information about Nettaxi.
RAE is a privately-held company and does not have any public reporting
requirements. As such, material information about RAE is generally not available
to its shareholders nor to the public at large.
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PROPOSAL NO. 2
REVERSE STOCK SPLIT
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INTRODUCTION
Nettaxi is asking stockholders to approve the reverse stock split of its
common stock such that each five and sixty-seven hundredths (5.67) shares of its
common stock is converted into one (1) share of common stock.
The Board of Directors will have the ability to effect the reverse stock
split only if the Merger described in Proposal 1 and the reincorporation
described in Proposal 3 are approved and are being implemented. The Board of
Directors has approved a resolution to effect the reverse stock split. The
resolution would have the effect of causing the reverse stock split of Nettaxi's
issued and outstanding common stock, with no effect on our two hundred million
(200,000,000) authorized shares of common stock. At February 12, 2002 Nettaxi
had 43,124,586 shares of common stock issued and outstanding. After the reverse
stock split, approximately 7,605,747 shares of common stock would be issued and
outstanding.
Nettaxi's Board of Directors has adopted a resolution approving, declaring
advisable and recommending to its stockholders for their approval the reverse
stock split. The resolution adopted by the Board of Directors is attached as
Appendix F to this proxy statement. In addition, its Board of Directors has
- ----------
reserved the right to abandon the reverse stock split, without further direction
by Nettaxi's stockholders, at any time before it becomes effective. Because the
reverse stock split is a condition to the closing of the Merger, if this
Proposal 2 is approved Nettaxi expects to complete the reverse stock split only
if the Merger is approved and is being implemented.
REQUIRED VOTE
The affirmative vote of a majority of the outstanding shares of our common
stock entitled to vote at the Special Meeting is required to approve this
Proposal 2. Abstentions and broker "non-votes" will have the same effect as
votes against the Proposal. As described above, Nettaxi has reserved the right
not to effect the reverse stock split even if it is approved by our
stockholders.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS HAS APPROVED AND DECLARED THE ADVISABILITY OF THE
REVERSE STOCK SPLIT INCLUDED IN PROPOSAL 2 AND BELIEVES THAT IT IS FAIR TO, AND
IN THE BEST INTERESTS OF, NETTAXI'S STOCKHOLDERS. THE BOARD RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" PROPOSAL 2.
PURPOSE OF THE REVERSE STOCK SPLIT
Nettaxi believes that the Board of Directors should be granted the
authority to implement the reverse stock split for the following reasons:
- to provide for a potential post-Merger capital structure that is more
comparable with those of similarly situated companies in the company's industry
and more reasonable in light of the company's size and market capitalization;
and
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- the reverse stock split is required by the Merger Agreement described
in Proposal 1. If the reverse stock split is not approved, the proposed Merger
with RAE will not be consummated.
Additionally, regardless of the amount of shares Nettaxi issues in the
Merger, the reverse stock split would reduce the number of shares of its common
stock that could be outstanding upon issuance under outstanding stock options
and warrants to amounts that Nettaxi believes are more reasonable in light of
its size and market capitalization.
MATERIAL EFFECTS OF PROPOSED REVERSE STOCK SPLIT
The principal effects of the reverse stock split will be that:
- each five and sixty-seven hundredths (5.67) shares of Nettaxi common
stock issued immediately prior to the reverse stock split will be converted into
one (1) share of new Nettaxi common stock, which will continue to have a par
value of $0.001 per share;
- the number of shares issuable pursuant to outstanding warrants and
options to purchase Nettaxi common stock will be adjusted so that each five and
sixty-seven hundredths (5.67) shares issuable thereunder will be reduced to one
(1) share issuable thereunder and such outstanding warrants and options will
have an exercise price equal to 5.67 times the applicable exercise price before
the reverse stock split; and
- the number of shares reserved for issuance under Nettaxi's existing
1998 and 1999 stock option plans will be reduced such that each five and
sixty-seven hundredths (5.67) shares reserved for issuance under the stock
option plans are converted to one (1) share issuable thereunder.
The reverse stock split will affect all of Nettaxi's stockholders uniformly
and will not affect any stockholder's percentage ownership interests in Nettaxi
or the proportionate voting power of Nettaxi's common stock, except to the
extent that the reverse stock split results in any of Nettaxi's stockholders
owning a fractional share. In lieu of issuing fractional shares, Nettaxi will
issue one full share of common stock for each fractional share to each
stockholder who otherwise would have been entitled to receive a fractional share
as a result of the reverse stock split (after aggregating all shares held by
such stockholder). For example, as a result of the reverse stock split, someone
holding 1,000 shares of common stock prior to the reverse stock split would
receive 176 shares of common stock and one additional share of common stock in
lieu of four-tenths of a post-split share of common stock.
Certain stockholder matters will not be affected by the reverse stock
split. For example, the number of shares of Nettaxi common stock authorized in
Nettaxi's Articles of Incorporation will remain unchanged by the reverse stock
split. This will permit the Board of Directors to issue additional shares of
common stock without prior stockholder approval, which could dilute the
interests of current stockholders.
The reverse stock split will not affect the par value of shares of Nettaxi
common stock. As a result, on the effective date of the reverse stock split, the
stated capital on our balance sheet attributable to the Nettaxi common stock
will be reduced to approximately $7,600 of its present amount, and the
additional paid-in capital account shall be credited with the amount by which
the stated capital is reduced. The per share net income or loss and per share
net book value of Nettaxi common stock will be increased as a result of the
reverse stock split, because there will be fewer shares of Nettaxi common stock
outstanding.
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The Nettaxi common stock issued and outstanding after the reverse stock
split will remain fully paid and non-assessable. Nettaxi will continue to be
subject to the periodic reporting requirements of the Securities Exchange Act of
1934.
PROCEDURE FOR EFFECTING REVERSE STOCK SPLIT AND EXCHANGE OF STOCK CERTIFICATES
If the reverse stock split, the reincorporation and the Merger are approved
by Nettaxi's stockholders and implemented, the reverse stock split will become
effective at the time specified by the Board of Directors. Beginning at the
effective time of the reverse stock split, each certificate representing Nettaxi
common stock that was issued before the reverse stock split will be deemed for
all corporate purposes to evidence post-reverse stock split ownership.
As soon as practicable following the reverse stock split, Nettaxi
stockholders will be notified that the reverse stock split has been effected.
Nettaxi expects its transfer agent will act as exchange agent for purposes of
implementing the exchange of stock certificates. Holders of shares of common
stock will be asked to surrender to Nettaxi's transfer agent certificates
representing shares of common stock in exchange for certificates representing
the reverse-split adjusted shares in accordance with the procedures to be set
forth in a letter of transmittal to be sent by the transfer agent. No new
certificates will be issued to a stockholder until the stockholder has
surrendered his or her outstanding certificate(s) together with the properly
completed and executed letter of transmittal to the transfer agent. Stockholders
should not destroy any stock certificate and should not submit any certificates
until requested to do so. If your shares of Nettaxi common stock are deposited
in book entry, your shares will automatically be converted to reflect the
reverse stock split without any action on your part.
FRACTIONAL SHARES
Nettaxi will not issue fractional shares in connection with the reverse
stock split. In lieu of issuing fractional shares, Nettaxi will issue one full
share to any stockholder who otherwise would have been entitled to receive a
fractional share as a result of the reverse stock split (after aggregating all
shares held by such stockholder). For example, as a result of the reverse stock
split, someone holding 1,000 shares of common stock prior to the reverse stock
split would receive 176 shares of common stock and one additional share of
common stock in lieu of four-tenths of a post-split share of common stock.
NO DISSENTERS' RIGHTS
Under the Nevada Corporation Law, Nettaxi stockholders are not entitled to
dissenters' rights with respect to the Company's proposed reverse stock split,
and Nettaxi will not independently provide Nettaxi stockholders with any such
right.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT
The following is a summary of the material U.S. federal income tax
consequences to Nettaxi stockholders of the reverse stock split. This summary
does not purport to be complete and does not address the tax consequences to
holders that are subject to special tax rules, such as banks, insurance
companies, regulated investment companies, personal holding companies, foreign
entities, nonresident alien individuals, broker-dealers and tax-exempt entities.
This summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), Treasury regulations and proposed regulations, court decisions and
current administrative rulings and pronouncements of the Internal Revenue
Service ("IRS"), all of which are subject to change, possibly with retroactive
effect, and assumes that the post-reverse common stock will be held as a
"capital asset" (generally, property held for investment) as defined in the
Code. Holders of pre-reverse common stock are advised to consult their own tax
advisers regarding the federal income tax consequences of the reverse stock
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split in light of their personal circumstances and the consequences under state,
local and foreign tax laws. The following U.S. federal income tax consequences
will result from the reverse stock split:
- The reverse split will qualify as a recapitalization described
in Section 368(a)(1)(E) of the Code.
- Nettaxi will not recognize gain or loss in connection with the
reverse stock split.
- A Nettaxi stockholder will not recognize a gain or loss upon the
exchange of shares of pre-reverse common stock solely for shares of post-reverse
common stock, except to the extent of any gain which may be attributable to the
exchange of a fractional share for a whole share.
- The aggregate basis of the shares of post-reverse common stock
to be received in the reverse stock split (including any whole shares received
in lieu of fractional shares) will be the same as the aggregate basis of the
shares of pre-reverse common stock surrendered in exchange therefor.
- The holding period of the shares of post-reverse common stock to
be received in the reverse stock split (including any whole shares received in
lieu of fractional shares) will include the holding period of the shares of
pre-reverse common stock surrendered in exchange therefor.
THE FOREGOING SUMMARY IS INCLUDED FOR GENERAL INFORMATION ONLY.
ACCORDINGLY, YOU ARE URGED TO CONSULT WITH YOUR OWN TAX ADVISER WITH RESPECT TO
THE TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT, INCLUDING THE APPLICATION AND
EFFECT OF THE LAWS OF ANY STATE, MUNICIPAL, FOREIGN OR OTHER TAXING
JURISDICTION.
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PROPOSAL NO. 3
REINCORPORATION
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INTRODUCTION
At the Special Meeting, Nettaxi's stockholders will consider and vote upon
a proposal to change Nettaxi's state of incorporation from Nevada to Delaware
(the "Reincorporation") by adoption of the Agreement and Plan of Merger (the
"Reincorporation Agreement") to be entered into by and among Nettaxi and
Nettaxi-Delaware, attached hereto as Appendix G. Stockholder approval of the
----------
Reincorporation Agreement will constitute approval of the Reincorporation and
all transactions relating to it.
The following discussion summarizes certain aspects of the Reincorporation
Agreement. The summary is not intended to be complete and is qualified in its
entirety by reference to the Reincorporation Agreement and to the Certificate of
Incorporation of Nettaxi-Delaware (the "Delaware Charter") and the Bylaws of
Nettaxi-Delaware (the "Delaware Bylaws"), attached hereto as Appendices H and I,
respectively.
GENERAL
The Board of Directors of Nettaxi (the "Nettaxi Board") has proposed that
the state of incorporation of Nettaxi be changed from Nevada to Delaware. Such
change is proposed to be effected by the Reincorporation Agreement. The
Reincorporation Agreement provides for the merger of Nettaxi with and into its
wholly-owned subsidiary, Nettaxi-Delaware, a Delaware corporation, with
Nettaxi-Delaware being the surviving corporation. The Reincorporation will, in
effect, cause Nettaxi to be reincorporated in Delaware.
On the effective date of the Reincorporation, Nettaxi-Delaware will succeed
to all of the assets, liabilities and business of Nettaxi and will possess all
of the rights and powers of Nettaxi. Under the terms of the Reincorporation
Agreement, the current officers and directors of Nettaxi will become the
officers and directors of Nettaxi-Delaware until such time as the Merger between
Nettaxi-Delaware and RAE, as described elsewhere in this proxy statement, is
consummated.
The Delaware Charter and Delaware Bylaws shall remain in full force and
effect after the Reincorporation, without amendment. Nettaxi-Delaware will
remain subject to the Delaware General Corporation Law (the "DGCL").
Differences between the Delaware Charter and Delaware Bylaws, on the one hand,
and the Articles of Incorporation of Nettaxi (the "Nevada Charter") and the
Bylaws of Nettaxi (the "Nevada Bylaws"), on the other hand, should be considered
in the context of the differences between the DGCL and the NRS Statutes ("NRS").
These differences are discussed in more detail in the sections below.
On the effective date of the Reincorporation, each issued and outstanding
share of common stock of Nettaxi, $0.001 par value per share (the "Nettaxi
Common Stock"), will be converted automatically into one share of
Nettaxi-Delaware common stock, $0.001 par value per share ("Nettaxi-Delaware
Common Stock"), and each issued and outstanding option and warrant of Nettaxi
will be converted automatically into one option or warrant, as the case may be,
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of Nettaxi-Delaware. Each stock certificate representing issued and outstanding
shares of Nettaxi Common Stock will continue to represent the same number of
shares of Nettaxi-Delaware Common Stock.
NO EXCHANGE OF CERTIFICATES REQUIRED
Stockholders may, but are not required to, surrender their present Nettaxi
Common Stock certificates so that replacement certificates representing shares
of Nettaxi-Delaware Common Stock may be issued in exchange therefore. After the
Reincorporation, certificates representing Nettaxi Common Stock will constitute
"good delivery" in connection with sales through a broker, or otherwise, of
shares of Nettaxi-Delaware Common Stock. Nettaxi's transfer agent, Interwest
Transfer Company, will act as transfer agent for Nettaxi-Delaware after the
Reincorporation. Stockholders may consult their stockbrokers or Nettaxi with
respect to any questions regarding the mechanics of such transactions.
Nettaxi Common Stock is listed for trading on the Over-the-Counter Bulletin
Board and, after the Reincorporation, Nettaxi-Delaware Common Stock will
continue to be listed for trading on the Over-the-Counter Bulletin Board under
the same symbol, NTXY.OB, as the shares of Nettaxi Common Stock are currently
traded. The shares of Nettaxi-Delaware Common Stock will continue to be
represented by the same CUSIP number that is currently used for Nettaxi Common
Stock. There will be no interruption in the trading of Nettaxi Common Stock as
a result of the Reincorporation.
AMENDMENT
The Reincorporation Agreement provides that it may be amended at any time,
whether before or after approval by the Nettaxi stockholders of the
Reincorporation Agreement, by agreement of the Nettaxi Board and the Board of
Directors of Nettaxi-Delaware (the "Nettaxi-Delaware Board"), subject to any
restrictions imposed by the DGCL and the NRS, respectively. DGCL will not
permit an amendment to the Reincorporation Agreement, absent stockholder
approval, if such amendment would adversely affect the holders of any class of
stock of either Nettaxi or Nettaxi-Delaware. As the Reincorporation Agreement
provides that it may be amended, the NRS will permit amendment to the
Reincorporation Agreement after it is approved by the Nettaxi stockholders and
prior to it becoming effective, so long as such amendments do not alter or
change the manner or basis for exchange of the Nettaxi stockholders' interests
under the Reincorporation Agreement and such amendments do not adversely affect
the Nettaxi stockholders. Neither the Nettaxi Board nor the Nettaxi-Delaware
Board intends to make any material amendment to the Reincorporation Agreement,
nor do they intend to amend the Delaware Charter or Delaware Bylaws should the
Reincorporation be approved by Nettaxi's stockholders.
VOTE REQUIRED
Under the NRS, the affirmative vote of the holders of a majority of the
outstanding shares of Nettaxi Common Stock is required for approval of the
Reincorporation Agreement. The Reincorporation Agreement has been approved by
the Nettaxi Board, who unanimously recommend a vote in favor of the
Reincorporation. Even if approved by Nettaxi's stockholders, however, the
Reincorporation may be abandoned by the Nettaxi Board, at its discretion, either
before or after Nettaxi's stockholders' approval has been obtained.
THE NETTAXI BOARD RECOMMENDS A VOTE "FOR" THIS PROPSAL NO. 3.
NETTAXI'S STOCKHOLDERS ARE URGED TO READ CAREFULLY THIS SECTION OF THE
PROXY STATEMENT, INCLUDING THE RELATED APPENDICES ATTACHED TO THE PROXY
STATEMENT, BEFORE VOTING ON THE REINCORPORATION AGREEMENT.
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REASONS FOR AND ADVANTAGES OF REINCORPORATION IN DELAWARE
In connection with the proposed merger of Nettaxi-Delaware with RAE, as
described elsewhere in this proxy statement, Nettaxi has agreed to effect the
Reincorporation from Nevada to Delaware. RAE requested that Nettaxi effect the
Reincorporation for many of the reasons described below.
For many years, Delaware has followed a policy of encouraging incorporation
in that state and, in furtherance of that policy, has adopted comprehensive,
modern and flexible corporate laws which are periodically updated and revised to
meet changing business needs. As a result, many major corporations have
initially chosen Delaware for their domicile or have subsequently reincorporated
in Delaware. Furthermore, the Delaware courts have developed considerable
expertise in dealing with corporate issues, and a substantial body of case law
has developed construing Delaware law and establishing public policies with
respect to Delaware corporations, thereby providing greater predictability with
respect to legal affairs.
Delaware law permits a corporation to adopt a number of measures, through
amendment of the corporate certificate of incorporation or bylaws or otherwise,
designed to reduce a corporation's vulnerability to unsolicited takeover
attempts. There is substantial judicial precedent in the Delaware courts as to
the legal principles applicable to such defensive measures with respect to the
conduct of the Board of Directors under the business judgment rule with respect
to unsolicited takeover attempts.
In the opinion of Board of Directors of RAE, the latitude described above
affords Delaware corporations more opportunities to raise capital. The
procedures and degree of stockholder approval required for Delaware corporations
for the authorization of additional shares of stock, and for approval of certain
mergers and other transactions, present fewer practical impediments to the
capital raising process than those which apply to Nevada corporations. For
example, a Delaware corporation has greater flexibility in declaring dividends,
which can aid a corporation in marketing various classes or series of dividend
paying securities. Under the DGCL, dividends may be paid out of surplus, or if
there is no surplus, out of net profits from the corporation's previous fiscal
year or the fiscal year in which the dividend is declared, or both, so long as
there remains in the stated capital account an amount equal to the par value
represented by all shares of the corporation's stock, if any, having a
preference upon the distribution of assets. Under the NRS, dividends may not be
paid by the corporation if the corporation would not be able to pay its debts as
they come due in the usual course of business, or (unless the corporation's
articles of incorporation permit otherwise) if the corporation's total assets
would be less than the sum of its total liabilities, plus amounts payable in
dissolution to holders of shares carrying a liquidation preference over the
class of shares to which a dividend is declared. These and other differences
between NRS and the DGCL are more fully explained below in the section entitled
"Comparative Rights of Stockholders."
In the opinion of the Board of Directors of RAE, underwriters and other
members of the financial services industry may be more willing and better able
to assist in capital raising programs for corporations having the greater
flexibility afforded by the DGCL.
DISADVANTAGES OF REINCORPORATION IN DELAWARE
Despite the belief of the Board of Directors of RAE as to the benefits and
advantages of reincorporation in Delaware, some stockholders may find the
Reincorporation disadvantageous for several reasons. As discussed below, the
DGCL, unlike any applicable provision of the NRS, contains a statutory provision
intended to discourage certain takeover attempts of Delaware corporations which
are not approved by the Board of Directors. This anti-takeover provision could
104
have the effect of lessening the possibility that stockholders of
Nettaxi-Delaware would be able to receive a premium above market value for their
shares of Nettaxi-Delaware Common Stock in the event of a takeover. This
provision could also have an adverse effect on the market value of the shares of
Nettaxi-Delaware Common Stock. To the extent that this provision may restrict
or discourage takeover attempts, it may render less likely a takeover opposed by
the Nettaxi-Delaware Board of Directors and may make removal of the Board of
Directors or management less likely as well.
As further discussed below, the Delaware Charter contains a provision
limiting director liability under certain circumstances and the Delaware Bylaws
contain provisions relating to indemnification of directors and officers. These
provisions could operate to the potential disadvantage of the stockholders of
Nettaxi-Delaware. For example, their inclusion may have the effect of reducing
the likelihood of Nettaxi-Delaware recovering monetary damages from directors as
a result of derivative litigation against directors for breach of their duty of
care, even though such an action, if successful, might otherwise have benefited
Nettaxi-Delaware and its stockholders. In addition, the stockholders of
Nettaxi-Delaware will forego potential causes of action for breach of duty of
care involving grossly negligent business decisions, including those relating to
attempts to change control of Nettaxi-Delaware.
Following the Reincorporation, the authorized capital stock of
Nettaxi-Delaware will remain unchanged. No additional shares of
Nettaxi-Delaware Common Stock other than those shares issued in exchange for
shares of Nettaxi Common Stock will be issued by Nettaxi-Delaware in connection
with the Reincorporation and no shares of Nettaxi-Delaware Preferred Stock will
be issued by Nettaxi-Delaware in connection with the Reincorporation. Nettaxi's
current directors will become the directors of Nettaxi-Delaware. All employee
benefit, stock option and employee stock purchase plans of Nettaxi will become
Nettaxi-Delaware plans, and each option or right issued by such plans will
automatically be converted into an option or right to purchase the same number
of shares of Nettaxi-Delaware Common Stock, at the same price per share, upon
the same terms and subject to the same conditions. Stockholders should note
that approval of the Reincorporation will also constitute approval of these
plans continuing as Nettaxi-Delaware plans. Other employee benefit arrangements
of Nettaxi will also be continued by Nettaxi-Delaware upon the terms and subject
to the conditions currently in effect.
DESCRIPTION OF NETTAXI-DELAWARE CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
Nettaxi-Delaware's authorized capital stock consists of (i) 100,000,000
authorized shares of common stock, $0.001 par value, of which one share is
currently issued and outstanding to Nettaxi, and (ii) 2,000,000 authorized
shares of preferred stock, $0.001 par value ("Nettaxi-Delaware Preferred
Stock"). All of the shares of Nettaxi-Delaware Common Stock issued in
connection with the Reincorporation will be validly issued, fully paid and
non-assessable.
The holders of Nettaxi-Delaware Common Stock will be entitled to one (1)
vote for each share on all matters voted on by stockholders, including the
election of directors, and holders of Nettaxi-Delaware Preferred Stock will be
entitled to vote, with the holders of Nettaxi-Delaware Common Stock as a single
class, on all matters voted on by stockholders on an as converted basis. The
holders of Nettaxi-Delaware Common Stock will not have any cumulative voting,
conversion, redemption or preemptive rights. Subject to any preferential rights
of any outstanding series of Nettaxi-Delaware Preferred Stock designated by the
Nettaxi-Delaware Board of Directors from time to time, the holders of
Nettaxi-Delaware Common Stock will be entitled to such dividends as may be
declared from time to time by the Nettaxi-Delaware Board of Directors from funds
available therefore, and upon liquidation will be entitled to receive pro rata
all assets of Nettaxi-Delaware available for distribution to such holders.
105
COMPARATIVE RIGHTS OF STOCKHOLDERS
As a result of the Reincorporation, holders of Nettaxi Common Stock will
become stockholders of Nettaxi-Delaware Common Stock and the rights of all such
former Nettaxi stockholders will thereafter be governed by the Delaware Charter,
the Delaware Bylaws, and the DGCL. The rights of the holders of Nettaxi Common
Stock are presently governed by the Nevada Charter, the Nevada Bylaws, and the
NRS.
The following summary, which does not purport to be a complete statement of
the general differences among the rights of the stockholders of Nettaxi-Delaware
and Nettaxi, sets forth certain differences between the DGCL and the NRS,
between the Delaware Charter and the Nevada Charter, and between the Delaware
Bylaws and the Nevada Bylaws. This summary is qualified in its entirety by
reference to the full text of each of such documents, the DGCL and the NRS.
NUMBER OF DIRECTORS; REMOVAL; FILLING VACANCIES
The Delaware Bylaws provide that, subject to any rights of holders of
Nettaxi-Delaware Preferred Stock, the number of directors will be fixed from
time to time by action of not less than a majority of the Nettaxi-Delaware Board
then in office. The Delaware Bylaws currently provide that in no event shall the
number of directors be less than one (1) nor more than six (6).
The Nevada Bylaws provide that the number of directors shall from time to
time be established by a vote of a majority of the Nettaxi Board serving at the
time of the vote, provided that the number shall be not less than one (1).
Accordingly, the Nettaxi-Delaware Board may be able to more easily prevent any
stockholder from enlarging the Nettaxi-Delaware Board and filling the new
directorships with such stockholder's own nominees.
Under the DGCL, any director or the entire board of directors generally may
be removed with or without cause by the holders of a majority of the shares
entitled to vote at an election of directors, except, in the case of a
classified board, if the certificate of incorporation provides otherwise. The
Delaware Charter provides that directors, as members on a classified board, may
be removed with or without cause, upon the affirmative vote of holders of at
least a majority of the voting power of all the then outstanding shares of stock
entitled to vote generally in the election of directors ("Voting Stock"), voting
together as a single class.
Under the NRS, stockholders may remove one or more directors by the vote of
the holders of not less than 66 2/3% of the voting power of the Voting Stock,
unless the articles of incorporation require a vote of a greater percentage of
the Voting Stock. The Nevada Charter currently provides that any or all
directors may be removed with or without cause by a vote of the stockholders,
subject to the NRS.
The Delaware Bylaws and Delaware Charter provide that, subject to any
rights of holders of Nettaxi-Delaware Preferred Stock, any vacancies (including
newly-created directorships) will be filled only by the affirmative vote of a
majority of the remaining directors, though less than a quorum. Directors
appointed to fill vacancies created by the resignation or termination of a
director will serve the remainder of the term of the resigning or terminated
director.
Under the Nevada Bylaws, newly created vacancies are to be filled by
affirmative vote of a majority of the remaining directors, though less than a
quorum exists, except if the vacancy is the result of a removal without cause.
A director elected to fill a vacancy caused by removal without cause may only be
filled by vote of the stockholders, not the directors.
106
Under the DGCL, classified boards with staggered terms are permitted. The
Delaware Bylaws provide for a classified board with the directors divided into
three classes, with the term of office of the first class to expire at a first
annual meeting of stockholders after the date when RAE, as described elsewhere
in this Proxy Statement, is merged into Nettaxi-Delaware, and the terms of the
second and third classes of directors not expiring until the second and third
annual meetings after such date.
Although NRS also permits classified boards with staggered terms, the
Nevada Charter and Nevada Bylaws do not create nor mandate a classified board.
Classified boards are an anti-takeover provision that could have an adverse
effect on the market value of the shares of Nettaxi-Delaware's Common Stock. To
the extent that a classified board may restrict or discourage takeover attempts,
the Delaware Bylaws may render less likely a takeover opposed by the
Nettaxi-Delaware Board and may make removal of directors or management less
likely as well.
BUSINESS COMBINATIONS
Section 203 of the DGCL provides that, subject to certain exceptions
specified therein, a corporation shall not engage in any business combination
with any "interested stockholder" for a three-year period following the date
that such stockholder becomes an interested stockholder unless (i) prior to such
date, the board of directors of the corporation approved either the business
combination or the transaction which resulted in the stockholder becoming an
interested stockholder, (ii) upon consummation of the transaction which resulted
in the stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding shares held by
directors who are also officers and employee stock purchase plans in which
employee participants do not have the right to determine confidentially whether
plan shares will be tendered in a tender or exchange offer) or (iii) on or
subsequent to such date, the business combination is approved by the board of
directors of the corporation and by the affirmative vote at an annual or special
meeting, and not by written consent, of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. Except as
specified in Section 203 of the DGCL, an interested stockholder is defined to
include (a) any person that is the owner of 15% or more of the outstanding
voting stock of the corporation or is an affiliate or associate of the
corporation and was the owner of 15% or more of the outstanding voting stock of
the corporation, at any time within three years immediately prior to the
relevant date and (b) the affiliates and associates of any such person.
Under certain circumstances, Section 203 of the DGCL may make it more
difficult for a person who would be an "interested stockholder" to effect
various business combinations with a corporation for a three-year period,
although the corporation's certificate of incorporation or stockholders may
elect to exclude a corporation from the restrictions imposed thereunder. The
Delaware Charter does not exclude Nettaxi-Delaware from the restrictions imposed
under Section 203 of the DGCL. It is anticipated that the provisions of Section
203 of the DGCL may encourage companies interested in acquiring Nettaxi-Delaware
to negotiate in advance with the Nettaxi-Delaware Board, since the stockholder
approval requirement would be avoided if a majority of the directors then in
office approve either the business combination or the transaction which results
in the stockholder becoming an interested stockholder.
The NRS also prohibits certain business combinations between a corporation
and an "interested stockholder" (one beneficially holding, directly or
indirectly, at least 10% of the outstanding voting stock) for three years after
such person became an interested stockholder unless such interested stockholder,
prior to becoming an interested stockholder, obtained the approval of the board
of directors of either the business combination or the transaction that resulted
in such person becoming an interested stockholder. Notwithstanding the
foregoing, the NRS permits business combinations that meet all requirements of
the corporation's articles of incorporation and either (i) are approved by the
board of directors before the interested stockholder became an interested
stockholder (or as to which the purchase of shares made by the interested
107
stockholder had been approved by the board of directors before the date of
purchase), or (ii) are approved by the affirmative vote of the holders of stock
representing a majority of the voting stock (excluding voting stock of the
interested stockholder and its affiliates and associates) at a meeting called
for such purpose no earlier than three years after the interested stockholder
became an interested stockholder, or (iii) the form and amount of consideration
to be received by stockholders (excluding the interested stockholder) of the
corporation satisfy certain tests and, with limited exceptions, the interested
stockholder has not become the beneficial owner of additional voting shares of
the corporation after becoming an interested stockholder and before the business
combination is consummated. A corporation may expressly exclude itself from
application of the foregoing business combination provisions of the NRS, but
Nettaxi has not done so.
LIMITATION OF LIABILITY OF DIRECTORS
The DGCL permits a corporation to include a provision in its certificate of
incorporation eliminating or limiting the personal liability of a director or
officer to the corporation or its stockholders for damages for certain breaches
of the director's fiduciary duty. However, no such provision may eliminate or
limit the liability of a director: (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders; (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law; (iii) for declaration of unlawful dividends or illegal redemptions or stock
repurchases; or (iv) for any transaction from which the director derived an
improper personal benefit. The Delaware Bylaws and the Delaware Charter each
include such a provision, in each case, to the maximum extent permitted by law.
The Delaware Charter provides that a director or an officer will not be
personally liable to the corporation or its stockholders for monetary damages
for breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under Section 174 of the DGCL,
which concerns unlawful payments of dividends, stock purchases or redemptions,
or (iv) for any transaction from which the director derived an improper personal
benefit.
As of August 1, 2001, the NRS permits a corporation to include any
provision in its articles of incorporation that are not contrary to the laws of
the State of Nevada; there is no restriction on a corporation's ability to limit
the personal liability of a director or officer to the corporation. Under the
NRS, a director is not individually liable to the corporation or its
stockholders for any damages as a result of any act or failure to act in his
capacity as a director or officer unless it is proven that: (i) his act or
failure to act constituted a breach of his fiduciary duties as a director or
officer; and (ii) his breach of those duties involved intentional misconduct,
fraud or a knowing violation of the law. There is no requirement that any such
provision be included in the articles of incorporation to be effective.
The Nevada Charter provides that Nettaxi's directors and officers shall not
be personally liable for monetary damages for any breach of fiduciary duty
except for (i) acts or omissions which involve intentional misconduct, fraud or
a knowing violation of law, or (ii) for the payment of dividends in violation of
the NRS, in which cases a director shall be liable to the extent provided under
prior Nevada law.
While these provisions provide officers and directors with protection from
awards for monetary damages for breaches of their duty of care, they do not
eliminate such duty. Accordingly, these provisions will have no effect on the
availability of equitable remedies such as an injunction or rescission based on
an officers or director's breach of his or her duty of care. The NRS limits an
officer's or director's liability for monetary damages, except for breach of his
duties under certain circumstances.
108
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Both the NRS and the DGCL permit a corporation to indemnify officers,
directors, employees and agents for actions taken in good faith and in a manner
they reasonably believed to be in, or not opposed to, the best interests of the
corporation, and with respect to any criminal action, which they had no
reasonable cause to believe was unlawful. Both states' laws provide that a
corporation may advance expenses of defense (upon receipt of a written
undertaking to reimburse the corporation if indemnification is not appropriate)
and must reimburse a successful defendant for expenses, including attorney's
fees, actually and reasonably incurred, and both states permit a corporation to
purchase and maintain liability insurance for its directors and officers. Both
the DGCL and NRS provide that indemnification may not be made for any claim,
issue or matter as to which a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation, unless and only to the extent a court determines that the person is
entitled to indemnity for such expenses as the court deems proper.
The Delaware Bylaws provide that each person who is involved in any actual
or threatened action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that he or she is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation or of a partnership, joint venture, trust or other
enterprise, including service with respect to an employee benefit plan, will be
indemnified by the corporation to the full extent permitted by the DGCL as the
law exists or may hereafter be amended (but, in the case of any such amendment,
only to the extent that such amendment permits the corporation to provide
broader indemnification rights than said law permitted prior to such amendment)
or by other applicable laws then in effect. However, the Delaware Bylaws do not
provide indemnification for a director who initiates a suit against
Nettaxi-Delaware, except in specified situations required by law or authorized
by the Nettaxi-Delaware Board, or if the director brings suit to enforce an
indemnification contract. The indemnification rights to be conferred by the
Delaware Bylaws are not exclusive of any other right to which a person seeking
indemnification may be entitled under any law, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise. Nettaxi-Delaware is
authorized to purchase and maintain insurance on behalf of its directors,
officers, employees and agents.
Under the Nevada Charter, Nettaxi may enter into an agreement of
indemnification with its directors to provide for indemnification to the fullest
extent permitted, as currently provided under NRS, and is substantially similar
to the indemnification of directors under the Delaware Bylaws except that the
Nevada Charter does not preclude indemnification when a suit is initiated by a
director.
The members of the Nettaxi Board have a personal interest in seeing that
the Reincorporation Agreement is approved and effected so that they are subject
to the limitation on liability and indemnification provisions included in the
Delaware Charter and the Delaware Bylaws.
SPECIAL MEETINGS OF STOCKHOLDERS
Under the DGCL, a special meeting of stockholders may be called by the
corporation's board of directors or by such persons as may be authorized by the
corporation's certificate of incorporation or bylaws. The Delaware Bylaws
provide that a special meeting may be called at any time by (i) the
Nettaxi-Delaware Board, the Chairman of the Board, the President or the Chief
Executive Officer or (ii) the holders of not less than 10% of all shares
entitled to cast votes at the meeting, voting together as a single class.
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Unless otherwise provided in the articles of incorporation or bylaws, the
NRS provides that the entire board of directors, any two directors or the
president of a corporation may call annual and special meetings of the
stockholders. The Nevada Bylaws provide that a special meeting of stockholders
may be called by the Chairman of the Nettaxi Board, the Nettaxi Board, the
President, or holders of not less than ten percent of the outstanding shares of
stock of Nettaxi entitled to vote at the meeting. Unlike the Nevada Bylaws, the
Delaware Bylaws do not provide an affirmative right to stockholders to call a
special meeting.
AUTHORIZED CAPITAL
The preferred stock may be issued from time to time in one or more series,
and the Nettaxi-Delaware Board, without further approval of its stockholders, is
authorized to fix the relative rights, preferences, privileges and restrictions
applicable to each series of preferred stock. Such shares of preferred stock,
if and when issued, may have rights, powers and preferences superior to those of
the Nettaxi-Delaware Common Stock. Similarly, the NRS provides that the
articles of incorporation may prescribe, or vest authority in the board of
directors to prescribe, the classes, series, voting powers, designations,
preferences, limitations, restrictions and relative rights of each class or
series of stock without further approval of its stockholders. While there are
no current plans, commitments or understandings, written or oral, to issue any
preferred stock, in the event of any issuances, the holders of Nettaxi-Delaware
Common Stock will not have any preemptive or similar rights to acquire any
preferred stock.
AMENDMENT OR REPEAL OF THE CERTIFICATE OF INCORPORATION
Under the DGCL, unless the certificate of incorporation otherwise provides,
amendments to the certificate of incorporation generally require the approval of
the holders of a majority of the outstanding stock entitled to vote thereon, and
if the amendment would increase or decrease the number of authorized shares of
any class or series or the par value of such shares or would adversely affect
the rights, powers or preferences of such class or series, a majority of the
outstanding stock of such class or series also would have to approve the
amendment. The proposed Delaware Charter requires 66 2/3% of the Voting Power
to amend the certificate of incorporation, except for the provisions relating to
the corporate name, address, purpose, and sole incorporation, which require a
majority vote of the then outstanding stock entitled to vote thereon.
Under the NRS, the board of directors of a Nevada corporation that has
already issued stock must approve and proposed amendment to its articles of
incorporation and declare its advisability. The proposed amendments must be
approved by a majority of all the votes entitled to be cast by each voting
group, unless the articles of incorporation require a greater or lesser vote
with respect to specified amendments. The Nevada Charter requires approval by a
majority of the stockholders to amend the Nevada Charter. Therefore, amending
certain provisions of the Delaware Charter could be more difficult under the
Delaware Charter.
AMENDMENTS TO BYLAWS
Under the DGCL, directors may amend the bylaws of a corporation only if
such right is expressly conferred upon the directors in its certificate of
incorporation. There is no provision in the NRS that proscribes amendments by
the board of directors to a corporation's bylaws. The Delaware Charter permits
the Nettaxi-Delaware Board to adopt, alter or amend the Delaware Bylaws, and
permits stockholders to amend the Delaware Bylaws, subject to approval by 66
2/3% of the Voting Power. The Nevada Charter provides the Nettaxi Board with
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the authority to adopt, alter or amend the Nevada Bylaws. The Nevada Charter
and the Nevada Bylaws are silent as to whether stockholders can amend the Nevada
Bylaws.
SUMMARY OF CERTAIN OTHER SIGNIFICANT DIFFERENCES BETWEEN DELAWARE AND NEVADA
CORPORATE LAWS
The following is a brief summary of certain other ways in which the NRS and
DGCL differ and does not purport to be a complete statement of such laws.
MERGER WITH SUBSIDIARY
Under the DGCL, a parent corporation may merge into a subsidiary and a
subsidiary may merge into its parent, without stockholder approval, where such
parent corporation owns at least 90% of the outstanding shares of each class of
capital stock of its subsidiary. The NRS permits such mergers without
stockholder approval if 90% of each class of capital stock of the subsidiary is
owned by the parent corporation.
COMMITTEES OF THE BOARD OF DIRECTORS
The NRS and DGCL both provide that the board of directors may delegate
certain of their duties to one or more committees elected by a majority of the
board. A Delaware corporation can delegate to a committee of the board of
directors, among other things, the responsibility of nominating candidates for
election to the office of director, to fill vacancies on the board of directors,
and to reduce earned or capital surplus and authorize the acquisition of the
corporation's own stock. Moreover, if the corporation's certificate of
incorporation or bylaws, or the resolution of the board of directors creating
the committee so permits, a committee of the board of directors may declare
dividends and authorize the issuance of stock. Under the NRS, unless it is
otherwise provided in the articles of incorporation, a committee of the board of
directors has and may exercise the powers of the board of directors in the
management of the business and affairs of the corporation.
VOTE REQUIRED FOR MERGERS
The NRS provides that the sale, lease, exchange or disposal of all of the
assets of a Nevada corporation as well as any merger, consolidation or share
exchange generally must be recommended by the Board of Directors and approved by
a vote of a majority of the shares of each class of the stock of the corporation
entitled to vote on such matters. Under the NRS, the vote of the stockholders
of a Nevada corporation surviving a merger is not required if: (i) the articles
of incorporation of the surviving corporation will not substantially differ from
its articles of incorporation before the merger, (ii) each stockholder of the
surviving corporation before the effective date will hold the same number of
shares, with identical designations, preferences, limitations and relative
rights immediately after the merger, (iii) the number of voting shares
outstanding immediately after the merger, plus the number of voting shares
issued a result of the merger, will not exceed by more than twenty percent the
total number of voting shares of the surviving entity outstanding immediately
before the merger, and (iv) the number of participating shares outstanding
immediately after the merger, plus the number of participating shares issuable
as a result of the merger will not exceed by more than twenty percent the total
number of participating shares outstanding immediately before the merger. The
DGCL has a similar provision requiring stockholder approval in the case of the
disposition of assets or a merger or a share exchange. The DGCL requires that
either (i) no shares of common stock of the surviving corporation and no shares,
securities or obligations convertible into such stock are to be issued or
delivered under the plan of merger or (ii) the authorized unissued shares or the
treasury shares of common stock of the surviving corporation to be issued or
delivered under the plan of merger, plus those initially issuable upon
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conversion of any other shares, securities or obligations to be issued or
delivered under such plan, do not exceed 20% of the shares of common stock of
such constituent corporation outstanding immediately prior to the effective date
of the merger.
STOCK REDEMPTIONS AND REPURCHASES
Both Delaware and Nevada corporations may generally purchase or redeem
their own shares of capital stock. Under the DGCL, a Delaware corporation may
purchase or redeem its own shares of capital stock, except when the capital of
the corporation is impaired or when such purchase or redemption would cause any
impairment of the capital of the corporation. Subject to any restrictions
imposed by its articles of incorporation, a Nevada corporation may make
distributions to stockholders, so long as, after giving effect to such
distribution: (i) the corporation would be able to pay its debts as they become
due in the usual course of business; or (ii) the corporation's total assets
would not be less than the sum of its total liabilities plus (unless the
articles of incorporation permit otherwise), the amount that would be needed if
the corporation were to be dissolved at the time of the distribution to satisfy
the preferential rights upon dissolution of stockholders whose preferential
rights are superior to those receiving the distribution.
PROXIES
Under the DGCL, a proxy executed by a stockholder will remain valid for a
period of three years unless the proxy provides for a longer period. Under the
NRS, a proxy is effective only for a period of six (6) months, unless it is
coupled with an interest or unless otherwise provided in the proxy which
duration may not exceed seven (7) years.
CONSIDERATION FOR STOCK
Under the NRS, a corporation may issue its capital stock in return for
consideration consisting of any tangible or intangible property or benefit to
the corporation, including but not limited to cash, promissory notes, services
performed, contracts for services to be performed, or other securities of the
corporation. Under the DGCL, a corporation may accept as consideration for its
stock a combination of cash, property or past services in an amount not less
than the par value of the shares being issued, and a secured promissory note or
other binding obligation executed by the subscriber for any balance, the total
of which must equal at least the par value of the issued stock, as determined by
the board of directors.
STOCKHOLDERS' RIGHTS TO EXAMINE BOOKS AND RECORDS
The DGCL provides that any stockholder of record may demand to examine the
corporation's books and records for any proper purpose. If management of the
corporation refuses, the stockholder can compel release of the books by court
order. Under the NRS, any stockholder who owns at least 15% of the outstanding
shares of the corporation's capital stock or has been authorized in writing by
the holders of at least 15% of all its issued and outstanding shares may
inspect, copy and audit the books of account and all financial records of the
corporation. However, only a stockholder whose demand is made with a proper
purpose may undertake any such inspection or audit. Under the NRS, if any
officer or agent keeping records in Nevada refuses to allow a stockholder of a
corporation to inspect or audit the corporation's books of account and financial
records, the corporation and the officer or agent will be liable to the
stockholder for all damages incurred by the stockholder, and the corporation may
be liable for fines payable to the State of Nevada. There is no such
corresponding provision in the DGCL.
DIVIDENDS
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The DGCL provides that the corporation may pay dividends out of surplus,
out the corporation's net profits for the preceding fiscal year, or both
provided that there remains in the stated capital account an amount equal to the
par value represented by all shares of the corporation's stock having a
distribution preference. The NRS provides that dividends may be paid, unless
after giving effect to such distribution, the corporation would not be able to
pay its debts as they come due in the usual course of business, or the
corporation's total assets would be less than the sum of its total liabilities,
plus (unless the corporation's articles of incorporation permit otherwise) the
amount needed to satisfy preferential distributions.
CORPORATE ACTION WITHOUT A STOCKHOLDER MEETING
The DGCL and the NRS both permit corporate action without a meeting of
stockholders upon the written consent of the holders of that number of shares
necessary to authorize the proposed corporate action being taken, unless the
certificate of incorporation or articles of incorporation, respectively, or the
bylaws of a Nevada corporation expressly provide otherwise. In the event such
proposed corporate action is taken without a meeting by less than the unanimous
written consent of stockholders, the DGCL requires that prompt notice of the
taking of such action be sent to those stockholders who have not consented in
writing.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION
The following description of federal income tax consequences is based on
the Code and applicable Treasury regulations promulgated thereunder, judicial
authority and current administrative rulings and practices as in effect on the
date of this Proxy Statement. This discussion should not be considered tax or
investment advice, and the tax consequences of the reincorporation may not be
the same for all stockholders. In particular, this discussion does not address
the tax treatment of special classes of stockholders, such as banks, insurance
companies, tax-exempt entities and foreign persons. Stockholders desiring to
know their individual federal, state, local and foreign tax consequences should
consult their own tax advisors.
The Reincorporation is intended to qualify as a tax-free reorganization
under Section 368(a)(1)(F) or 368(a)(1)(A) of the Code. Assuming such tax
treatment, the following U.S. federal income tax consequences will generally
result:
- No taxable income, gain, or loss will be recognized by Nettaxi or the
Nettaxi stockholders as a result of the exchange of shares of Nettaxi Common
Stock for shares of Nettaxi-Delaware Common Stock pursuant to the
Recapitalization.
- The aggregate tax basis of the Nettaxi-Delaware Common Stock received
by each Nettaxi stockholder in the Reincorporation will be equal to the
aggregate tax basis of the Nettaxi Common Stock surrendered in exchange
therefore.
- The holding period of the Nettaxi-Delaware Common Stock received by
each Nettaxi stockholder in the Reincorporation will include the period for
which such stockholder held the Nettaxi Common Stock surrendered in exchange
therefore, provided that such Nettaxi Common Stock was held by such stockholder
as a capital asset at the time of the Reincorporation.
SECURITIES ACT CONSEQUENCES
The shares of Nettaxi-Delaware Common Stock to be issued in exchange for
shares of Nettaxi Common Stock are not being registered under the Securities Act
of 1933, as amended (the "1933 Act"). In that regard, Nettaxi-Delaware is
relying on Rule 145(a)(2) under the 1933 Act, which provides that a merger which
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has "as its sole purpose" a change in the domicile of a corporation does not
involve the sale of securities for purposes of the 1933 Act, and on
interpretations of the Rule by the Securities and Exchange Commission (the
"Commission") which indicate that the making of certain changes in the surviving
corporation's charter documents which could otherwise be made only with the
approval of the stockholders of either corporation does not render Rule
145(a)(2) inapplicable.
After the Reincorporation, Nettaxi-Delaware will be a publicly-held
company, Nettaxi-Delaware Common Stock will be listed for trading on the
Over-the-Counter Bulletin Board, and Nettaxi-Delaware will file periodic reports
and other documents with the Commission and provide to its stockholders the same
types of information that Nettaxi has previously filed and provided.
Stockholders whose Common Stock is freely tradable before the Reincorporation
will have freely tradable shares of Nettaxi-Delaware Common Stock. Stockholders
holding restricted shares of Common Stock will have shares of Nettaxi-Delaware
Common Stock which are subject to the same restrictions on transfer as those to
which their present shares of Common Stock are subject, and their stock
certificates, if surrendered for replacement certificates representing shares of
Nettaxi-Delaware Common Stock, will bear the same restrictive legend as appears
on their present stock certificates. For purposes of computing compliance with
the holding period requirement of Rule 144 under the 1933 Act, stockholders will
be deemed to have acquired their shares of Nettaxi-Delaware Common Stock on the
date they acquired their shares of Nettaxi Common Stock. In summary,
Nettaxi-Delaware and its stockholders will be in the same respective positions
under the federal securities laws after the Reincorporation as were Nettaxi and
the stockholders prior to the Reincorporation.
APPRAISAL AND DISSENTERS' RIGHTS
Under the DGCL and the NRS, stockholders have appraisal or dissenter's
rights, respectively, in the event of certain corporate actions such as a
merger. These rights include the right to dissent from voting to approve such
corporate action, and demand fair value for the shares of the dissenting
stockholder. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, a stockholder who wishes to
assert dissenter's rights (i) must deliver to the corporation, before the vote
is taken, written notice of his intent to demand payment for his shares if the
proposed action is effected, and (ii) must not vote his shares in favor of the
proposed action. If fair value is unsettled, the DGCL and the NRS provide for
the dissenter and the company to petition the Court of Chancery or a Nevada
state court, respectively. Although appraisal or dissenter's rights are
substantially similar in Delaware and Nevada, this discussion is qualified in
its entirety by reference to the DGCL and the NRS which provide more specific
provisions and requirements for dissenting stockholders.
ABANDONMENT
Notwithstanding a favorable vote of the stockholders, Nettaxi reserves the
right by action of the Nettaxi Board to abandon the Reincorporation prior to
effectiveness of the Reincorporation if it determines that such abandonment is
in the best interests of Nettaxi. The Nettaxi Board has made no determination
as to any circumstances which may prompt a decision to abandon the
Reincorporation.
RECOMMENDATION OF THE NETTAXI BOARD
Under the Nettaxi Bylaws and pursuant to the NRS, this Proposal 3 to
reincorporate Nettaxi in Delaware pursuant to the Reincorporation Agreement must
be approved by the affirmative vote of at least a majority of the shares of
Nettaxi Common Stock present in person or by proxy at the Special Meeting and
entitled to vote at the Meeting.
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THE NETTAXI BOARD UNANIMOUSLY RECOMMENDS A VOTE "FOR" PROPOSAL 3.
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PROPOSAL NO. 4
ADOPTION OF THE 1999 STOCK OPTION PLAN, AS AMENDED
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The Board of Directors Nettaxi proposes that stockholders adopt the 1999
Stock Option Plan (the "Plan"), which was adopted by the Board of Directors on
January 20, 2000 and amended by the Board of Directors on April 3, 2000 and on
January 7, 2002.
Nettaxi believes that the Plan has helped it to attract and retain
qualified directors, officers, employees and consultants and to motivate their
best efforts on Nettaxi's behalf. Thus, Nettaxi believes that the Plan has been
an important part of Nettaxi's compensation of directors, officers, employees
and consultants.
The Plan is set forth in full as Appendix J to this proxy statement. The
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principal features of the Plan are summarized below, but the summary is
qualified in its entirety by the full text of the Plan.
DESCRIPTION OF THE PLAN
The purpose of the Plan is to enhance Nettaxi's profitability and
stockholder value by enabling Nettaxi to offer stock based incentives to
employees, directors, consultants and affiliates. The Plan authorizes the grant
of options to purchase shares of common stock to Nettaxi's employees, directors
and consultants and Nettaxi's affiliates. Under the Plan, Nettaxi may only grant
non-qualified stock options.
Under the Plan as originally adopted by the Board of Directors, the number
of shares available for issuance was three million three hundred thousand
(3,300,000). The Board of Directors amended the Plan on April 3, 2000 to
increase the number of shares available for issuance to an aggregate total of
eight million nine hundred thousand (8,900,000) shares of common stock. In
connection with the Merger described in Proposal 1, Nettaxi's Board of Directors
amended the Plan on January 7, 2002 to reduce the number of shares available for
issuance under the Plan to 3,053,000, the number of shares underlying options
which were outstanding as of that date. Approximately 46% of the options
outstanding under the Plan are issued to current executive officers and
directors of Nettaxi. The Plan provides for adjustment as to the number and
kinds of shares covered by the outstanding options and the option price therefor
to give effect to any stock dividend, stock split, stock combination or other
reorganization of or by us. If the reverse stock split described under Proposal
2 is implemented, the number of shares available for issuance under the Plan
will be reduced to approximately 539,000.
The Plan is administered by the Compensation Committee of the Board.
Subject to the provisions of the Plan, the Compensation Committee has the
authority to determine which of Nettaxi's employees, directors and consultants
will be awarded options and the terms of such awards, including the number of
shares subject to such option, the fair market value of the common stock subject
to options, the exercise price per share and other terms.
Terms and conditions of awards are set forth in written agreements between
Nettaxi and the respective option holders. Awards under the Plan may not be made
after the tenth anniversary of the date of its adoption but awards granted
before that date may extend beyond that date.
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As of February 12, 2002, options to purchase up to 3,053,000 shares of
common stock, without giving effect to the reverse stock split contemplated in
Proposal 2, had been granted under the 1999 Stock Option Plan, and no options
were available for future grants. The exercise prices of the outstanding
options ranged from $0.74 to $13.83, without giving effect to the reverse stock
split contemplated in Proposal 2. Nettaxi has registered the shares subject to
issuance under its 1999 Stock Option Plan, pursuant to Nettaxi's registration
statement filed on Form S-8 (File No. 333-32678). As of February 12, 2002,
8,333 shares have been issued as the result of the exercise of options granted
under the Plan.
Optionees have no rights as stockholders with respect to shares subject to
options prior to the issuance of shares pursuant to the exercise thereof.
Options issued to employees under the Plan, as amended, shall expire no later
than ten years after the date of grant. An option becomes exercisable at such
time and for such amounts as determined at the discretion of the Board of
Directors or the Compensation Committee at the time of the grant of the option.
An optionee may exercise a part of the option from the date that part first
becomes exercisable until the option expires. The purchase price for shares to
be issued to an employee upon his or her exercise of an option is determined by
the Board of Directors or the Compensation Committee on the date the option is
granted. The purchase price is payable in full in cash, by promissory note, by
net exercise or by delivery of shares of Nettaxi's common stock when the option
is exercised.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE PLAN
Options granted under the Plan may only be non-qualified options, and
receive the following federal income tax treatment:
No taxable income is recognized by an optionee upon the grant of a
non-qualified option. The optionee will in general recognize ordinary income, in
the year in which the option is exercised, equal to the excess of the fair
market value of the purchased shares on the exercise date over the exercise
price paid for the shares, and the optionee will be required to satisfy the tax
withholding requirements applicable to such income.
If the shares acquired upon exercise of the non-qualified option are
unvested and subject to repurchase by Nettaxi in the event of the optionee's
termination of service prior to vesting in those shares, then the optionee will
not recognize any taxable income at the time of exercise but will have to report
as ordinary income, as and when Nettaxi repurchase right lapses, an amount equal
to the excess of (i) the fair market value of the shares on the date the
repurchase right lapses over (ii) the exercise price paid for the shares. The
optionee may, however, elect under Section 83(b) of the Internal Revenue Code to
include as ordinary income in the year of exercise of the option an amount equal
to the excess of (i) the fair market value of the, purchased shares on the
exercise date over (ii) the exercise price paid for such shares. If the Section
83(b) election is made, the, optionee will not recognize any additional income
as and when the purchase right lapses.
Nettaxi will be entitled to an income tax deduction equal to the amount of
ordinary income recognized by the optionee with respect to the exercised
non-qualified option. The deduction will in general be allowed for the taxable
year in which such ordinary income is recognized by the optionee.
DEDUCTIBILITY OF EXECUTIVE COMPENSATION
Nettaxi anticipates that any compensation deemed paid by Nettaxi in
connection with disqualifying dispositions of non-statutory options will qualify
as performance-based compensation for purposes of Section 162(m) of the Code and
will not have to be taken into account for purposes of the $1 million limitation
per covered individual on the deductibility of the compensation paid to certain
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executive officers. Accordingly, all compensation deemed paid with respect to
those options will remain deductible by Nettaxi without limitation under Code
Section 162(m).
STOCKHOLDER APPROVAL
The affirmative vote of at least two-thirds of the outstanding shares
entitled to vote at the Special Meeting is required for approval of this
Proposal. Should stockholder approval not be obtained, the Plan will not be
effective and the Board of Directors will consider alternative methods of
issuing the options outside of the Plan.
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF NETTAXI RECOMMENDS THAT STOCKHOLDERS VOTE FOR
ADOPTION OF THE 1999 STOCK OPTION PLAN. NETTAXI WILL VOTE NETTAXI STOCKHOLDERS'
SHARES AS THEY SPECIFY ON THE ENCLOSED PROXY CARD. IF NETTAXI STOCKHOLDERS DO
NOT SPECIFY HOW THEY WANT THEIR SHARES VOTED, NETTAXI WILL VOTE THEM FOR
APPROVAL OF THE 1999 STOCK OPTION PLAN.
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PROPOSAL NO. 5
ADOPTION OF THE 2002 STOCK OPTION PLAN
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The Board of Directors proposes that Nettaxi stockholders approve the 2002
Stock Option Plan. The 2002 Stock Option Plan was adopted by the Board of
Directors on February 20, 2002, to become effective on the date of its approval
by stockholders (the "Effective Date").
The Board of Directors believes that Nettaxi must offer a competitive
equity incentive program if it is to continue to successfully attract and retain
the best possible candidates for positions of responsibility within Nettaxi.
The Board expects that the 2002 Stock Option Plan will be an important factor in
attracting and retaining the high caliber employees, directors and consultants
essential to the success of Nettaxi and in motivating these individuals to
strive to enhance Nettaxi's growth and profitability.
The 2002 Stock Option Plan is set forth in full as Appendix K to this Proxy
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Statement. Some of the principal features of the 2002 Stock Option Plan are
summarized below, but the summary is qualified in its entirely by the full text
of the 2002 Stock Option Plan.
DESCRIPTION OF THE 2002 STOCK OPTION PLAN
GENERAL. The purpose of the 2002 Stock Option Plan is to advance the
interests of Nettaxi and its stockholders by providing an incentive program that
will enable Nettaxi to attract, retain and reward persons performing services
for Nettaxi and by motivating them to contribute to the growth and profitability
of Nettaxi. These incentives are provided through the grant of incentive stock
options within the meaning of Section 422 of the Code and nonstatutory stock
options.
SHARES SUBJECT TO PLAN. A maximum of 28,350,000 of the authorized but
unissued or reacquired shares of Nettaxi common stock may be issued under the
2002 Stock Option Plan (before taking into account the reverse stock split
describe in Proposal No. 2). If any outstanding option expires, terminates or
is canceled, or if shares acquired pursuant to an option are repurchased by
Nettaxi, the expired or repurchased shares are returned to the 2002 Stock Option
Plan and again become available for grant. Appropriate adjustments will be made
to the shares subject to the 2002 Stock Option Plan, the foregoing limit on
incentive stock option shares, and to the shares subject to and purchase prices
under outstanding options upon any stock dividend, stock split, reverse stock
split, recapitalization, combination, reclassification, or similar change in the
capital structure of Nettaxi.
ADMINISTRATION. The 2002 Stock Option Plan will be administered by the
Board of Directors or a duly appointed committee of the Board of Directors,
which, in the case of options intended to qualify for the performance-based
compensation exemption under Section 162(m) of the Code, must be comprised
solely of two or more "outside directors" within the meaning of Section 162(m).
(For purposes of this discussion, the term "Board" refers to either the Board of
Directors or such committee.) Subject to the provisions of the 2002 Stock
Option Plan, the Board determines the persons to whom options are to be granted,
the number of shares to be covered by each option, whether an option is to be an
incentive stock option or a nonstatutory stock option, the timing and terms of
exercisability and vesting of each option, the purchase price and the type of
consideration to be paid to Nettaxi upon the exercise of each option, the time
of expiration of each option, and all other terms and conditions of the options.
119
The Board may amend, modify, extend, cancel or renew any option, waive any
restrictions or conditions applicable to any option, and accelerate, continue,
extend or defer the exercisability or vesting of any option. The 2002 Stock
Option Plan provides, subject to certain limitations, for indemnification by
Nettaxi of any director, officer or employee against all reasonable expenses,
including attorneys' fees, incurred in connection with any legal action arising
from such person's action or failure to act in administering the 2002 Stock
Option Plan. The Board will interpret the 2002 Stock Option Plan and options
granted thereunder, and all determinations of the Board will be final and
binding on all persons having an interest in the 2002 Stock Option Plan or any
option.
ELIGIBILITY. Options may be granted under the 2002 Stock Option Plan to
employees, directors and consultants of Nettaxi or of any present or future
parent or subsidiary corporations of Nettaxi. While any eligible person may be
granted a nonstatutory stock option, only employees may be granted incentive
stock options.
To enable Nettaxi to deduct in full for federal income tax purposes the
compensation recognized by certain executive officers in connection with options
granted under the 2002 Stock Option Plan, the plan is designed to qualify such
compensation as "performance-based compensation" under Section 162(m) of the
Code. To comply with Section 162(m), the 2002 Stock Option Plan limits the
number of shares for which options may be granted to any employee. Under this
limitation (the "Grant Limit"), no employee may be granted options for more than
11,340,000 shares (before taking into account the reverse stock split describe
in Proposal No. 2)in any fiscal year of Nettaxi. The Grant Limit is subject to
appropriate adjustment in the event of certain changes in Nettaxi's capital
structure, as previously described.
STOCK OPTION TERMS. Each option granted under the 2002 Stock Option Plan
will be evidenced by a written agreement between Nettaxi and the participant
specifying the number of shares subject to the option and the other terms and
conditions of the option, consistent with the requirements of the 2002 Stock
Option Plan. Incentive stock options must have an exercise price at least equal
to the fair market value of a share of our common stock on the date of grant,
while nonstatutory stock options must have an exercise price equal to at least
85% of such fair market value. However, any option granted to a person who at
the time of grant owns stock possessing more than 10% of the total combined
voting power of all classes of stock of Nettaxi or any parent or subsidiary
corporation of Nettaxi (a "Ten Percent Stockholder") must have an exercise price
equal to at least 110% of the fair market value of a share of our common stock
on the date of grant.
The 2002 Stock Option Plan provides that the option exercise price may be
paid in cash, by check, or in cash equivalent; by the assignment of the proceeds
of a sale or loan with respect to some or all of the shares being acquired upon
the exercise of the option; to the extent legally permitted, by tender of shares
of common stock owned by the participant having a fair market value not less
than the exercise price; by such other lawful consideration as approved by the
Board; or by any combination of these. Nevertheless, the Board may restrict the
forms of payment permitted in connection with any option grant. No option may
be exercised unless the participant has made adequate provision for federal,
state, local and foreign taxes, if any, relating to the exercise of the option,
including, if permitted by Nettaxi, through the participant's surrender of a
portion of the option shares to Nettaxi.
Options will become vested and exercisable at such times or upon such
events and subject to such terms, conditions, performance criteria or
restrictions as specified by the Board. The maximum term of an option granted
under the 2002 Stock Option Plan is ten years, provided that an incentive stock
120
option granted to a Ten Percent Stockholder must have a term not exceeding five
years. An option generally will remain exercisable for ninety days following
the participant's termination of service. However, if such termination results
from the participant's death or disability, the option generally will remain
exercisable for one year. In any event, the option must be exercised no later
than its expiration date.
Incentive stock options are nontransferable by the participant other than
by will or by the laws of descent and distribution, and are exercisable during
the optionee's lifetime only by the optionee. Nonstatutory stock options
granted under the 2002 Stock Option Plan may be assigned or transferred to the
extent permitted by the Board and set forth in the option agreement.
CHANGE IN CONTROL. The 2002 Stock Option Plan defines a "Change in
Control" of Nettaxi as any of the following events upon which the stockholders
of Nettaxi immediately before the event do not retain immediately after the
event, in substantially the same proportions as their ownership of shares of
Nettaxi's voting stock immediately before the event, direct or indirect
beneficial ownership of more than 50% of the total combined voting power of the
voting securities of Nettaxi or the corporation or corporations to which the
assets of Nettaxi were transferred: (i) a sale or exchange by the stockholders
in a single or series of related transactions of more than 50% of Nettaxi's
voting stock; (ii) a merger or consolidation in which Nettaxi is a party; (iii)
the sale, exchange or transfer of all or substantially all of the assets of
Nettaxi; or (iv) a liquidation or dissolution of Nettaxi. If a Change in
Control occurs, the surviving, continuing, successor or purchasing corporation
or parent thereof may either assume Nettaxi's rights and obligations under
outstanding stock options or substitute substantially equivalent options for
such corporation's stock. Generally, options that are not assumed, replaced or
exercised prior to a Change in Control will terminate. Additionally, the Board,
in its discretion, may provide for the acceleration of the exercisability and
vesting of any or all outstanding options or may provide for the cash-out of any
or all outstanding options in connection with a Change of Control.
TERMINATION OR AMENDMENT. The 2002 Stock Option Plan will continue in
effect until the earlier of its termination by the Board or the date on which
all shares available for issuance under the 2002 Stock Option Plan have been
issued and all restrictions on such shares under the terms of the 2002 Stock
Option Plan and the agreements evidencing the options have lapsed, provided that
all options must be granted within ten years following the date on which the
Board adopted the 2002 Stock Option Plan. The Board may terminate or amend the
2002 Stock Option Plan at any time. However, without stockholder approval, the
Board may not amend the 2002 Stock Option Plan to increase the total number of
shares of common stock issuable thereunder, change the class of persons eligible
to receive incentive stock options, or effect any other change that would
require stockholder approval under any applicable law, regulation or rule. No
termination or amendment may affect an outstanding option unless expressly
provided by the Board, and, in any event, may not adversely affect an
outstanding option without the consent of the participant, unless the amendment
is required to preserve an option's status as an incentive stock option or is
necessary to comply with any applicable law, regulation or rule.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF OPTIONS GRANTED UNDER THE 2002
STOCK OPTION PLAN
The following summary is intended only as a general guide as to the U.S.
federal income tax consequences under current law of participation in the 2002
Stock Option Plan and does not attempt to describe all possible federal or other
tax consequences of such participation or tax consequences based on particular
circumstances.
INCENTIVE STOCK OPTIONS. A participant recognizes no taxable income for
regular income tax purposes as a result of the grant or exercise of an incentive
stock option qualifying under Section 422 of the Code. Optionees who neither
dispose of their shares within two years following the date the option was
121
granted nor within one year following the exercise of the option will normally
recognize a capital gain or loss equal to the difference, if any, between the
sale price and the purchase price of the shares. If a participant satisfies
such holding periods upon a sale of the shares, Nettaxi will not be entitled to
any deduction for federal income tax purposes. If a participant disposes of
shares within two years after the date of grant or within one year after the
date of exercise (a "disqualifying disposition"), the difference between the
fair market value of the shares on the date of exercise and the option exercise
price (not to exceed the gain realized on the sale if the disposition is a
transaction with respect to which a loss, if sustained, would be recognized)
will be taxed as ordinary income at the time of disposition. Any gain in excess
of that amount will be a capital gain. If a loss is recognized, there will be
no ordinary income, and such loss will be a capital loss. Any ordinary income
recognized by the optionee upon the disqualifying disposition of the shares
generally should be deductible by Nettaxi for federal income tax purposes,
except to the extent such deduction is limited by applicable provisions of the
Code.
The difference between the option exercise price and the fair market value
of the shares on the exercise date of an incentive stock option is treated as an
adjustment in computing the optionee's alternative minimum taxable income and
may be subject to an alternative minimum tax which is paid if such tax exceeds
the regular tax for the year. Special rules may apply with respect to certain
subsequent sales of the shares in a disqualifying disposition, certain basis
adjustments for purposes of computing the alternative minimum taxable income on
a subsequent sale of the shares and certain tax credits which may arise with
respect to optionees subject to the alternative minimum tax.
NONSTATUTORY STOCK OPTIONS. Options not designated or qualifying as
incentive stock options will be nonstatutory stock options having no special tax
status. A participant generally recognizes no taxable income as the result of
the grant of such an option. Upon exercise of a nonstatutory stock option, the
optionee normally recognizes ordinary income in the amount of the difference
between the option exercise price and the fair market value of the shares on the
exercise date. If the optionee is an employee, such ordinary income generally
is subject to withholding of income and employment taxes. Upon the sale of
stock acquired by the exercise of a nonstatutory stock option, any gain or loss,
based on the difference between the sale price and the fair market value on the
exercise date, will be taxed as capital gain or loss. No tax deduction is
available to Nettaxi with respect to the grant of a nonstatutory stock option or
the sale of the stock acquired pursuant to such grant. Nettaxi generally should
be entitled to a deduction equal to the amount of ordinary income recognized by
the optionee as a result of the exercise of a nonstatutory stock option, except
to the extent such deduction is limited by applicable provisions of the Code.
NEW PLAN BENEFITS
No options will be granted under the 2002 Stock Option Plan prior to its
approval by the stockholders of Nettaxi. Future grants under the 2002 Stock
Option Plan will be made at the discretion of the Board, and, accordingly, are
not yet determinable. In addition, benefits under the 2002 Stock Option Plan
will depend on a number of factors, including the fair market value of Nettaxi's
common stock on future dates and the exercise decisions made by the
participants. Consequently it is not possible to determine the benefits that
might be received by participants receiving discretionary grants under the 2002
Stock Option Plan.
STOCKHOLDER APPROVAL
The affirmative vote of at least two-thirds of the outstanding shares
entitled to vote at the Special Meeting is required for approval of this
Proposal. Should stockholder approval not be obtained, the 2002 Stock Option
Plan will not be effective and the Board will consider alternative methods of
issuing the options outside the 2002 Stock Option Plan.
122
RECOMMENDATION OF THE BOARD OF DIRECTORS
THE BOARD OF DIRECTORS OF NETTAXI RECOMMENDS THAT THE STOCKHOLDERS VOTE FOR
ADOPTION OF THE 2002 STOCK OPTION PLAN. NETTAXI WILL VOTE NETTAXI STOCKHOLDERS'
SHARES AS THEY SPECIFY ON THE ENCLOSED PROXY CARD. IT NETTAXI STOCKHOLDERS DO
NOT SPECIFY HOW THEY WANT THEIR SHARES VOTED, NETTAXI WILL VOTE THEM FOR
ADOPTION OF THE 2002 STOCK OPTION PLAN.
123
STOCKHOLDER PROPOSALS
Nettaxi has not scheduled an annual meeting for 2001 due to the proposed
Merger. Assuming the Merger is completed, no 2001 annual meeting will be held
for Nettaxi-Delaware, the surviving company. If the Merger is not completed, an
annual meeting of stockholders may be held in calendar year 2002. If such a
meeting is held, any proposals of Nettaxi stockholders intended to be included
in the Nettaxi proxy statement for such meeting would have to be received by
Nettaxi at 1875 S. Bascom, No. 116, Campbell, California 95008, attention Chief
Executive Officer, a reasonable time before Nettaxi begins to print and mail its
proxy materials with respect to such meeting.
Under Nettaxi-Delaware's bylaws, which will be the bylaws of the surviving
company following the Merger, a stockholder that desires to nominate a person to
be elected as a director of the company, or to bring any other matter before an
annual meeting of stockholders, must give timely notice to Nettaxi-Delaware's
secretary. To be timely, written notice must contain information specified in
the bylaws and be received by Nettaxi-Delaware not less than 120 calendar days
in advance of the anniversary date that the Corporation's proxy statement was
release to stockholders in connection with previous year's annual meeting of
stockholders. If, however, no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholder in order to be timely must be received by
Nettaxi-Delaware not later than the close of business on the tenth day following
the day on which such public disclosure of the date of the annual meeting was
made.
124
WHERE YOU CAN FIND ADDITONAL INFORMATION
Nettaxi files periodic reports, proxy statements and other information with
the Securities and Exchange Commission under the Securities Exchange Act of
1934. These filings contain important information which does not appear in this
proxy statement. Nettaxi stockholders may review and copy this information at
the Securities and Exchange Commission's public reference room at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 or Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. The public may obtain
information on the operation of the public reference room by calling the
Securities and Exchange Commission at 1-800-SEC-0330.
Nettaxi's Securities and Exchange Commission filings can also be reviewed
by accessing the Securities and Exchange Commission's Internet site at
http://www.sec.gov, which contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
RAE is not a reporting company and therefore no additional reports or
financial information about RAE are publicly available.
125
NETTAXI.COM
CONTENTS
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-2
Consolidated statements of operations F-3
Consolidated statements of shareholders' equity F-4
Consolidated statements of cash flows F-5
Notes to consolidated financial statements F-6 - F-30
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To The Board of Directors and Shareholders of
Nettaxi.com
We have audited the accompanying consolidated balance sheets of Nettaxi.com as
of December 31, 2001 and 2000, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe our audits provide a reasonable
basis for our opinion.
As discussed in Note 1 to the financial statements, on January 9, 2002,
Nettaxi.com entered into a merger agreement under which Nettaxi.com, subject to
shareholder approval, agreed to merge with RAE Systems, Inc. If the merger is
consummated, Nettaxi.com will abandon its business model and adopt the business
model of RAE Systems, Inc.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Nettaxi.com as of
December 31, 2001 and 2000, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United States of America.
/s/ BDO Seidman, LLP
San Jose, California
January 11, 2002
F-1
NETTAXI.COM
Consolidated Balance Sheets
==============================================================================================
December 31, 2001 2000
- ----------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents (Note 9) $ 8,586,800 $13,894,700
Accounts receivable, net of allowance for doubtful accounts
of $114,100 and $433,000, respectively (Note 9) - 775,100
Prepaid expenses and other assets (Note 7) 122,300 1,035,000
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 8,709,100 15,704,800
- ----------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (Note 2) 77,000 1,748,300
PURCHASED TECHNOLOGY, net (Note 3) - 319,000
OTHER INTANGIBLES, net (Note 3) - 55,000
DEFERRED EXPENSE (Note 7) - 272,500
DEPOSITS 5,600 24,000
- ----------------------------------------------------------------------------------------------
$ 8,791,700 $18,123,600
==============================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 49,200 $ 1,162,400
Accrued expenses (Note 4) 134,700 397,900
- ----------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 183,900 1,560,300
- ----------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 9, and 12)
SHAREHOLDERS' EQUITY (Notes 6 and 7):
Preferred stock, $0.001 par value; 1,000,000 shares authorized;
no shares issued and outstanding - -
Common stock subscribed (95,000) (95,000)
Common stock, $0.001 par value; 200,000,000 shares authorized;
43,124,586 shares issued and outstanding 43,100 43,100
Additional paid-in capital 44,897,900 44,732,900
Deferred compensation - (429,900)
Accumulated deficit (36,238,200) (27,687,800)
- ----------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 8,607,800 16,563,300
- ----------------------------------------------------------------------------------------------
$ 8,791,700 $18,123,600
==============================================================================================
See accompanying notes to consolidated financial statements.
F-2
NETTAXI.COM
Consolidated Statements of Operations
(Note 1)
===================================================================================
Years ended December 31, 2001 2000 1999
- -----------------------------------------------------------------------------------
NET REVENUES (Notes 9 and 10) $ 2,069,500 $ 9,418,400 $ 5,032,800
OPERATING EXPENSES:
Cost of operations 4,258,100 7,307,700 4,003,800
General and administrative 5,482,900 5,007,300 3,456,000
Sales and marketing 933,700 5,908,300 4,788,800
Research and development 381,300 1,563,000 2,186,700
- -----------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 11,056,000 19,786,300 14,435,300
- -----------------------------------------------------------------------------------
LOSS FROM OPERATIONS (8,986,500) (10,367,900) (9,402,500)
OTHER INCOME (EXPENSE):
Interest income 447,900 703,800 75,100
Interest expense (Notes 6 and 7) (9,400) (4,685,700) (426,200)
- -----------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES (8,548,000) (14,349,800) (9,753,600)
INCOME TAXES (Note 8) (2,400) (1,600) (126,800)
- -----------------------------------------------------------------------------------
NET LOSS $(8,550,400) $(14,351,400) $(9,880,400)
===================================================================================
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.20) $ (0.36) $ (0.46)
===================================================================================
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING 43,124,586 39,381,211 21,274,203
===================================================================================
See accompanying notes to consolidated financial statements.
F-3
NETTAXI.COM
Consolidated Statements of Shareholders' Equity
(Notes 6 and 7)
==============================================================================================================================
Common Stock Common Additional
-------------------- Stock Paid-in Deferred Accumulated
Shares Amount Subscribed Capital Compensation Deficit Total
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1998 14,110,000 $14,100 $(95,000) $ 4,868,800 $ - $ (3,455,800) $ 1,332,100
Issuance of common stock in
connection with pooling 7,000,000 7,000 - - - (200) 6,800
(Note 1)
Deferred compensation related - - - 702,700 (702,700) - -
to stock options
Amortization of deferred - - - - 211,300 - 211,300
compensation
Interest related to issuance - - - 361,200 - - 361,200
of warrants
Warrants exercised for 150,000 100 - 1,181,200 - - 1,181,300
common stock
Exchange of convertible notes
payable and accrued interest 802,223 800 - 1,862,500 - - 1,863,300
Proceeds from the issuance of 802,223 800 - 1,862,500 - - 1,863,300
common stock
Issuance of common stock 350,000 400 - 1,060,400 - - 1,060,800
for services
Net loss - - - - - (9,880,400) (9,880,400)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 1999 23,214,446 23,200 (95,000) 11,899,300 (491,400) (13,336,400) (2,000,300)
Exchange of convertible notes
payable and accrued interest 2,382,472 2,400 - 3,317,500 - - 3,319,900
Proceeds from the issuance of 632,472 600 - 834,300 - - 834,900
common stock
Deemed interest on settlement - - - 3,896,000 - - 3,896,000
agreement
Deferred compensation related - - - 512,200 (512,200) - -
to stock options
Amortization of deferred - - - - 573,700 - 573,700
Compensation
Conversion of trade payables to 778,982 800 - 1,557,200 - - 1,558,000
common stock
Warrants issued in conjunction with
conversion of trade payables - - - 541,400 - - 541,400
Issuance of common stock 686,250 700 - 947,800 - - 948,500
for services
Warrants issued for services - - - 84,000 - - 84,000
Proceeds from sale of common stock,
net of costs of $1,831,600 15,416,633 15,400 - 21,127,200 - - 21,142,600
Issuance of common stock due to
the exercise of stock options 13,331 - - 16,000 - - 16,000
Net loss - - - - - (14,351,400) (14,351,400)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2000 43,124,586 43,100 (95,000) 44,732,900 (429,900) (27,687,800) 16,563,300
Amortization of deferred - - - - 429,900 - 429,900
compensation
Options granted for services - - - 165,000 - - 165,000
Net loss - - - - (8,550,400) (8,550,400)
- ------------------------------------------------------------------------------------------------------------------------------
BALANCES, December 31, 2001 43,124,586 $43,100 $(95,000) $44,897,900 $ - $(36,238,200) $ 8,607,800
==============================================================================================================================
See accompanying notes to consolidated financial statements.
F-4
NETTAXI.COM
Consolidated Statements of Cash Flows
(Note 11)
===================================================================================================
Years Ended December 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(8,550,400) $(14,351,400) $(9,880,400)
Adjustments to reconcile net loss to net cash used in
operating activities:
Loss on disposal of equipment 327,600 - -
Depreciation and amortization 939,500 1,195,300 595,900
Write-down of assets 823,000 - -
Allowance for doubtful accounts (318,900) 349,400 52,400
Issuance of common stock for interest on
convertible notes - 119,900 63,300
Issuance of common stock for services (Note 7) 955,700 1,019,400 34,200
Compensation expense related to options
and warrants granted 595,600 615,700 211,300
Interest expense related to settlement agreement - 2,400,000 -
Interest expense related to issuance of warrants - 2,196,400 202,200
Changes in operating assets and liabilities:
Accounts receivable 1,094,000 57,100 (1,100,300)
Prepaid expenses and other assets 228,800 (231,000) (62,700)
Accounts payable (1,113,200) (1,321,000) 3,854,500
Accrued expenses (265,600) (262,800) 585,100
Deferred revenue - - (47,000)
Income taxes payable 2,400 (124,000) 125,600
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (5,281,500) (8,337,000) (5,365,900)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Deposits 18,400 26,900 (50,900)
Proceeds from sale of equipment 28,500 - -
Capital expenditures (73,300) (771,000) (2,105,400)
- ---------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (26,400) (744,100) (2,156,300)
- ---------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on obligations under capital lease - (5,400) (7,300)
Proceeds from convertible notes payable - - 5,000,000
Net proceeds from issuance of common stock - 21,993,500 3,051,400
- ---------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES - 21,988,100 8,044,100
- ---------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,307,900) 12,907,000 521,900
CASH AND CASH EQUIVALENTS, beginning of year 13,894,700 987,700 465,800
- ---------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 8,586,800 $ 13,894,700 $ 987,700
===================================================================================================
See accompanying notes to consolidated financial statements.
F-5
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF The Company
ACCOUNTING
POLICIES Nettaxi.com (formerly Nettaxi, Inc and formerly Swan Valley
Snowmobiles, Inc.), the Company, is a Nevada Corporation,
which was incorporated on October 26, 1995.
On September 29, 1998 the Company completed the acquisition
of 100% of the outstanding common stock of Nettaxi OnLine
Communities, Inc., a Delaware corporation, and changed its
name to Nettaxi, Inc. (now Nettaxi.com). For accounting
purposes, the acquisition has been treated as the
acquisition of the Company by Nettaxi OnLine Communities,
Inc. with Nettaxi OnLine Communities, Inc. as the acquiror.
Nettaxi.com is an Internet marketing portal that provides a
wide range of content and Internet based services for
consumers and businesses. Subscribers to the Company's web
site, www.nettaxi.com, are also provided with access to
enhanced content such as broadband video clips and e-mail
accounts. In 1999, the Company developed a diversified
revenue model under which it provided subscribers with
access to web site hosting services an a broad range of
content, and provided affiliated businesses with access to a
large population of Internet users for advertising and
promotional purposes. The Company also provided web site
hosting and Internet connectivity services for corporate
customers.
The Company's principal executive offices are located in
Campbell, California.
Beginning in April 2001, the bankruptcy and liquidation of
many of the Company's Internet based customers and suppliers
caused management to re-evaluate the Company's business
model. Since the Internet infrastructure was unstable and
customer base financially weak, management began to take
corrective action to significantly decrease cash burn and
determine the best course of action to maintain and enhance
the value of the Company. In this regard, management
implemented an acquisition strategy pursuant to which it has
been seeking to identify an appropriate entity with which to
merge, acquire or restructure the Company's current
business.
F-6
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Beginning in May 2001, management reduced the Company's
overhead and burn rate by reducing the salaries of employees
and reducing the number of personnel, marketing expenses and
costs associated with the Company's hosting activities.
Effective July 7, 2001, the Company terminated its
significant co-hosting customer contracts. In connection
with this, it also discontinued the purchase of bandwidth
and premium services from its third party provider. The
terminations reduced operating expenses, and materially
affected the Company's revenues beginning in the third
quarter of 2001.
The Company continues to operate its website, however,
following the implementation of an acquisition strategy, the
Company has not pursued any revenue generating activities in
the last six months of 2001.
The Company's current management team, consisting of finance
and administrative employees is in place to maintain
operations and enable ongoing review and analysis of
acquisition candidates and to assist in the consummation of
an appropriate transaction. Management has also engaged the
services of an investment banker, to assist in this process
(see Note 12).
Current Developments
On January 9, 2002 Nettaxi.com executed a definitive merger
agreement which contemplates the merger of RAES Acquisition
Corporation, a California corporation and wholly owned
subsidiary of Nettaxi.com with RAE Systems, Inc., a
California corporation that designs and manufacturers
portable gas detection instruments and wireless monitoring
and communications equipment. Under the terms of the merger
agreement, unanimously approved by both Boards of Directors,
RAE Systems shareholders will receive approximately 80% of
the outstanding shares of the combined entity. Subject to
the approval of shareholders, Nettaxi.com shares will be
reverse split at the ratio of 5.67 to 1 prior to the closing
of the merger. The management and Board of Directors of
Nettaxi will resign at the closing of the merger and be
replaced with the Board of Directors and management team of
RAE Systems. It is the understanding of the respective
parties that upon completion of the merger the going-forward
operating activities of the combined company will be that of
RAE Systems, Inc. The transaction, which is expected to be
tax-free to shareholders of both companies for U.S. Federal
income tax purposes is subject to the approval of each
party's shareholders(see Note 12). Upon completion of the
merger, the new company will be known as RAE Systems Inc.
F-7
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Consolidation
The accompanying consolidated financial statements include
the accounts of Nettaxi.com and its wholly-owned
subsidiaries, Nettaxi OnLine Communities, Inc. and RAES
Acquisition Corporation. 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. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments having
original maturities of 90 days or less to be cash
equivalents.
Accounts Receivable and Allowances For Doubtful Accounts
The Company grants credit to its customers after undertaking
an investigation of credit risk for all significant amounts.
An allowance for doubtful accounts is provided for estimated
credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such
amounts. The allowance is based on reviews of losses,
adjustment history, current economic conditions and other
factors that deserve recognition in estimating potential
losses. While management uses the best information available
in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future
economic and other conditions that may be beyond
management's control.
F-8
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Property and Equipment
Property and equipment are stated at cost. Depreciation is
provided using the straight-line method over the estimated
economic useful lives of the assets, as follows:
Estimated useful lives
-------------------------------------------------------------
Furniture and fixtures 5 years
Office equipment 5 years
Computers and equipment 3 years
-------------------------------------------------------------
Assets held under capital leases are amortized on a
straight-line basis over the shorter of the lease term or
the estimated useful lives of the related assets.
Purchased Technology and Other Intangibles
The Company amortizes, on a straight-line basis, the cost of
purchased technology and other intangibles over the shorter
of five (5) years or the useful life of the related
technology or underlying asset.
Revenue Recognition and Deferred Revenue
The Company's revenues are derived principally from the sale
of banner advertisements, web hosting services and from
products from its online malls. Advertising revenues are
recognized in the period in which the advertisement is
delivered, provided that collection of the resulting
receivable is probable. Advertisers are charged on a per
impression or delivery basis up to a maximum as specified in
the contract. To date, the duration of the Company's
advertising commitments has not exceeded one year. When the
Company guarantees a minimum number of impressions or
deliveries, revenue is recognized ratably in proportion to
the number of impressions or deliveries recorded to the
minimum number of impressions and deliveries guaranteed. Web
hosting revenues are recognized in the period in which the
services are provided. Product revenue is recognized upon
shipment, provided no significant obligations remain and
collectability is probable.
F-9
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Advertising revenue include barter revenues, which are the
exchange by Nettaxi.com of advertising space on
Nettaxi.com's web sites for reciprocal advertising space on
other web sites. Revenues from these barter transactions are
recorded as advertising revenues at the lower of the
estimated fair value of the advertisements received or
delivered and are recognized when the advertisements are run
on Nettaxi.com's web sites. Barter expenses are recorded
when Nettaxi.com's advertisements are run on the reciprocal
web sites, which is typically in the same period as when
advertisements are run on Nettaxi.com's web sites. Barter
revenues and related expenses for the years ended December
31, 2001, 2000, and 1999 were approximately $0, $2,224,800,
and $343,400, respectively, representing 0%, 28%, and 7% of
net revenues, respectively.
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.
Royalty revenues are earned on sales of the Company
developed CD-Rom "Internet the City" by third-party
distributors. Third-party distributors package the CD-Rom
with their products for sale to the end-user. The
distributor remits payments to the Company 90 days after the
sales of their product to the end-user and the end-user does
not have a right of return. The Company recognizes these
revenues only upon receipt of payment from the distributor.
The Company is in contract with several partners in revenue
and expense sharing agreements. The agreements provide for
the Company to earn revenues based on the sale of
third-party suppliers products. For those transactions,
where the Company receives either a percentage of the
transaction or a fixed fee, revenues are recorded net.
F-10
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company charges its co-hosting customers one-time
installation fees. Prior to January 31, 2001, the Company
recognized these fees upon completion of the installation.
In accordance with Staff Accounting Bulletin (SAB) No. 101,
Revenue Recognition one-time installation fees are to be
deferred and systematically recognized as the products
and/or services are delivered and/or performed over the term
of the arrangement or the expected period of performance
that the fees are earned. The Company did not recognize any
one-time installation fees in 2001.
Premium subscribers are charged web-site development fees to
develop their web-site upon request. These fees charged and
the costs to develop these sites by the Company are nominal.
The Company defers the recognition of the fees charged over
the period of the contract.
In December 1999, the staff of the Securities and Exchange
Commission (SEC) issued its Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition. SAB No. 101 provides the SEC
staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. SAB No.
101 is effective for the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The Company
believes that its current revenue recognition policies
comply with the provisions of SAB No. 101.
Income Taxes
The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109,
Accounting for Income Taxes, which requires an asset and
liability approach. This approach results in the recognition
of deferred tax assets (future tax benefits) and liabilities
for the expected future tax consequences of temporary
differences between the book carrying amounts and the tax
basis of assets and liabilities. The deferred tax assets and
liabilities represent the future tax return consequences of
those differences, which will either be deductible or
taxable when the assets and liabilities are recovered or
settled. Future tax benefits are subject to a valuation
allowance when management believes it is more likely than
not that the deferred tax assets will not be realized.
Advertising Costs
The cost of advertising is expensed as incurred. Advertising
costs for the years ended December 31, 2001, 2000, and 1999,
were approximately $74,700, $2,365,600, and $2,831,300,
respectively.
F-11
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Long-Lived Assets
The Company periodically reviews its long-lived assets for
impairment. When events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable,
the Company writes the asset down to its fair value.
The Company periodically reviews other intangible assets to
evaluate whether events or changes have occurred that would
suggest an impairment of carrying value. An impairment would
be recognized when expected future operating cash flows are
lower than the carrying value.
Fair Values of Financial Instruments
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
Cash and cash equivalents:
The carrying amount reported in the consolidated
balance sheets for cash and cash equivalents
approximates fair value.
Short-term debt:
The fair value of short-term debt approximates cost
because of the short period of time to maturity.
Stock-Based Incentive Program
SFAS No. 123, Accounting for Stock-Based Compensation,
encourages entities to recognize compensation costs for
stock-based employee compensation plans using the fair value
based method of accounting defined in SFAS No. 123, but
allows for the continued use of the intrinsic value based
method of accounting prescribed by Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. The Company continues to use the accounting
prescribed by APB Opinion No. 25 and as such is required to
disclose pro forma net income (loss) and earnings (loss) per
share as if the fair value based method of accounting had
been applied (Note 7).
F-12
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In March 2000, the Financial Accounting Standards Board
(FASB) issued Interpretation (Interpretation) No. 44,
Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25, which
became effective July 1, 2000. Interpretation No. 44
clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining
whether a stock compensation plan qualifies as a
noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed
stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business
combination. Adoption of the provisions of the
Interpretation had no significant impact on the Company's
financial statements.
Basic and Diluted Loss Per Common Share
In February 1997, the FASB issued SFAS No. 128, Earnings Per
Share, which was effective December 28, 1997. Conforming to
SFAS No. 128, the Company changed its method of computing
earnings per share and restated all prior periods included
in the consolidated financial statements. Basic loss per
common share is determined by dividing loss available to
common shareholders by the weighted average number of common
shares outstanding. Diluted per-common-share amounts assume
the issuance of common stock for all potentially dilutive
equivalent shares outstanding. Anti-dilution provisions of
SFAS 128 require consistency between diluted
per-common-share amounts and basic per-common-share amounts
in loss periods. For the periods reported, there were no
differences between basic and diluted earnings per share.
The number of potential common shares not included in
diluted earnings per share, due to their being
anti-dilutive, are 25,953,816, 23,994,732, and 3,838,679,
for the years ended December 31, 2001, 2000, and 1999,
respectively. All share and per share information has been
adjusted for the shares exchanged for the common stock of
Plus Net, Inc.
F-13
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Adoption of New Accounting Pronouncements
In June 1999, the FASB issued SFAS No. 137, Accounting for
Derivative Instrument and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133, which amends
SFAS No. 133 to be effective for all fiscal years beginning
after June 15, 2000. In June 2000, SFAS No. 133 was amended
by SFAS No. 138, Accounting for Certain Derivative
Instruments and Hedging Activities, which amended or
modified certain issues discussed in SFAS No. 133. SFAS No.
138 is also effective for all fiscal years beginning after
June 15, 2000. SFAS No. 133 and SFAS No. 138 establish
accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as
either an asset or liability measured at its fair value. The
statements also require that changes in the derivative's
fair value be recognized currently in earnings unless
specific hedge accounting criteria are met. The Company does
not engage in derivative instruments or hedging activities.
Accordingly, there was no impact on the Company's financial
statements from the adoption of SFAS No. 133 and SFAS No.
138.
In July 2001, the FASB issued SFAS No. 141 (SFAS 141),
Business Combinations, which supersedes Accounting
Principles Board (APB) Opinion No. 16, Business
Combinations. SFAS 141 eliminates the pooling- of-interests
method of accounting for business combinations and modifies
the application of the purchase accounting method. The
elimination of the pooling-of-interests method is effective
for transactions initiated after June 30, 2001. The
remaining provision of SFAS 141 will be effective for
transactions accounted for using the purchase method that
are completed after June 30, 2001.
In July 2001, the FASB also issued SFAS No. 142 (SFAS 142),
Goodwill and Intangible Assets, which supersedes APB Opinion
No. 17, Intangible Assets. Under SFAS 142, goodwill and
intangible assets with indefinite lives are not amortized
but are tested for impairment annually using the fair value
approach, except in certain circumstances, and whether there
is an impairment indicator, other intangible assets will
continue to be valued and amortized over their estimated
lives; in-process research and development will continue to
be written off immediately; all acquired goodwill must be
assigned to reporting units for purposes of impairment
testing and segment reporting and existing goodwill will no
longer be subject to amortization. The provisions of SFAS
No. 142 are required to be applied starting with fiscal
years beginning after December 15, 2001.
F-14
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In August 2001, the FASB issued SFAS No. 143 (SFAS 143)
Accounting for Obligations Associated with the Retirement of
Long-Lived Assets. SFAS 143 addresses financial accounting
and reporting for the retirement obligation of an asset.
SFAS 143 states that companies should recognize the asset
retirement cost, at its fair value, as part of the cost
asset and classify the accrued amount as a liability in the
balance sheet. The asset retirement liability is then
accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently
updated for revised estimates of the discounted cash
outflows. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. The Company has not yet
determined the effect SFAS 143 will have on its financial
position, results of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144)
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 supersedes the SFAS No. 121 by requiring
that one accounting model to be used for long-lived assets
to be disposed of by sale, whether previously held and used
or newly acquired, and by broadening the presentation of
discontinued operation to include more disposal
transactions. SFAS 144 will be effective for fiscal years
beginning after December 15, 2001. The Company has not yet
determined the effect SFAS 144 will have on its financial
position, results of operations, or cash flows.
2. PROPERTY AND Property and equipment consisted of the following:
EQUIPMENT
December 31, 2001 2000
----------------------------- ---------- ----------
Computers and equipment $1,470,900 $2,721,100
Furniture and fixtures 55,200 203,600
Office equipment 55,100 55,100
----------------------------- ---------- ----------
1,581,200 2,979,800
Less accumulated depreciation 1,504,200 1,231,500
----------------------------- ---------- ----------
$ 77,000 $1,748,300
=====================================================
In the fourth quarter of 2001, the Company had a third-party
appraisal carried out of its property and equipment. As a
result of this appraisal the Company recorded asset
impairment charges of $551,000.
F-15
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. PURCHASED Purchased technology and other intangibles consisted of the
TECHNOLOGY AND following:
OTHER
INTANGIBLES
December 31, 2001 2000
----------------------------- -------- --------
Purchased technology $870,000 $870,000
Less accumulated amortization 870,000 551,000
----------------------------- -------- --------
$ -- $319,000
Other intangibles $150,000 $150,000
Less accumulated amortization 150,000 95,000
----------------------------- -------- --------
$ -- $ 55,000
=================================================
As a result of the decision taken by management in mid-2001
to implement an acquisition strategy and to terminate the
Company's significant co-hosting customer contracts, the
projected undiscounted cash flows to support the value of
the purchased technology and other intangibles were no
longer deemed adequate. In 2001, the Company wrote-down its
purchased technology and other intangibles by $232,000 and
$40,000, respectively.
4. ACCRUED Accrued expenses consisted of the following:
EXPENSES
December 31, 2001 2000
---------------------------- -------- --------
Professional fees $109,300 $157,300
Payroll and related expenses 2,300 97,800
Marketing - 83,800
Other 23,100 59,000
---------------------------- -------- --------
$134,700 $397,900
================================================
5. LEASE The Company leases its facility under an operating lease,
COMMITMENTS which expires on May 31, 2002. The facility lease requires
the Company to pay certain maintenance and operating
expenses, such as taxes, insurance, and utilities. Rent
expense for the years ended December 31, 2001, 2000, and
1999, was $245,300, $281,600, and $178,000, respectively.
F-16
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In 1999, the Company entered into operating leases on
certain vehicles. For the years ended December 31, 2001,
2000, and 1999, rent expense related to the vehicle leases
aggregated $5,300, $5,300, and $2,600.
A summary of the future minimum payments required under
noncancelable operating leases with terms in excess of one
year follows:
Operating
Year Ending December 31, Leases
-------------------------------------------- ----------
2002 $ 23,800
-------------------------------------------- ----------
$ 23,800
========================================================
6. CONVERTIBLE On March 31, 1999 the Company entered into a $5,000,000
NOTES PAYABLE, Convertible Debt Financing Agreement (the Agreement) with
RELATED PARTY RGC International Investors, LDC (RGC). The convertible
debenture bears interest at 5% and matures on March 31,
2004. The debentures are convertible at the option of the
holder into that number of shares of common stock equal to
the principal amount of the debentures to be converted
including all accrued interest, divided by the conversion
price specified in the debentures. The conversion price is
the lesser of a variable or fixed conversion price. The
variable conversion price is based on the trading price of
the Company's common stock over a fixed period to conversion
of the debentures, and the fixed conversion price is $11.88.
The fixed conversion price represents 120% of the average of
the three lowest trades ten days prior to the effective date
of the Agreement.
In accordance with the terms of the debt agreement, RGC
converted, in November and December 1999, $1,800,000 of the
debentures, with accrued interest of $63,300, into 802,223
shares of common stock and, in January and February 2000,
$800,000 of the debentures, with accrued interest of $34,900
into 632,472 shares of common stock.
F-17
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
On April 28, 2000, the Company reached a settlement
agreement with RGC for the $2,400,000 remaining principal
amount of the convertible debentures, plus accrued interest
thereon of approximately $85,000, whereby the Company agreed
to issue an aggregate of 1,750,000 shares of common stock
"settlement shares" and warrants to purchase an aggregate of
2,200,000 shares of common stock, with an exercise price of
$1.50 per share, as discussed further in Note 7. It was also
agreed that beginning on the date of the agreement and prior
to the delivery of the settlement shares, the debentures
would be convertible at a fixed conversion price of $1.42
per share. As the fair market value of the Company's stock
on April 28, 2000 was $3.00, the Company recognized a deemed
noncash interest expense of $2,400,000 resulting from the
implied beneficial conversion feature.
7. SHAREHOLDERS' COMMON STOCK
EQUITY
In May 1999, the Company completed a merger in a single
transaction with Plus Net, Inc. (as discussed in Note 1) by
exchanging 7,000,000 shares of its common stock for all of
the common stock of Plus Net, Inc. Each share of Plus Net
was exchanged for 1,000 shares of Nettaxi common stock. The
merger constituted a tax-free reorganization and was
accounted for as a pooling of interest under Accounting
Principles Board Opinion No. 16.
For periods proceeding the merger, there were no
intercompany transactions that require elimination from the
combined consolidated results of operations and there were
no adjustments necessary to conform the accounting practices
of the two companies. Plus Net, Inc. reported no revenues
and a net loss of $200 for the period ended December 31,
1998. For the period from January 1 to May 7, 1999 Plus Net,
Inc. had revenues of approximately $700,000 and net income
of approximately $413,600. Subsequent to the merger the
Company ceased its evaluation and processing of online
credit card transactions business. In 1999, this line of
business accounted for approximately $1,285,000 of the
Company's revenues.
In accordance with the Convertible Debt Financing Agreement,
entered into between the Company and RGC International
Investors, LDC on March 31, 1999, RGC had the option to
purchase one additional share of common stock for every
share of common stock issuable as a result of a conversion
of the debenture, at a price equal to the applicable
conversion price.
F-18
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In November and December 1999, RGC exercised this investment
option right and purchased 802,223 shares of the Company's
common stock for proceeds of $1,863,300 and, in January and
February 2000, an additional 632,472 shares of common stock
for proceeds of $834,900.
In December 1999, the Company issued 350,000 shares of
common stock to a consulting group in exchange for a
two-year agreement to provide the Company with consulting
services. Based on the then fair market value of the shares
issued the price of these services was determined to be
$1,060,800. In February 2000, the Company issued an
additional 175,000 shares of common stock, with a fair
market value of $574,200, in consideration for extending the
agreement for an additional six months.
The Company amortized the aggregate consideration given over
the term of the agreement and fully recognized the
unamortizated portion in the second quarter of 2001.
Included in prepaid expenses and deferred expenses was as of
December 31, 2000, $926,500, representing the then
unamortized portion of the consideration given for these
consulting services.
In September 2000, the Company issued 75,000 additional
shares of common stock to the consulting group in
consideration of failure to execute the demand registration
rights in a timely manner pursuant to the agreements. Based
on the fair market value of the shares issued, the Company
recognized $37,500 in consulting expense for this
transaction.
In February 2000, the Company offered shares of its common
stock, valued at $1.50 per share, and warrants, each
expiring on January 31, 2003 and entitling the holder the
right to purchase one share of common stock at an exercise
price of $4.00 per share, through a private placement
offering. The Company issued 15,416,633 shares of common
stock and warrants to purchase 15,416,633 shares of common
stock in the offering for net proceeds of $21,142,600.
In February 2000, the Company issued 6,250 shares of common
stock, with a fair market value of $9,700, in settlement for
the cancellation of a letter of intent to provide
sponsorship.
In March and April 2000, the Company issued 778,982 shares
of common stock and warrants to purchase 389,491 shares of
common stock at an exercise price of $2.76 per share, as
discussed further below, in exchange for the conversion of
$1,558,000 in trade payables.
F-19
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In July and August 2000, the Company issued an aggregate of
430,000 shares of common stock, with a fair market value of
$327,100, in consideration for consulting services. The
Company amortizes the aggregate consideration given over the
term of the underlying agreements. Included in prepaid
expenses is, as of December 31, 2000, $29,200 representing
the unamortized portion of the consideration given for these
consulting services.
In May 2000, the Company's Certificate of Incorporation was
amended to increase the number of shares of authorized
common stock to 200,000,000.
WARRANTS
In 1998, prior to the adoption of the Stock Option Plan as
discussed below, the Company granted warrants to directors
and employees of the Company, to purchase 2,399,298 shares
of common stock at $0.04. As the exercise price for those
warrants was less than the market price of the common stock
on the grant date, the Company recorded in accordance with
APB Opinion No. 25, Accounting for Stock Issued to
Employees, $855,000 of compensation costs associated with
these warrants.
In September 1998, these warrants were exchanged for
2,399,298 shares of common stock via the issuance of
promissory notes for $95,000, concurrent with the
reorganization of the Company. The promissory notes have
been accounted for as common stock subscribed and are an
offset to shareholders' equity until such notes are
collected.
During the years ended December 31, 2000 and 1999, the
Company issued warrants in connection with financing,
consulting services, and conversion of trade payables to
purchase 3,139,491 and 475,000 shares of common stock,
respectively.
The Company estimates the fair value of warrants at the
grant date by using the Black-Scholes valuation model with
the following weighted-average assumptions used for grants
in 2001, 2000, and 1999: dividend yield of 0%; expected
volatility of 94%, 138%, and 69%; risk-free interest rate of
5.5%, 6.2%, and 6.2%; and the expected contractual lives of
the warrant. The computed value is charged to operations or
interest over the term of the related agreements.
F-20
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In conjunction with the Agreement, entered into between the
Company and RGC on March 31, 1999, the Company issued
warrants, which vested immediately, to purchase 150,000
shares of common stock at $12.375. The Company recognized an
additional $115,500 of interest expense associated with
these warrants. In August 1999, the Company entered into an
agreement with RGC pursuant to which it exercised these
warrants.
In consideration for the early exercise of the warrants, the
exercise price for the warrants was decreased from $12.375
to $7.875 and the Company issued RGC warrants to purchase an
additional 150,000 shares of common stock at $7.875. These
warrants were subsequently, due to anti-dilution provisions,
issued at an exercise price of $4.38 per share, resulting in
an increase in the number of shares issuable upon exercise
of the warrants to 269,692. The Company recognized an
additional $245,700 of interest expense associated with
these warrants. In 2000 and 1999, the Company recognized
$159,000 and $86,700 of this amount as interest expense
respectively.
In June 2000, the Company issued warrants, which vested
immediately, to purchase 2,200,000 shares of common stock at
$1.50 per share, exercisable over five years, in accordance
with the settlement agreement entered into between the
Company and RGC or April 28, 2000. The Company recognized an
additional $1,496,000 of deemed interest expense associated
with these warrants.
In February 2000, the Company issued warrants, which vested
immediately, to purchase 200,000 shares of common stock at
an exercise price of $4.00, in addition to previously issued
warrants to purchase 50,000 shares of common stock at an
exercise price of $12.375 for finders fee in connection with
the private placement.
In March and April 2000, the Company issued warrants to
purchase 389,491 shares of common stock at an exercise price
of $2.76 in conjunction with the conversion of trade
payables. The Company recognized $541,400 in interest
expense associated with these warrants.
F-21
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In October 2000, the Company issued warrants for consulting
services, which vested immediately to purchase 350,000
shares of common stock at an exercise price of $0.35 per
share. The aggregate value of these warrants, $84,000, was
amortized over a four months period. In 2001 and 2000, the
Company recognized $42,000 and $42,000 of this amount,
respectively.
In April 2001, the Company issued warrants, which vested
immediately, to purchase 1,500,000 shares of common stock at
an exercise price of $0.13 for financial consulting
services. The aggregate value of these warrants amounted to
$165,000. Included in prepaid expenses as of December 31,
2001, is $41,200 representing the unamortized portion of the
consideration given for these consulting services.
STOCK OPTION PROGRAM
In September 1998, the Company adopted the 1998 Stock Option
Plan and, in January 2000, the Board of Directors adopted
the 1999 Stock Option Plan (collectively "the Plans"), which
is subject to its ratification by the shareholders.
The Plans authorizes the grant of options to purchase shares
of common stock to employees, directors, and consultants of
the Company and its affiliates. The options are a
combination of both incentive and nonstatutory options.
Incentive options may be granted at not less than 100% of
the fair market value per share, and nonstatutory options
may be granted at not less than 85% of the fair market value
per share at the date of grant as determined by the Board of
Directors or committee thereof, except for options granted
to a person owning greater than 10% of the outstanding
stock, for which the exercise price must not be less than
110% of the fair market value. Options granted under the
Plans generally vest over three years and are exercisable
over ten years.
The Company has reserved 3,000,000 shares of common stock
for issuance under the 1998 Stock Option Plan and 8,900,000
shares of common stock for issuance under the 1999 Stock
Option Plan.
F-22
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
A summary of the status of the Company's stock option plan
as of December 31, 2001, 2000, and 1999, and changes during
the years then ended is presented in the following table:
Options Outstanding
----------------------------------------------------------------------------
December 31, 2001 December 31, 1999 December 31, 2000
------------------------- ------------------------ -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------------------------------------------------------------------------------------
Beginning 5,293,916 $ 4.83 2,580,166 $ 9.47 280,000 $ 0.80
Granted 3,005,000 $ 0.16 3,931,600 $ 1.88 2,614,000 $ 10.40
Exercised -- $ -- (13,331) $ 1.20 -- $ --
Forfeited (2,720,916) $ 2.45 (1,204,519) $ 5.19 (313,834) $ 9.45
------------ ------------ -----------
Ending 5,578,000 $ 3.47 5,293,916 $ 4.83 2,580,166 $ 9.47
========= ============ =========== ============ ========== =========== ==========
Exercisable at
year-end 4,521,734 2,368,750 640,499
============ ============ ===========
Weighted-average fair value of options granted during the period:
$ 0.11 $ 1.34 $ 5.71
=========== =========== ==========
The following table summarizes information about stock
options outstanding as of December 31, 2001:
Options Outstanding
--------------------------------------- Options Exercisable
Weighted- -------------------------
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Prices Exercisable Prices
--------------------------------------------------------------------------------
$0.01-0.75 1,408,000 7.53 $ 0.16 593,826 $ 0.17
$0.76-1.00 165,000 3.50 $ 0.80 165,000 $ 0.80
$1.01-2.00 1,199,000 6.46 $ 1.50 1,221,894 $ 1.48
$2.01-5.00 1,396,000 7.76 $ 2.44 921,894 $ 2.44
$5.01-10.00 1,200,000 7.61 $ 9.08 1,200,000 $ 9.08
$10.01-15.00 210,000 6.87 $ 13.91 205,528 $ 13.96
-------------------------------------- -----------
5,578,000 $ 3.47 4,521,734 $ 4.13
=========== ============= =========== ============
F-23
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
During the years ended December 31, 2001, 2000, and 1999,
the Company recorded deferred compensation of approximately
$0, $512,200, and $702,700, respectively, relating to the
issuance of 0, 380,000, and 285,000 consultant options,
respectively, for administrative and sales and marketing
services. These amounts were computed using the
Black-Scholes option valuation model. The related
amortization was charged to operations over the term of the
related consulting agreements. In 2001, 2000, and 1999, such
amortization amounted to approximately $429,900, $573,700,
and $211,300, respectively. The weighted-average assumptions
used to compute the value of the options granted in 2000 and
1999 were as follows: dividend yield of 0%; expected
volatility of 110% and 82%; risk-free interest rate of 6.2%
and 6.2%; and expected lives of two years.
SFAS No. 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information
regarding net (loss) income and (loss) earnings per share as
if compensation cost for the Company's stock option plan had
been determined in accordance with the fair value based
method prescribed in SFAS No.123. The Company estimates the
fair value of stock options at the grant date by using the
Black-Scholes option valuation model with the following
weighted average assumptions used for grants in 2001, 2000,
and 1999: dividend yield of 0%; expected volatility of 96%,
124%, and 112%; risk-free interest rate of 5.0%, 6.2%, and
6.2%; and expected lives of three years for all plan
options.
Under the accounting provisions of SFAS No. 123, the
Company's net loss and the basic and diluted net loss per
common share would have been adjusted to the pro forma
amounts below:
2001 2000 1999
---------------------------------------------------------------
Net income (loss):
As reported $ (8,550,400) $(14,351,400) $ (9,880,400)
Pro forma $(11,905,200) $(19,426,800) $(11,516,600)
Basic and diluted earnings (loss) per share:
As reported $ (0.20) $ (0.36) $ (0.46)
Pro forma $ (0.28) $ (0.49) $ (0.54)
F-24
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. INCOME TAXES The provision for income taxes for the year ended December
31, 1999 relates to the earnings of Plus Net, Inc. prior to
the merger. The provision for income taxes for the years
ended December 31, 2001 and 2000 consisted of minimum state
taxes.
The following summarizes the differences between income tax
expense and the amount computed applying the Federal income
tax rate of 34% for the years ended December 31, 2001, 2000,
and 1999:
2001 2000 1999
---------------------------------------------------------------------
Federal income tax
benefit at statutory rate $(2,720,000) $(4,675,000) $(3,316,200)
State income taxes, net
of federal benefit (466,000) (799,000) (566,500)
Nondeductible book
expenses 555,000 2,308,000 -
Tax benefit not currently
recognizable 2,404,000 2,992,900 3,884,100
Other 229,400 174,700 125,400
---------------------------------------------------------------------
Provision for income taxes $ 2,400 $ 1,600 $ 126,800
=====================================================================
The Company's effective tax rate differs from the statutory
federal income tax principally as a result of federal and
state net operating losses for which no deferred benefit is
recognized due to a full valuation allowance provided on the
resulting deferred tax asset.
F-25
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Temporary differences and carryforwards which gave rise to
significant portions of deferred tax assets and liabilities
as of December 31, 2001, 2000, and 1999 are as follows:
December 31, 2001 2000 1999
----------------------------------------------------------------------
Net operating loss
carryforward $ 9,994,000 $ 7,375,000 $ 4,558,900
Depreciation and
amortization 280,000 (36,000) (216,800)
Accrued compensation
and benefits - 37,000 562,700
Reserves not currently
deductible 61,000 555,000 33,300
----------------------------------------------------------------------
Net deferred tax asset 10,335,000 7,931,000 4,938,100
Valuation allowance (10,335,000) (7,931,000) (4,938,100)
----------------------------------------------------------------------
Reported deferred tax asset $ - $ - $ -
======================================================================
As of December 31, 2001, the Company had a federal net
operating loss (NOL) carryforward in the amount of
$26,754,000 which may be applied to future taxable income
until these benefits begin to expire in 2017. The Company
also had a California NOL carryforward in the amount of
$14,200,600 which may be applied to future taxable income
until these benefits begin to expire in 2002.
The Company's ability to utilize the NOL carryforwards are
dependent upon the Company's ability to generate taxable
income in future periods and may be limited due to
restrictions imposed under Federal and state laws upon a
change in ownership.
9. CONCENTRATION Financial instruments, which potentially subject the Company
OF CREDIT RISK to concentration of credit risk, consist principally of cash
and cash equivalents and trade receivables. The Company
places its cash and cash equivalents with high quality
financial institutions and, by policy, limits the amounts of
credit exposure to any one financial institution.
F-26
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The Company's accounts receivable are derived from many
customers in various industries. The Company believes any
risk of accounting loss is significantly reduced due to the
diversity of its end-customers and geographic sales areas.
The Company performs credit evaluation of its customers'
financial condition whenever necessary, and generally does
not require cash collateral or other security to support
customer receivables.
10. MAJOR In 2001, three customers accounted for approximately 47%,
CUSTOMERS 25%, and 19% of revenues, respectively, with related account
receivable as of December 31, 2001 of $0, $0, and $0,
respectively.
In 2000, four customers accounted for approximately 20%,
13%, 11%, and 10% of revenues, respectively, with related
account receivable as of December 31, 2000 of $294,000, $0,
$95,200, and $0, respectively.
In 1999, one customer accounted for approximately 17% of
revenues, with related account receivable as of December 31,
1999 of $250,000.
11. SUPPLEMENTAL The following is supplemental disclosure for the statements
DISCLOSURE of cash flows.
OF CASH FLOW
INFORMATION
Years Ended December 31, 2001 2000 1999
--------------------------------------------------------------------
CASH PAID:
Income taxes $ - $ 127,200 $ 1,600
Interest $9,400 $ - $ 3,000
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Issuance of common stock for
convertible notes payable plus
accrued interest $ - $3,319,900 $1,863,300
Issuance of common stock
for consulting services $ - $ 948,500 $1,060,800
Issuance of common stock
for trade payables $ - $1,558,000 $ -
Warrants issued in conjunction
with debt financing $ - $ - $ 361,200
====================================================================
F-27
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. COMMITMENTS On May 1, 2001 seven shareholders of Nettaxi filed an action
AND CONTINGENCIES against the Company. The complaint also names the Company's
Chief Executive Officer, President and former Chief
Financial Officer as additional defendants. The complaint
alleged that the Company violated securities laws in
connection with its February 2000 private placement. The
complaint was amended on May 23, 2001. The amendment
addressed factual matters and added three new plaintiffs to
the lawsuit. Shortly after filing the amended complaint, the
Company, pursuant to the rules of the District Court, met
with plaintiffs and pointed out further factual inaccuracies
and deficiencies. Plaintiffs, then, chose to attempt to
amend their complaint for a second time. Six of the
plaintiffs purchased shares of Nettaxi common stock in the
February 2000 private placement. Prior to filing the
complaint the plaintiffs demanded the refund of all of the
money invested in Nettaxi and demanded that the exercise
price of the warrants issued in the private placement be
reduced from $4.00 to $0.25 per share. Additionally, prior
to filing the complaint, Nettaxi was asked to invest capital
in a company affiliated with one of the plaintiffs. In the
complaint, the plaintiffs seek compensatory damages,
injunctive relief and fees and interest. On October 1, 2001,
the Company filed a motion to dismiss the complaint filed by
Plaintiffs. In response, Plaintiffs have given notice that
they intend to seek court permission to file a third amended
complaint to attempt to recharacterize their claims and to
remove some claims which Plaintiffs concede are contrary to
the law. Management believes that the allegations made in
the complaint are without merit and that this lawsuit
reflects shareholder frustration over the recent downturn in
the stock market and will defend the action vigorously.
From time to time, in the normal course of business, various
claims are made against the Company. At this time, in the
opinion of management, there are no pending claims, the
outcome of which is expected to result in a material adverse
effect on the financial position of the Company.
F-28
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
In May 2001, the Company entered into an agreement with an
investment banker to provide, on a semi-exclusive basis,
services in connection with identifying a potential merger
candidate and to assist in negotiating and effecting a
transaction. The terms of the agreement provide for
compensation to be paid to the investment banker upon the
successful closing of a transaction in the amount of 5% of
the total amount of the transaction up to $3 million and 2%
of the remaining amount of the transaction, payable, at the
election of the investment banker, in cash or common stock
of the Company and a warrant exercisable to purchase up to
5% of the Company's common stock at a purchase price as
defined in the agreement
On January 9, 2002, the Company entered into a merger
agreement under which the Company, subject to shareholder
approval, agreed to merge with RAE Systems, Inc. If the
Company's shareholders do not approve of the merger, the
Company shall pay RAE Systems, Inc., within five days of the
date of the termination of the merger agreement, an amount
equal to $250,000.
If the merger is consummated, with a change in control of
the Company as a result, the two officers of the Company
will each be entitled to receive a severance package
consisting of a cash payment of $150,000; accelerated
vesting on outstanding options to purchase 67,020 shares of
common stock (after taking into account the 5.67 to 1
reverse split) at an exercise price of $0.737 per share, and
a cash bonus of an amount necessary to exercised price of
$0.737 per share, and a cash bonus of an amount necessary to
exercise the options; and warrants to purchase up to 176,366
shares of common stock (after taking into account the 5.67
to 1 reverse split) at an exercise price of $1.134 per
share.
13. VALUATION AND Additions
QUALIFYING Balance Charged to Balance
ACCOUNTS as of Beginning Costs and as of End
Description of Period Expenses Deductions of Period
------------------------------------------------------------------------------
2001:
Allowance for
doubtful accounts $ 433,000 $ 2,600 $ (321,500) $ 114,100
2000:
Allowance for
doubtful accounts $ 83,600 $ 504,900 $ (155,500) $ 433,000
1999:
Allowance for
doubtful accounts $ 31,200 $ 52,400 $ - $ 83,600
==============================================================================
F-29
NETTAXI.COM
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
14. QUARTERLY The summarized quarterly financial data presented below
INFORMATION reflect all adjustments, which, in the opinion of
(UNAUDITED) management, are of a normal and recurring nature necessary
to present fairly the results of operations for the periods
presented. Effective July 7, 2001, the Company terminated
its significant co-hosting customer contracts and
effectively ceased all revenue generating activities.
Year Ended First Second Third Fourth
December 31, Quarter Quarter Quarter Quarter 2001
- -----------------------------------------------------------------------------------------
Net revenues $ 1,192,500 $ 869,700 $ 7,000 $ 300 $ 2,069,500
Gross profit
(loss) (761,300) (1,282,200) (145,400) 300 (2,188,600)
Operating (loss) (2,533,800) (4,408,100) (914,500) (1,130,100) (8,986,500)
Net (loss) (2,361,300) (4,286,200) (826,500) (1,076,400) (8,550,400)
Basic and diluted
(loss) per
common share (0.05) (0.10) (0.02) (0.02) (0.20)
=========================================================================================
Year Ended First Second Third Fourth
December 31, Quarter Quarter Quarter Quarter 2000
- -----------------------------------------------------------------------------------------
Net revenues $ 2,764,900 $ 2,984,900 $ 2,254,000 $ 1,414,600 $ 9,418,400
Gross profit
(loss) 991,400 1,063,100 600,600 (544,400) 2,110,700
Operating (loss) (2,696,500) (2,605,400) (2,360,500) (2,705,500) (10,367,900)
Net (loss) (2,769,000) (6,461,600) (2,132,200) (2,988,600) (14,351,400)
Basic and diluted
(loss) per
common share (0.09) (0.15) (0.05) (0.07) (0.36)
=========================================================================================
F-30
RAE SYSTEMS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
RAE SYSTEMS, INC.
================================================================================
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2001 AND 2000
RAE Systems, Inc.
Contents
================================================================================
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-31
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets F-32
Consolidated statements of income F-33
Consolidated statements of shareholders' equity F-34
Consolidated statements of cash flows F-35
Notes to consolidated financial statements F-36 - F-58
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders
RAE Systems, Inc. and subsidiaries
We have audited the accompanying consolidated balance sheets of RAE Systems,
Inc. and subsidiaries (the Company) as of December 31, 2001 and 2000, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of RAE Systems, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States of America.
/s/ BDO Seidman, LLP
San Jose, California
January 25, 2002
F-31
RAE SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
========================================================================================================
December 31, 2001 2000
- ---------------------------------------------------------------------------- ------------ ------------
ASSETS (Notes 2 and 6)
CURRENT ASSETS:
Cash and cash equivalents (Note 10) $ 3,742,600 $ 3,004,100
Restricted cash (Notes 6 and 10) 3,000,000 2,000,000
Accounts receivable, net of allowance for doubtful accounts
of $200,000 and $75,000, respectively (Notes 10 and 14) 2,398,100 2,270,200
Inventories (Note 3) 3,715,800 3,228,600
Prepaid expenses and other current assets 267,100 269,400
Deferred income taxes (Note 7) 500,800 292,000
- ---------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT ASSETS 13,624,400 11,064,300
- ---------------------------------------------------------------------------- ------------ ------------
PROPERTY AND EQUIPMENT, net (Notes 4 and 10) 1,202,300 1,578,600
DEPOSITS AND PRE-MERGER COSTS (Note 2) 216,500 63,500
- ---------------------------------------------------------------------------- ------------ ------------
$15,043,200 $12,706,400
========================================================================================================
LIABILITIES, CONVERTIBLE REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable and lines of credit (Note 6) $ 4,425,800 $ 2,088,300
Accounts payable 842,200 971,300
Accrued expenses (Note 5) 1,234,800 1,522,100
Income taxes payable 1,670,200 1,625,400
Current portion of deferred revenue 248,900 233,700
Current portion of capital lease obligations (Note 8) 96,600 94,600
- ---------------------------------------------------------------------------- ------------ ------------
TOTAL CURRENT LIABILITIES 8,518,500 6,535,400
- ---------------------------------------------------------------------------- ------------ ------------
DEFERRED REVENUE, NET OF CURRENT PORTION 149,900 383,400
CAPITAL LEASES OBLIGATIONS, net of current portion (Note 8) 51,300 127,100
DEFERRED INCOME TAXES (Note 7) 443,100 308,600
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 1,141,900 1,097,100
- ---------------------------------------------------------------------------- ------------ ------------
TOTAL LIABILITIES 10,304,700 8,451,600
- ---------------------------------------------------------------------------- ------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 8, 9, and 13)
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Note 11):
Series A, $0.01 par value; 700,000 shares authorized, issued,
and outstanding at each date, $.40 per share redemption value 300,000 300,000
Series B, $0.01 par value; 1,000,000 shares authorized, issued,
and outstanding at each date, $1.00 per share redemption value 1,000,000 1,000,000
- ---------------------------------------------------------------------------- ------------ ------------
1,300,000 1,300,000
- ---------------------------------------------------------------------------- ------------ ------------
SHAREHOLDERS' EQUITY (Notes 2, 11 and 12):
Common stock, $0.01 par value; 40,000,000 shares authorized;
16,492,960 and 15,115,461 shares issued and outstanding
at December 31, 2001 and 2000, respectively 164,900 151,100
Additional paid-in capital 1,161,600 262,900
Deferred compensation (717,800) (152,200)
Retained Earnings 2,829,800 2,693,000
- ---------------------------------------------------------------------------- ------------ ------------
TOTAL SHAREHOLDERS' EQUITY 3,438,500 2,954,800
- ---------------------------------------------------------------------------- ------------ ------------
$15,043,200 $12,706,400
========================================================================================================
See accompanying notes to consolidated financial statements.
F-32
RAE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
=================================================================================================
Years ended December 31, 2001 2000 1999
- ------------------------------------------------------- ------------ ------------ ------------
NET SALES (Notes 10 and 14) $19,013,600 $18,194,100 $10,832,900
COST OF SALES 7,041,900 6,579,000 3,130,300
- ------------------------------------------------------- ------------ ------------ ------------
GROSS MARGIN 11,971,700 11,615,100 7,702,600
- ------------------------------------------------------- ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 4,486,700 4,622,000 3,360,400
Research and development 3,289,300 3,184,300 1,365,700
General and administrative 3,055,900 2,236,000 1,800,500
Legal fees and settlement costs (Note 13) 1,237,000 291,100 353,700
- ------------------------------------------------------- ------------ ------------ ------------
TOTAL OPERATING EXPENSES 12,068,900 10,333,400 6,880,300
- ------------------------------------------------------- ------------ ------------ ------------
OPERATING INCOME (LOSS) (97,200) 1,281,700 822,300
- ------------------------------------------------------- ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income 136,100 197,600 106,800
Interest expense (294,200) (272,400) (87,500)
Other, net (9,000) 13,000 (5,400)
Minority interest in loss of consolidated subsidiary 455,200 27,900 --
- ------------------------------------------------------- ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 190,900 1,247,800 836,200
INCOME TAXES (Note 7) 54,100 418,600 330,300
- ------------------------------------------------------- ------------ ------------ ------------
NET INCOME $ 136,800 $ 829,200 $ 505,900
======================================================= ============ ============ ============
BASIC EARNINGS PER COMMON SHARE $ 0.01 $ 0.06 $ 0.03
======================================================= ============ ============ ============
DILUTED EARNINGS PER COMMON SHARE $ 0.01 $ 0.04 $ 0.02
======================================================= ============ ============ ============
Weighted-average common shares outstanding 15,596,922 14,763,896 14,575,856
Convertible Preferred Stock 6,800,000 6,800,000 6,800,000
Stock options 1,538,063 1,317,514 1,225,556
- ------------------------------------------------------- ------------ ------------ ------------
Diluted weighted-average common shares
outstanding 23,934,985 22,881,410 22,601,412
======================================================= ============ ============ ============
See accompanying notes to consolidated financial statements.
F-33
RAE SYSTEMS, INC.
Consolidated Statements of Shareholders' Equity
(Notes 12 and 15)
=================================================================================================================================
Common Stock Additional
------------------- Paid-in Deferred Retained
Shares Amount Capital Compensation Earnings Total
- ------------------------------------------------------ ----------- -------- ---------- -------------- ---------- ----------
BALANCES, January 1, 1999 14,498,932 145,000 -- -- 1,357,900 1,502,900
Issuance of common stock due to exercise
of stock options 124,489 1,200 1,900 -- -- 3,100
Deferred compensation related to stock options granted -- -- 75,500 (75,500) -- --
Amortization of deferred compensation -- -- -- 22,100 -- 22,100
Net income -- -- -- -- 505,900 505,900
- ------------------------------------------------------ ----------- -------- ---------- -------------- ---------- ----------
BALANCES, December 31, 1999 14,623,421 146,200 77,400 (53,400) 1,863,800 2,034,000
Issuance of common stock due to exercise
of stock options 492,040 4,900 24,600 -- -- 29,500
Deferred compensation related to stock options granted -- -- 160,900 (160,900) -- --
Amortization of deferred compensation -- -- -- 62,100 -- 62,100
Net income -- -- -- -- 829,200 829,200
- ------------------------------------------------------ ----------- -------- ---------- -------------- ---------- ----------
BALANCES, December 31, 2000 15,115,461 151,100 262,900 (152,200) 2,693,000 2,954,800
Issuance of common stock due to exercise
of stock options 677,499 6,800 52,500 -- -- 59,300
Issuance of common stock due to exercise of
stock purchase rights 700,000 7,000 80,500 -- -- 87,500
Deferred compensation related to stock options granted -- -- 765,700 (765,700) -- --
Amortization of deferred compensation -- -- -- 200,100 -- 200,100
Net income -- -- -- -- 136,800 136,800
- ------------------------------------------------------ ----------- -------- ---------- -------------- ---------- ----------
BALANCES, December 31, 2001 $16,492,960 $164,900 $1,161,600 $ (717,800) $2,829,800 $3,438,500
====================================================== =========== ======== ========== ============== ========== ==========
See accompanying notes to consolidated financial statements.
F-34
RAE SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 15)
==============================================================================================
Years Ended December 31, 2001 2000 1999
- ---------------------------------------------------- ------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 136,800 $ 829,200 $ 505,900
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 447,800 429,700 250,600
Provision for doubtful accounts 125,000 41,000 --
Amortization of deferred compensation 200,100 62,100 22,100
Minority interest in loss of consolidated
subsidiary (455,200) (27,900) --
Deferred income taxes (74,300) (427,000) (335,200)
Changes in operating assets and liabilities:
Accounts receivable (252,900) (932,400) (538,900)
Inventories (487,200) (125,800) (1,568,700)
Prepaid expenses and other current assets 2,300 (91,700) 41,300
Accounts payable (129,100) 133,800 467,300
Accrued expenses (287,300) 704,100 149,200
Income taxes payable 44,800 967,700 484,700
Deferred revenue (218,300) 612,600 (13,600)
- ---------------------------------------------------- ------------ ------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (947,500) 2,175,400 (535,300)
- ---------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (59,500) (600,700) (1,012,000)
Deposits and pre-merger costs (153,000) (1,400) (51,000)
- ---------------------------------------------------- ------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (212,500) (602,100) (1,063,000)
- ---------------------------------------------------- ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the sale of common stock 146,800 29,500 3,100
Payment on capital lease obligation (85,800) (47,700) --
Proceeds from note payable and lines of credit 10,925,800 8,113,300 4,690,100
Payments on notes payable and lines of credit (8,588,300) (8,730,000) (2,235,100)
Increase in restricted cash (1,000,000) (2,000,000) --
Proceeds from minority shareholder investment 500,000 1,125,000 --
- ---------------------------------------------------- ------------ ------------ ------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 1,898,500 (1,509,900) 2,458,100
- ---------------------------------------------------- ------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 738,500 63,400 859,800
CASH AND CASH EQUIVALENTS, beginning of year 3,004,100 2,940,700 2,080,900
- ---------------------------------------------------- ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 3,742,600 $ 3,004,100 $ 2,940,700
==================================================== ============ ============ ============
See accompanying notes to consolidated financial statements.
F-35
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
1. SUMMARY OF The Company
SIGNIFICANT
ACCOUNTING RAE Systems, Inc. ("the Company") was incorporated in March
POLICIES 1991 in California and has its headquarters in Sunnyvale,
California. The Company develops, manufactures, and
distributes technologically advanced, single and multiple
sensor atmosphere monitors, photo-ionization detectors, gas
detection tube sampling pumps, and wireless connected gas
detector and security monitoring systems. See Note 2.
Principles of Consolidation
The accompanying consolidated financial statements include
the accounts of RAE Systems, Inc. and its subsidiaries as
described below. The Company owns 100% of RAE Systems-Asia,
Ltd. ("RAE-Asia"). RAE-Asia is a Hong Kong corporation which
distributes the Company's products in Asia and the Pacific
Rim. RAE-Asia owns (i) 100% of WARAE Science Instruments,
Ltd. ("WARAE") and (ii) 47% of Renex Technology Ltd
("Renex"). WARAE, which is incorporated in the People's
Republic of China, manufactures the Company's products for
final assembly in the United States.
Renex, a Hong Kong corporation, performs a portion of the
Company's research and development activities relating
principally to the development of a wireless platform for
detection and monitoring. The Company exercises managerial
control over the day-to-day operations of Renex and holds
approximately 90% of the voting shares, accordingly, Renex
has been consolidated in the accompanying financial
statements. As of December 31, 2001, Renex was in the
process of completing a $3 million private placement of its
capital stock and, in connection therewith, had received a
$500,000 deposit from one of its minority shareholders. This
amount is included in minority interest in consolidated
subsidiary in the consolidated balance sheet as of December
31, 2001.
All intercompany accounts and transactions have been
eliminated in the consolidated financial statements.
F-36
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United
States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual
results could differ materially from those estimates.
Revenue Recognition
The Company recognizes sales upon shipment provided no
significant obligations remain and collectibility is
probable. A provision for estimated product returns is
established at the time of sale based upon historical return
rates adjusted for current economic conditions. Service
revenues relating to maintenance services performed by the
Company, which represent less than 5% of net revenues in
each of 2001, 2000, and 1999, are recognized as earned based
upon contract terms, which is generally ratably over the
term of service. Net sales includes amounts billed to
customers in sales transactions for shipping and handling,
as prescribed by the Emerging Issues Task Force Issue No.
00-10 Accounting for Shipping and Handling Fees and Costs.
Shipping fees represent approximately 1% of net revenues in
each of 2001, 2000, and 1999.
In December 1999, the Staff of the Securities and Exchange
Commission (SEC) issued its Staff Accounting Bulletin (SAB)
No. 101, Revenue Recognition. SAB No. 101 provides the
Staff's views in applying generally accepted accounting
principles to selected revenue recognition issues. SAB No.
101 is effective for the fourth fiscal quarter of fiscal
years beginning after December 15, 1999. The Company
believes that its current revenue recognition policies
comply with the provisions of SAB No. 101.
Cash and Cash Equivalents
The Company considers all highly liquid investments having
original maturities of 90 days or less to be cash
equivalents.
F-37
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Accounts Receivable and Allowance for Doubtful Accounts
The Company grants credit to its customers after undertaking
an investigation of credit risk for all significant amounts.
An allowance for doubtful accounts is provided for estimated
credit losses at a level deemed appropriate to adequately
provide for known and inherent risks related to such
amounts. The allowance is based on reviews of loss,
adjustments history, current economic conditions and other
factors that deserve recognition in estimating potential
losses. While management uses the best information available
in making its determination, the ultimate recovery of
recorded accounts receivable is also dependent upon future
economic and other conditions that may be beyond
management's control.
Inventories
Inventories are stated at the lower of cost (moving weighted
average method) or market.
Property and Equipment
Property and equipment are stated at cost net of accumulated
depreciation. Depreciation is provided using the
straight-line method over the related estimated useful
lives, as follows:
---------------------------------------------------------------------------
Equipment 5 to 7 years
Furniture and fixtures 5 to 7 years
Computers equipment 5 years
Automobiles 5 years
Building improvements Lesser of 5 years or the remaining lease term
---------------------------------------------------------------------------
Warranty Repairs
The Company generally provides a one to three year limited
warranty on its products and establishes a provision for the
estimated costs of fulfilling these warranty obligations at
the time the related revenue is recorded. Historically,
warranty costs have been insignificant.
F-38
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Research and Development
Research and development costs incurred by the Company are
expensed as incurred.
Advertising Costs
The Company expenses the costs of advertising as incurred.
During the years ended December 31, 2001, 2000 and 1999,
advertising expense was 235,000, $271,600 and $159,300,
respectively.
Income Taxes
The Company reports income taxes in accordance with SFAS No.
109, Accounting for Income Taxes, which requires an asset
and liability approach. This approach results in the
recognition of deferred tax assets (future tax benefits) and
liabilities for the expected future tax consequences of
temporary differences between the book carrying amounts and
the tax basis of assets and liabilities. The deferred tax
assets and liabilities represent the future tax return
consequences of those differences, which will either be
deductible or taxable when the assets and liabilities are
recovered or settled. Future tax benefits pertaining to
unrealized foreign losses have been fully offset by a 100%
valuation allowance as management is unable to determine
that it is more likely than not that this deferred tax asset
will be realized.
Long-Lived Assets
The Company periodically reviews its long-lived assets for
impairment. When events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable,
the Company writes the asset down to its estimated fair
value.
Fair Values of Financial Instruments
The following methods and assumptions were used by the
Company in estimating its fair value disclosures for
financial instruments:
- Cash and Cash Equivalents, Accounts Receivable and
Accounts Payable: The carrying amount reported in the
balance sheet for these items approximates fair value
because of the short maturity of these instruments.
F-39
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
- Line of Credits:
The Company's borrowings under its lines of credit are
made at floating rates based on the prime-lending rate
and the carrying value of such borrowings approximates
fair value.
As of December 31, 2001 and 2000, the fair values of the
Company's financial instruments approximate their historical
carrying amounts.
Translation of Foreign Currencies
The balance sheets and income statements of the Company's
foreign subsidiaries are translated at current exchange
rates in effect at the end of the fiscal period. Translation
gains and losses are immaterial to the consolidated
financial statements. Foreign currency transaction gains and
losses are included in consolidated net income.
Stock-Based Incentive Programs
Statement of Financial Accounting Standards (SFAS) No. 123,
Accounting for Stock-Based Compensation, encourages entities
to recognize compensation costs for stock-based employee
compensation plans using the fair value based method of
accounting defined in SFAS No. 123, but allows for the
continued use of the intrinsic value based method of
accounting prescribed by Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees.
The Company continues to use the accounting prescribed by
APB Opinion No. 25, and as such, is required to disclose pro
forma net income and earnings per share as if the fair value
based method of accounting had been applied.
In March 2000, the Financial Accounting Standards Board
(FASB) issued Interpretation (Interpretation) No. 44,
Accounting for Certain Transactions involving Stock
Compensation, an Interpretation of APB Opinion No. 25, which
became effective July 1, 2000. Interpretation No. 44
clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining
whether a stock compensation plan qualifies as a
noncompensatory plan, (c) the accounting consequences of
various modifications to the terms of a previously fixed
stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business
combination. Adoption of the provisions of the
Interpretation had no significant impact on the Company's
consolidated financial statements.
F-40
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Earnings Per Share
The Company applies the provisions of SFAS No. 128, Earnings
Per Share. SFAS No. 128 provides for the calculation of
basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing
income available to common shareholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflect the potential dilution of
securities that could share in the earnings of an entity.
Anti-dilution provisions of SFAS No.128 require consistency
between diluted per-common-share amounts and basic per-
common share amounts in loss periods.
New Accounting Pronouncements
In June 2000, SFAS No. 133 was amended by SFAS No. 138,
Accounting for Certain Derivative Instruments and Hedging
Activities, which amended or modified certain issues
discussed in SFAS No. 133. SFAS No. 138 is effective for all
fiscal years beginning after June 15, 2000. SFAS No. 133 and
SFAS No. 138 establish accounting and reporting standards
requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured
at its fair value. The statements also require that changes
in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.
At this time, the Company does not engage in derivative
instruments or hedging activities. Accordingly, there was no
impact on the Company's financial statements from the
adoption of SFAS No. 133 and SFAS No. 138.
In June 2001, the Financial Accounting Standards Board
finalized SFAS No. 141 (SFAS No. 141), Business
Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 requires the use of the
purchase method of accounting and prohibits the use of the
pooling-of-interests method of accounting for business
combinations initiated after June 30, 2001. SFAS No. 141
also requires that the Company recognize acquired intangible
asserts apart from goodwill if the acquired intangible
assets meet certain criteria. SFA No. 141 applies to all
business combinations initiated after June 30, 2001 and for
purchase business combinations completed on or after July 1,
2001. It also requires, upon adoption of SFAS No. 142, that
the Company reclassify the carrying amounts of intangible
assets and goodwill base on the criteria in SFAS No. 141.
F-41
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
SFAS No. 142 requires, among other things, that companies no
longer amortize goodwill, but instead test goodwill for
impairment at least annually. In addition, SFAS No. 142
requires that the Company identify reporting units for the
purposes of assessing potential future impairments of
goodwill, reassess the useful lives of other existing
recognized intangible assets, and cease amortization of
intangible assets with an indefinite useful life. An
intangible asset with an indefinite useful life should be
tested for impairment in accordance with the guidance in
SFAS No. 142. SFAS No. 142 is required to be applied in
fiscal years beginning after December 15, 2001 to all
goodwill and other intangible assets recognized at that
date, regardless of when those assets were initially
recognized. SFAS No. 142 requires the Company to complete a
transitional goodwill impairment test six months from the
date of adoption. The Company is also required to reassess
the useful lives of other intangible assets within the first
interim quarter after adoption of SFAS No. 142. At this
time, the Company does not expect that the implementation of
SFAS No. 142 will have any material impact on its financial
position, results of operations or cash flows.
In August 2001, the FASB issued SFAS No. 143 (SFAS 143)
Accounting for Obligations Associated with the Retirement of
Long-Lived Assets. SFAS 143 addresses financial accounting
and reporting for the retirement obligation of an asset.
SFAS 143 states that companies should recognize the asset
retirement cost, at its fair value, as part of the cost
asset and classify the accrued amount as a liability in the
balance sheet. The asset retirement liability is then
accreted to the ultimate payout as interest expense. The
initial measurement of the liability would be subsequently
updated for revised estimates of the discounted cash
outflows. SFAS 143 will be effective for fiscal years
beginning after June 15, 2002. At this time, the Company
does not expect that the implementation of SFAS 143 will
have any material impact on its financial position, results
of operations, or cash flows.
In October 2001, the FASB issued SFAS No. 144 (SFAS 144)
Accounting for the Impairment or Disposal of Long-Lived
Assets. SFAS 144 supersedes the SFAS No. 121 by requiring
that one accounting model to be used for long-lived assets
to be disposed of by sale, whether previously held and used
or newly acquired, and by broadening the presentation of
discontinued operation to include more disposal
transactions. SFAS 144 will be effective for fiscal years
beginning after December 15, 2001. At this time, the Company
does not expect that the implementation of SFAS 144 will
have any material impact on its financial position, results
of operations, or cash flows.
F-42
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
2. CURRENT On January 9, 2002 RAE Systems, Inc. executed a definitive
DEVELOPMENTS merger agreement, which contemplates the merger of RAES
Acquisition Corporation, a California corporation and
wholly-owned subsidiary of Nettaxi.com, a Nevada
corporation, with RAE Systems, Inc. Under the terms of the
merger agreement, RAE Systems, Inc. shareholders will
receive approximately 80% of the outstanding shares of the
combined entity. Subject to the approval of shareholders,
Nettaxi.com shares will be reverse split at the ratio of
5.67 to 1 prior to the closing of the merger. The management
and Board of Directors of Nettaxi.com will resign at the
closing of the merger and be replaced with the Board of
Directors and management team of RAE Systems, Inc. The
transaction, which is expected to be tax-free to
shareholders of both companies for U.S. Federal income tax
purposes, is subject to the approval of each party's
shareholders. Upon completion of the merger, the new company
will be known as RAE Systems, Inc., a publicly traded
company. See Note 13.
Included in other assets and pre-merger costs as of December
31, 2001 is $110,000 of capitalized merger costs incurred
relating to the contemplated merger with Nettaxi.com. These
costs will be expensed in 2002 to the extent that such costs
exceed the cash balance of Nettaxi.com or in the event the
merger is not consummated.
3. INVENTORIES Inventories consist of the following:
December 31, 2001 2000
==================================================
Raw Materials $1,685,100 $1,679,100
Work-in-Progress 1,786,600 1,244,000
Finished Goods 244,100 305,500
-------------------------- ---------- ----------
$3,715,800 $3,228,600
==================================================
F-43
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
4. PROPERTY AND A summary of property and equipment follows:
EQUIPMENT
December 31, 2001 2000
------------------------------------ ---------- ----------
Equipment $1,236,400 $1,436,400
Furniture and fixtures 367,700 354,800
Computer equipment 902,000 679,200
Automobiles 123,900 89,300
Building improvements 45,200 44,000
------------------------------------ ---------- ----------
2,675,200 2,603,700
Less accumulated depreciation 1,472,900 1,025,100
------------------------------------ ---------- ----------
$1,202,300 $1,578,600
============================================================
As of December 31, 2001 and 2000, the cost of the Company's
equipment under capital leases, which consist principally of
computer equipment, totaled $281,900 and $253,500, with
accumulated amortization of $121,000 and $35,500 in 2001 and
2000, respectively.
5. ACCRUED Accrued expenses as of December 31, 2001 and 2000 are
EXPENSES summarized as follows:
December 31, 2001 2000
---------------------------------------------------- ---------- ----------
ACCRUED EXPENSES:
Compensation and related benefits $462,800 $317,100
Accrued commissions 45,400 390,400
Legal and professional (Note 13) 389,600 598,100
Warranty reserve 111,200 104,300
Other 225,800 112,200
---------------------------------------------------- ---------- ----------
$1,234,800 $1,522,100
=============================================================================
F-44
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
6. NOTES The bank lines of credit and notes payable as of December
PAYABLE 31, 2001 and 2000 are as follows:
December 31, 2001 2000
------------------------- ---------- ----------
HSBC Bank USA $2,000,000 $1,000,000
General Bank 1,425,800 --
Note Payable 1,000,000 --
Comerica Bank -- 1,088,300
------------------------- ---------- ----------
$4,425,800 $2,088,300
=================================================
The Company has a line of credit arrangement with HSBC Bank
USA to borrow up to $3,000,000 for working capital purposes
at an interest rate of 0.5% below the prime rate (4.25% at
December 31, 2001). Borrowings under this line are
separately due and payable every 90 days. Under this
arrangement, which expires October 31, 2002 and is subject
to annual review by the bank, the Company is required to
maintain a letter of credit as collateral for the loan.
Additionally, the Company's wholly-owned subsidiary,
RAE-Asia, has been required to place $3,000,000 in a
restricted cash account to collateralize the letter of
credit. As of December 31, 2001 and 2000, there was
$2,000,000 and $1,000,000, respectively, outstanding under
this line of credit.
During 2001, the Company entered into line of credit
agreement, expiring in April 2002, with General Bank to
borrow up to $2,000,000 for working capital purposes at an
interest rate of prime plus 0.25% (5% at December 31, 2001).
The borrowings are limited to 85% of aggregate eligible
accounts receivable plus 30% of aggregate eligible
inventory, with any outstanding borrowings collateralized by
substantially all of the business assets, including the
assignment of patents. The Company is required to maintain
certain financial ratios and covenants as defined in the
agreement. As of December 31, 2001, the Company was in
compliance with all of these financial covenants. As of
December 31, 2001, there was $1,425,800 outstanding under
this line of credit.
F-45
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
During 2001, RAE-Asia entered into a one-year loan agreement
with Ascendant Incorporated, an unrelated Hong Kong
corporation, to borrow $1,000,000 at an interest rate of
9.5%. This loan, which is due on July 25, 2002, was obtained
in order to satisfy the restricted cash requirement noted
above. The loan agreement specifies that the interest rate
will increase to 12% should the loan repayment be delayed
beyond the scheduled due date. As of December 31, 2001,
there was $1,000,000 outstanding under this note payable.
During 2000, the Company had a line of credit from Comerica
Bank for $2,000,000, collateralized by all business assets,
with an interest rate at the bank's prime rate plus 0.25%.
As of December 31, 2000, $1,088,300 was outstanding under
this line of credit. The Company repaid all amounts owed and
terminated the agreement in April 2001.
7. INCOME TAXES Income tax expense (benefit) comprises:
2001 CURRENT DEFERRED TOTAL
------------------ -------- ---------- ---------
FEDERAL $ 89,200 $ 4,200 $ 93,400
STATE 800 (78,500) (77,700)
FOREIGN 38,400 -- 38,400
------------------ -------- ---------- ---------
$128,400 $ (74,300) $ 54,100
===================================================
2000 Current Deferred Total
------------------ -------- ---------- ---------
Federal $771,100 $(392,800) $378,300
State 800 (34,200) (33,400)
Foreign 73,700 -- 73,700
------------------ -------- ---------- ---------
$845,600 $(427,000) $418,600
===================================================
1999 Current Deferred Total
------------------ -------- ---------- ---------
Federal $664,700 $(340,700) $324,000
State 800 5,500 6,300
Foreign -- -- --
------------------ -------- ---------- ---------
$665,500 $(335,200) $330,300
===================================================
F-46
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
The following summarizes the differences between the income
tax expense and the amount computed by applying the Federal
income tax rate in 2001, 2000, and 1999 to income before
income taxes:
Years ending December 31, 2001 2000 1999
- ----------------------------- ---------- ---------- ---------
Federal income tax at
statutory rate $ 64,900 $ 424,200 $284,300
Nondeductible expenses 90,100 44,900 24,800
Effects of foreign operations 50,400 95,600 86,000
Federal tax credits (101,000) (124,000) (69,000)
State income taxes, net
of federal benefit 21,300 64,400 42,400
State tax credits (71,600) (86,500) (38,200)
- ----------------------------- ---------- ---------- ---------
$ 54,100 $ 418,600 $330,300
================================================================
Deferred tax assets and liabilities as of December 31, 2001 and 2000 were
comprised of the following:
December 31, 2001 2000
------------------------------------- ---------- ----------
DEFERRED TAX ASSETS:
Allowance for doubtful accounts $ 82,100 $ 20,500
Inventories 119,000 106,500
Accrued vacation 95,900 65,300
Other accruals 105,700 7,400
Deferred revenue 157,300 243,700
Unrealized foreign losses 177,400 11,500
State income taxes and credits 63,000 70,400
------------------------------------- ---------- ----------
800,400 525,300
Valuation allowance (177,400) (11,500)
------------------------------------- ---------- ----------
Total deferred tax assets $ 623,000 $ 513,800
=============================================================
DEFERRED TAX LIABILITIES:
Fixed assets $(121,900) $ (87,000)
Foreign earnings (443,400) (443,400)
------------------------------------- ---------- ----------
Total deferred tax liabilities (565,300) (530,400)
------------------------------------- ---------- ----------
Net deferred tax assets (liabilities) $ 57,700 $ (16,600)
=============================================================
F-47
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
U.S. income taxes were provided for deferred taxes on
undistributed earnings of non-U.S. subsidiaries that are not
expected to be permanently reinvested in such companies.
There has been no provision for U.S. income taxes for the
remaining undistributed earnings of approximately $335,000
as of December 31, 2001, because the Company intends to
reinvest these earnings indefinitely in operations outside
the United States. If such earnings were distributed,
additional U.S. taxes of approximately $133,000 would accrue
after utilization of U.S. tax credits. Any foreign
withholding taxes incurred as a result of the remittance of
all previously undistributed earnings would be creditable
against U.S. tax liabilities.
As of December 31, 2001, the Company had research credit
carryforwards of approximately $0 and $80,000 for Federal
and California income tax purposes, respectively. The
California credits are not subject to expiration under
current California tax law.
8. OPERATING AND The Company and its subsidiaries lease certain
CAPITAL LEASES manufacturing, warehousing, and other facilities under
operating leases expiring in various years through 2006. The
leases generally provide for the lessee to pay taxes,
maintenance, insurance, and certain other operating costs of
the leased property. Total rent expense for the years ended
December 31, 2001, 2000, and 1999 was $660,700, $631,700,
and $465,100, respectively. The Company also leases certain
computer equipment under capital leases expiring in various
years through 2004. As of December 31, 2001, future minimum
rental payments required under operating and capital leases
are as follows:
Operating Capital
Year Ending December 31, Leases Leases
----------------------------------------------- ---------- --------
2002 $ 667,400 $110,000
2003 680,300 53,400
2004 334,200 1,200
2005 79,700 --
2006 57,000 --
----------------------------------------------- ---------- --------
Total minimum lease payments $1,818,600 164,600
==========
Less: Amount representing interest at 10 to 19% 16,700
--------
Present value of minimum lease payments 147,900
Less: Current portion 96,600
----------------------------------------------- --------
Long-term capitalized lease obligation $ 51,300
=====================================================================
F-48
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
In addition to the leases above, the Company's 47%-owned
subsidiary, Renex, entered into an operating lease agreement
in June 2001 for an office facility in Hong Kong which is
scheduled for completion in July 2002. The lease required a
$33,600 deposit upon execution, is subject to annual renewal
by the landlord and is guaranteed by the Company. Monthly
rent is estimated to be $5,200.
9. EMPLOYEE BENEFIT The Company has a defined contribution 401(k) plan (the
PLANS Plan) for its domestic employees. The Plan is available to
all employees who have reached the age of twenty-one and who
have completed three months of service with the Company.
Under the Plan, eligible employees may defer a portion of
their salaries as their contributions to the Plan. The
Company's contributions are determined based on 25% of the
first 6% of the covered employee's salary, subject to
statutory maximum levels. Contributions to the Plan totaled
$47,700, $31,400 and $26,000, for the years ended December
31, 2001, 2000, and 1999, respectively.
10. CONCENTRATIONS Financial instruments, which potentially subject the Company
to concentration of credit risk, consist principally of cash
and cash equivalents and trade receivables. The Company
places its domestic and foreign cash and cash equivalents
with high quality financial institutions. Domestic cash
balances are insured by the Federal Deposit Insurance
Company up to $100,000 per bank. As of December 31, 2001 and
2000, the Company had deposits at several domestic financial
institutions in excess of insured limits of $978,100 and
$697,300, respectively. Also, the Company had deposits at
several foreign financial institutions, which are not
insured, that aggregated $5,177,500 and $4,091,900 as of
December 31, 2001 and 2000, respectively.
F-49
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
A significant portion of the Company's revenues and accounts
receivable are derived from sales made to unrelated
distributors located primarily throughout North America, as
well as Europe and Asia. The following table presents
certain data by geographic area:
December 31, 2001 2000 1999
-------------------------------- ----------- ----------- -----------
NET SALES TO EXTERNAL CUSTOMERS:
United States $13,085,800 $14,036,900 $ 7,232,600
-------------------------------- ----------- ----------- -----------
International:
Asia 2,329,900 1,203,500 824,600
Europe 1,796,400 1,739,100 1,273,600
Canada and Mexico 1,013,500 878,800 593,800
All other 788,000 335,800 908,300
-------------------------------- ----------- ----------- -----------
5,927,800 4,157,200 3,600,300
----------- ----------- -----------
Total consolidated net sales to
external customers $19,013,600 $18,194,100 $10,832,900
=======================================================================
PROPERTY AND EQUIPMENT, NET:
United States $ 732,000 $ 1,098,500
Asia 470,300 480,100
-------------------------------- ----------- -----------
Total property and
equipment, net $ 1,202,300 $ 1,578,600
==========================================================
For the year ended December 31, 2000, the Company had sales
to one customer who comprised 21% of consolidated sales. No
individual customer comprised more than 10% of consolidated
net sales in 2001 and 1999. The Company believes any risk of
accounting loss is significantly reduced due to the
diversity in customers, geographic sales areas and the
Company extending credit based on established limits or
terms. The Company performs credit evaluations of its
customers' financial condition whenever necessary, and
generally does not require cash collateral.
F-50
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
11. CONVERTIBLE The rights, preferences, and privileges of the holders of
REDEEMABLE preferred stock are as follows:
PREFERRED
STOCK - The holders of the Series A and B preferred stock are
entitled to annual noncumulative dividends, if and when
declared by the Board of Directors, of $0.024 per share
and $0.06 per share, respectively. No dividends have
been declared or paid on the preferred stock since
inception of the Company.
- Shares of preferred stock are convertible to common
stock at any time at the rate of four shares of common
stock for each share of preferred stock. In addition,
the preferred stock may be automatically converted into
common stock: 1) ninety days after the end of the
fiscal year in which the Company achieves $3 million in
net book value, as reflected in the audited financial
statements for that fiscal year; 2) in the event of a
"Qualified Public Offering", as defined; or 3) upon the
written consent of the holders of a majority of the
then outstanding shares of preferred stock. The holders
of preferred stock are also protected by certain
anti-dilution provisions.
- The holders of each share of convertible preferred
stock have the right to one vote for each full share of
common stock on an "as if converted" basis.
Redemption Features
Shares of Series A and B preferred stock are redeemable at
any time at the option of the Company at $0.40 and $1.00 per
share, respectively, plus declared but unpaid dividends
("Redemption Proceeds"). Additionally, the terms of the
preferred stock provide that in the event of any liquidation
of the Company, which includes a change in control whereby
the shareholders of the Company own less than 50% of the
equity securities of the surviving corporation, the
preferred shareholders shall be entitled to receive their
Redemption Proceeds prior to and in preference to any
distributions to the holders of common stock. As the
preferred stock has conditions for redemption that are not
solely within the control of the Company, such preferred
stock has been classified outside of shareholders' equity.
F-51
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
12. CAPITAL STOCK Common Stock
In December 1998, the Company's Board of Directors approved
a 4-for-1 split of its common stock. All shares and per
share amounts, as well as options and corresponding exercise
prices and fair market values, have been restated in the
accompanying consolidated financial statements to reflect
the stock split.
Stock Option Plan
In August 1993, the Company's Board of Directors adopted the
1993 Stock Option Plan (the Plan). The Plan authorizes the
grant of options to purchase shares of common stock to
employees, directors, and consultants of the Company and its
affiliates. The options are a combination of both incentive
and non-statutory options.
Incentive options may be granted at not less than 100% of
the fair market value per share, and non-statutory options
may be granted at not less than 85% of the fair market value
per share at the date of grant as determined by the Board of
Directors or committee thereof, except for options granted
to a person owning greater than 10% of the outstanding
stock, for which the exercise price must not be less than
110% of the fair market value. Options granted under the
Plan generally vest 25 % after one year with the remainder
vesting monthly over the following three years and are
exercisable over ten years.
The Company has reserved 4,000,000 shares of common stock
for issuance under the Plan. As of December 31, 2001, the
Company had 867,540 shares of common stock available for
future grant under the Plan.
F-52
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
A summary of the status of the Company's stock option plan
as of December 31, 2001, 2000, and 1999, and changes during
the years then ended is presented in the following table:
Options Outstanding
----------------------------------------------------------------------
December 31, 2001 December 31, 2000 December 31, 1999
---------------------- ---------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- ---------- ---------- ---------- ----------
Beginning 1,804,000 $ 0.100 1,972,500 $ 0.085 1,135,580 $ 0.032
Granted 955,500 $ 0.125 998,500 $ 0.125 1,552,500 $ 0.125
Exercised (677,499) $ 0.088 (492,040) $ 0.060 (124,489) $ 0.025
Forfeited (342,501) $ 0.113 (674,960) $ 0.124 (591,091) $ 0.099
---------- ---------- ----------
Ending 1,739,500 $ 0.116 1,804,000 $ 0.100 1,972,500 $ 0.085
========= ========== ========== ========== ========== ========== ==========
Exercisable at
year-end 585,166 782,794 622,409
========== ========== =========
Weighted-average fair value of options granted during the period:
$ 0.900 $ 0.280 $ 0.130
========== ========== ==========
The following table summarizes information about stock
options outstanding as of December 31, 2001:
Options Outstanding
-------------------------------------------------
Options Exercisable
----------------------
Weighted-
Average Weighted- Weighted-
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Prices Exercisable Prices
---------- ----------- ------------ ---------- ----------- ---------
0.01-0.10 160,000 5.41 $ 0.025 160,000 $ 0.025
0.11-0.20 1,579,500 8.14 $ 0.125 425,166 $ 0.125
---------- ----------- ------------ ----------
1,739,500 $ 0.116 585,166 $ 0.098
=========== ========== ========== ==========
F-53
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
The Company accounts for its stock-based awards using the
intrinsic value method in accordance with APB No. 25.
Accordingly, compensation cost has been recognized for stock
options in the accompanying financial statements if, on the
date of grant, the current market value of the underlying
common stock exceeded the exercise price of the stock
options at the date of grant.
During the years ended December 31, 2001, 2000, and 1999,
deferred compensation of approximately $765,700 $160,900,
and $75,500, respectively, was recorded for options granted
at an exercise price below the estimated fair market value
of the underlying common stock, of which approximately
$200,100, $62,100, and $22,100 was amortized to compensation
expense in 2001, 2000 and 1999, respectively. The remaining
deferred compensation will be amortized over the balance of
the four-year vesting period of stock options.
In December 2001, the Company issued 700,000 non-plan stock
purchase rights, which vested and were exercised
immediately, to an officer, a director and a consultant at
an exercise price of $0.125 per share. The fair value of the
underlying shares of common stock on the date of issuance
was approximately $700,000. Under the terms of the stock
purchase agreement with these individuals, the shares were
placed in escrow and are earned contingent upon the
consummation of the merger discussed in Note 2. As such, the
Company may be required to repay the $87,500 in proceeds
received during 2001 should the contemplated merger not
occur. Additionally, if and when the merger occurs, the
Company will be required to record a significant non-cash
charge to compensation expense based on the intrinsic or
fair value of the equity instrument, as applicable, on the
effective date of the merger. See Note 13.
SFAS No. 123, Accounting for Stock-Based Compensation,
requires the Company to provide pro forma information
regarding net income and earnings per share as if
compensation cost for the Company's stock option plan had
been determined in accordance with the fair value based
method prescribed in SFAS No.123. The Company estimates the
fair value of stock options at the grant date by using the
Black-Scholes option valuation model with the following
weighted average assumptions used for grants in 2001, 2000,
and 1999: dividend yield of 0%; expected volatility of 0.1%;
risk-free interest rates of 5.01%, 5.7%, and 5.63%; and
expected lives of five years for all plan options.
F-54
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Under the accounting provisions of SFAS No. 123, the
Company's net income and the basic and diluted net income
per common share would have been adjusted to the pro forma
amounts below:
2001 2000 1999
--------------------------- -------- -------- --------
Net income:
As reported $136,800 $829,200 $505,900
Pro forma $124,900 $819,500 $497,400
Basic earnings per share:
As reported $ 0.01 $ 0.06 $ 0.03
Pro forma $ 0.01 $ 0.06 $ 0.03
Diluted earnings per share:
As reported $ 0.01 $ 0.04 $ 0.02
Pro forma $ 0.01 $ 0.04 $ 0.02
13. COMMITMENTS AND Royalty
CONTINGENCIES
In 1998, Dragerwerk Aktiengesellschaft ("Dragerwerk"), a
German corporation, filed a patent infringement lawsuit
against the Company. In November 2000, as part of the
settlement of this dispute, the Company entered into
non-exclusive, non-sublicensable right and license agreement
with Dragerwerk for the use of U.S. Patent No. 5,654,498
issued August 5, 1997 and entitled "Device for the Selective
Detection of a Component in a Gas Mixture." As part of the
settlement agreement, the Company was required to pay
$73,200 in back royalties relating to net sales of certain
of the Company's products during the period from January 1,
1998 through December 31, 2000. Additionally, commencing
January 1, 2001 and continuing through December 31, 2009,
the Company is required to pay Dragerwerk a royalty equal to
7.5% of net sales of certain licensed products manufactured
or imported for sale by or for the Company in the United
States. During the years ended December 31, 2001 and 2000,
the Company incurred royalty expense of $47,900 and $73,200,
respectively.
F-55
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Litigation
In November 2000, Gastec Corporation ("Gastec"), a Japanese
corporation, filed a lawsuit against the Company claiming,
among other things, trade dress infringement regarding
certain product model numbers and advertising conflicts. In
October 2001, the Company entered into a settlement
agreement with Gastec which provided for the phase out of
these conflicting product model numbers and certain
promotional programs by the Company. In addition, the
Company was required to make a cash payment to Gastec upon
the execution of the settlement agreement with a final cash
payment due in September 2002. This obligation due in
September 2002 is included in accrued expenses as of
December 31, 2001.
During the fourth quarter of 2001, the Company was named as
a defendant in a product liability lawsuit. This matter is
in the early stages of investigation and the Company intends
to defend itself vigorously. The Company has referred this
matter to its insurance carrier under the product liability
provisions of the Company's insurance policy. The Company is
unable, however, to predict the outcome of this matter, or
reasonably estimate a range of possible loss given the
current status of the litigation.
The Company is engaged in various ongoing legal proceedings
incidental to its normal business activities. The Company is
unable, however, to predict the outcome of these matters, or
reasonably estimate a range of possible losses given the
current status of the litigation.
Funding Commitment
RAE Asia has entered into a shareholder agreement among the
shareholders of its 47%-owned subsidiary in Hong Kong,
Renex, whereby the shareholders agree to fund Renex's
operations as necessary when requested to do so by its Board
of Directors. The Company has committed to provide $500,000
in cash funding to Renex during 2002.
F-56
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
Employment Agreements
The Company has entered into employment agreements with two
key executives. The employment agreements provide for
minimum combined aggregate annual base compensation of
$305,000 for fiscal year 2001 and options to purchase
300,000 shares of Company stock, vesting over four years.
The employment agreements are "at will" and can be
terminated with or without cause or with or without notice
at any time by either the employee or the Company.
Stock Purchase Rights
In connection with the pending merger (Note 2), in December
2001, the Company issued 700,000 fully vested stock purchase
rights, which vested and were exercised immediately, to an
officer, a director and a consultant at an exercise price of
$0.125 per share. The fair value of the underlying shares of
common stock on the date of issuance was approximately
$700,000. The shares have been placed in escrow and are
earned contingent upon the consummation of the merger. If
and when the merger is consummated, the Company will be
required to record a significant non-cash charge to
compensation expense based on the intrinsic or fair value of
the equity instrument, as applicable, on the effective date
of the merger.
Consulting Arrangement
In connection with the pending merger described in Note 2,
the Company engaged Harter Financial to provide certain
advisory services. If and when the merger is consummated,
the Company will be required to make a $415,000 cash payment
to Harter Financial, which will be reflected in the
financial statements as a reduction to additional paid-in
capital.
Capital Lease Agreement
As of January 25, 2002, the Company is in the process of
finalizing a five- year capital lease agreement for a
customer management database system. Aggregate payments to
be made over the lease term are estimated to be $333,000.
F-57
RAE Systems, Inc.
Notes to Consolidated Financial Statements
================================================================================
14. RELATED PARTY During 2001, the Company recognized $11,400 in sales revenue
TRANSACTIONS from a Company wholly-owned by an officer shareholder of the
Company. Included in accounts receivable as of December 31,
2001 is $3,000 due from this related customer.
15. SUPPLEMENTAL The following is supplemental disclosure for the statements
DISCLOSURE OF of cash flows.
CASH FLOW
INFORMATION
Years Ended December 31, 2001 2000 1999
------------------------------- -------- -------- -------
CASH PAID:
Income taxes $ 83,600 $ 2,100 $ --
Interest $284,800 $272,400 $87,500
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Capital leases entered into
for equipment $ 12,000 $265,000 $ --
============================================================
F-58
APPENDIX A
MERGER AGREEMENT
AND
PLAN OF REORGANIZATION
This MERGER AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") dated as
of January 9, 2002, is entered into by and among RAE Systems Inc., a California
corporation ("RAE Systems"), Nettaxi.com, a Nevada corporation ("Nettaxi") and
RAES Acquisition Corporation, a California corporation ("RSAC").
RECITALS
A. Nettaxi is in the business of providing Internet services, including
a search engine, Web hosting services and an Internet portal and RSAC is a
wholly-owned subsidiary of Nettaxi.
B. RAE Systems is in the business of developing gas detection monitors
And tubes.
C. Nettaxi desires to acquire ownership of RAE Systems by causing RAE
Systems to merge with RSAC under the terms and conditions set forth below.
D. For United States federal income tax purposes, the merger is
intended to qualify as a reorganization under the provisions of section 368(a)
of the United States Internal Revenue Code of 1986, as amended (the "Code").
AGREEMENT
NOW, THEREFORE, in consideration of the terms, conditions, agreements and
covenants contained herein, and in reliance upon the representations and
warranties contained in this Agreement, the parties hereto agree as follows:
1. MERGER OF RAE SYSTEMS WITH RSAC
1.1 DELAWARE REINCORPORATION AND REVERSE STOCK SPLIT: On or before the
Closing Date (as defined herein), Nettaxi shall be merged with and into a
Delaware corporation, with the Delaware corporation as the surviving
corporation, and which Delaware corporation shall have a certificate of
incorporation and bylaws in the forms attached hereto as Exhibit A and Exhibit
--------- -------
B, respectively. Prior to the Effective Time (as defined herein), Nettaxi shall
- -
undergo a reverse stock split such that each five and sixty-seven one hundredths
(5.67) shares of Common Stock of Nettaxi is reverse-split into one (1) share of
Common Stock of Nettaxi.
1.2 MERGER AND SURVIVAL OF RAE SYSTEMS: In the manner and subject to
the terms and conditions set forth herein, RAE Systems shall be merged with and
into RSAC (the "Merger") in accordance with the provisions of, and with the
effect provided in the Delaware General Corporation Law and California General
Corporation Law (the "CGCL"). RAE Systems shall be the surviving corporation
after the Merger with RSAC and shall continue to exist as a wholly-owned
subsidiary of Nettaxi, created and governed by the laws of the State of
California.
1.3 EFFECTIVE TIME: If all of the conditions precedent to the
obligations of each of the parties hereto as hereinafter set forth shall have
been satisfied or shall have been waived, the Merger shall become effective (the
time of such effectiveness is referred to herein as the "Effective Time") upon
the filing of an agreement of merger, in the form set forth as Exhibit C hereto
---------
(the "Agreement of Merger"), with the Secretary of State of California. This
shall take place on the Closing Date (as defined herein).
1.4 CONSIDERATION FOR THE MERGER.
(a) SHARES OF THE CONSTITUENT AND SURVIVING CORPORATIONS: At the
Effective Time, each share of RAE Systems Common Stock and each share of RAE
Systems Preferred Stock issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares (as hereinafter defined)) shall, by
virtue of the Merger and without any action on the part of Nettaxi, RAE Systems
or RSAC or any holder thereof, be converted into and be exchangeable for the
right to receive that number of fully paid and non-assessable shares of Nettaxi
Common Stock ("Nettaxi Merger Stock") equal to the Exchange Ratio.
For purposes of this Agreement, the "Exchange Ratio" shall be determined in
accordance with the following formula:
E = VPS (RAE)
---------
VPS (Nettaxi)
where E = the Exchange Ratio
VPS (RAE) = 1.48113
VPS (Nettaxi) = (NV+100,000+T)/7,605,747
NV = Nettaxi's net cash plus cash equivalents minus (i) an
amount equal to all payables and other fixed
obligations (excluding the four (4) liabilities
described in Nettaxi Disclosure Schedule 4.24) and (ii)
an appropriate reserve for payables and any other
contingencies (including a reasonable reserve to be
mutually agreed upon for the two (2) litigation matters
described in Section 2.2(c)) (collectively, "Net
Cash"), each calculated as of the Effective Time;
provided, however, that if such amount is greater than
$7,500,000, NV shall nonetheless equal $7,500,000.
T = The dollar amount, if any, by which the tax reserve
relating to transactions involving RAE System's foreign
subsidiaries in the audited financial statements of RAE
Systems exceeds $2,000,000 for taxes payable relative
to foreign income for the years 1998 through 2001.
A-2
For illustrative purposes only, if NV was $7,500,000 and T was 0 at the
Effective Time,
E = VPS (RAE)
---------
VPS (Nettaxi)
= 1.48113
-------------------------
(7,500,000 + 100,000+0)/7,605,747
= 1.48225
and whereby there would be 43,091,835 shares of Nettaxi common stock
outstanding immediately after the Effective Time, with
7,605,747 shares of Nettaxi common stock, constituting 17.65% of the
outstanding shares of Nettaxi common stock at the Effective Time,
being held by the Nettaxi shareholders that were Nettaxi
shareholders immediately prior to the Effective Time;
34,526,088 shares of Nettaxi common stock, constituting 80.12% of the
outstanding shares of Nettaxi common stock at the Effective Time,
being held by shareholders of RAE Systems immediately prior to
the Effective Time ("RAE Systems Ownership"); and
960,000 shares of Nettaxi common stock, constituting 2.23% of the
outstanding shares of Nettaxi common stock at the Effective Time,
being held by BayTree Capital Associates ("Baytree") ("Baytree
Ownership").
Notwithstanding the foregoing, if RAE Systems or Nettaxi shall issue any shares
of its capital stock between the date hereof and the Effective Time (other than
shares of RAE Systems common stock issued with respect to the conversion of its
preferred stock), the Exchange Ratio shall be adjusted such that the Nettaxi
Ownership, the RAE Systems Ownership and the Baytree Ownership are 17.65%,
80.12% and 2.23%, as adjusted appropriately if NV is less than $7,500,000.
Subject to Section 1.6 hereof, all of such shares of RAE Systems Common Stock or
Preferred Stock, when so converted, shall otherwise no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have any
rights with respect thereto, except the right to receive Nettaxi Merger Stock as
set forth above and any cash in lieu of fractional shares of RAE Common Stock or
Preferred Stock if required to be issued or paid in consideration therefor upon
the surrender of such certificate in accordance with Section 1.4(e) hereof and
pursuant to Section 407 of the CGCL.
A-3
(b) OPTIONS OF THE CONSTITUENT AND SURVIVING CORPORATIONS: At the
Effective Time, each option to purchase RAE Systems Common Stock ("RAE Systems
Option"), whether vested or unvested, will be assumed by Nettaxi. Each such
option so assumed by Nettaxi under this Agreement shall continue to have, and be
subject to, the same terms and conditions set forth in the RAE Systems Inc. 1993
Stock Plan (the "RAE Systems Stock Plan") and any other document governing such
option immediately prior to the Effective Time, except that (a) such option will
be exercisable for that number of whole shares of Nettaxi Common Stock equal to
the product of the number of shares of RAE Systems Common Stock that were
issuable upon exercise of such option immediately prior to the Effective Time
multiplied by the Exchange Ratio and rounded down to the nearest whole number of
shares of Nettaxi Common Stock, (b) the per share exercise price for the shares
of Nettaxi Common Stock issuable upon exercise of such assumed option will be
equal to the quotient determined by dividing the exercise price per share of RAE
Systems Common Stock at which such option was exercisable immediately prior to
the Effective Time by the Exchange Ratio, rounded up to the nearest whole tenth
of a cent and (c) any restriction on the exercisability of such RAE System
Option shall continue in full force and effect, and the term, exercisability,
vesting schedule and other provisions of such RAE System Option shall remain
unchanged. Consistent with the terms of the RAE Systems Stock Plan and the
documents governing the outstanding options, the Merger will not terminate any
of the outstanding options under the RAE Systems Stock Plan or accelerate the
exercisability or vesting of such options or the shares of Nettaxi Common Stock
which will be subject to those options upon Nettaxi's assumption of the options
in the Merger. It is the intention of the parties that the options so assumed
by Nettaxi following the Effective Time will remain incentive stock options as
defined in Section 422 of the Code to the extent such options qualified as
incentive stock options prior to the Effective Time, and the parties hereto
shall use their commercially reasonable efforts to carry out such intention.
(c) NO FRACTIONAL SHARES OR OPTIONS: Unless otherwise required by
Section 407 of the CGCL, no fractional shares of Nettaxi Common Stock shall be
issued in connection with the Merger, and no certificate or scrip for any such
fractional shares shall be issued.
(d) NO LIABILITY: Notwithstanding anything to the contrary in this
Section 1.4, none of the parties hereto nor any exchange agent with respect to
the Nettaxi Merger Stock shall be liable to any person for any amount properly
paid to a public official pursuant to any applicable abandoned property, escheat
or similar law.
(e) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES: No dividends
or other distributions with respect to Nettaxi Common Stock with a record date
after the Effective Time will be paid to the holder of any unsurrendered
certificate with respect to the shares of RAE Common Stock represented thereby
until the holder of record of such certificate shall surrender such certificate.
Subject to applicable law, following surrender of any such certificate, there
shall be paid to the record holder of the certificates representing whole shares
A-4
of Nettaxi Common Stock issued in exchange therefor, without interest at the
time of such surrender, the amount of any such dividends or other distributions
with a record date after the Effective Time theretofore payable (but for the
provisions of this Section 1.4(e)) with respect to such shares of Nettaxi Common
Stock.
1.5 EFFECT OF MERGER: As of the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of the CGCL, and each of the following shall occur:
(a) The separate existence and corporate organization of RSAC
shall cease and RAE Systems as the corporation surviving the Merger with RSAC
(the "Surviving Corporation"), shall possess the rights, privileges, powers and
franchises, and be subject to all the restrictions, disabilities and duties of,
the constituent corporations in the manner specified in the CGCL.
(b) Except as otherwise agreed by the parties, the Certificate of
Incorporation of Nettaxi, as in effect immediately prior to the Effective Time,
shall continue in effect without change or amendment, except that Article I of
the Certificate of Incorporation of Nettaxi shall be amended to state that the
name of the corporation is RAE Systems Inc.
(c) The By-laws of Nettaxi and RAE Systems, as in effect
immediately prior to the Effective Time, shall continue in effect without change
or amendment.
(d) The directors and officers of the RAE Systems immediately
after the Closing Date shall be the respective individuals who are directors and
officers of RAE Systems immediately prior to the Effective Time. The current
officers and directors of Nettaxi shall resign and the officers and directors of
RAE Systems shall assume the officer and director positions in Nettaxi.
1.6 DISSENTING SHARES: Notwithstanding anything to the contrary
contained in this Agreement, any shares of capital stock of RAE Systems that, as
of the Effective Time, are or may become "dissenting shares" under the CGCL
("Dissenting Shares"), shall not be converted into or represent the right to
receive Nettaxi Merger Stock in accordance with this Agreement, and the holder
or holders of such shares shall be entitled only to such rights as may be
granted to such holder or holders under the CGCL law; provided, however, that if
the status of any such shares as "dissenting shares" shall not be perfected, or
if any such shares shall lose their status as "dissenting shares," then, as of
the later of the Effective Time or the time of the failure to perfect such
status or the loss of such status, such shares shall automatically be converted
into and shall represent only the right to receive (upon the surrender of the
certificate or certificates representing such shares) Nettaxi Common Stock in
accordance with this Agreement.
1.7 FURTHER ACTION: If, at any time after the Effective Time, any
further action is determined by Nettaxi to be necessary or desirable to carry
A-5
out the purposes of this Agreement, the officers and directors of Nettaxi shall
be fully authorized (in the name of RAE Systems) to take such action.
2. CONDUCT OF BUSINESS PENDING CLOSING; SHAREHOLDER APPROVAL. RAE Systems,
Nettaxi and RSAC covenant that between the date hereof and the Closing Date (as
hereinafter defined):
2.1 ACCESS/DUE DILIGENCE: Each party shall afford the others and their
respective legal counsel, accountants and other representatives full access,
during normal business hours, throughout the period prior to the Closing Date,
(a) to all of the books, contracts and records of such party and shall furnish
the other party during such period with all information concerning such party
that the other parties may reasonably request and (b) to its business premises
and properties in order to conduct inspections at the requesting party's
expense.
2.2 CONDUCT OF BUSINESS: During the period from the date hereof to the
Closing Date, the business of RAE Systems shall be operated by RAE Systems in
the usual and ordinary course of such business and in material compliance with
the terms of this Agreement. Without limiting the generality of the foregoing:
(a) RAE Systems shall use its commercially reasonable efforts,
consistent with past practice and policy, to: (i) keep available the services of
the present employees and agents of RAE Systems; (ii) complete or maintain all
existing material arrangements including but not limited to filings, licenses,
affiliate arrangements, leases and other arrangements referred to in Sections
3.6(a) and 3.6(b) in full force and effect in accordance with their existing
terms; (iii) maintain the integrity of all confidential information of RAE
Systems; (iv) comply in all material respects with all applicable laws; and (v)
preserve the goodwill of RAE Systems' business and contractual relationships
with, suppliers, customers and others having business relations with RAE
Systems; and
(b) Neither Nettaxi nor RAE Systems shall: (i) sell or transfer
any of its assets or property; (ii) shall make any distribution, whether by
dividend or otherwise, to any of its shareholders or employees except for
compensation to employees and payments to associated companies for goods and
services, in the usual and ordinary course of business; (iii) declare any
dividend or other distribution; (iv) redeem or otherwise acquire any shares of
its capital stock or other securities; (v) incur any material debt or other
obligation; or (vi) agree to do any of the foregoing.
(c) Notwithstanding the provisions of Section 2.2(b) above,
immediately prior to the Closing, except for that certain shareholder litigation
Lahey v. Nettaxi et. al, case no. SACV 01-459 AHS, US Dist Ct, Central District,
(which Nettaxi's directors and officers insurance policy is covering) and that
certain litigation Envision Media, Inc. v. Nettaxi et. al, case no. CV 14 1408
Superior Court of California, Santa Cruz County, Nettaxi will be a clean public
shell with no liabilities of any kind whatsoever, whether accrued, contingent,
absolute, determined, determinable or otherwise, other than the foregoing
A-6
litigation or liabilities reducing Net Cash, and prior to the Closing of the
Merger, all business, assets (other than cash and cash equivalents), and
material liabilities would be transferred out of Nettaxi or satisfied to the
commercially reasonable satisfaction of RAE Systems. Such transfer or
satisfaction of material liabilities includes, but is not limited to, the
termination of the agreements, plans, programs and arrangements listed on
Schedule 2.2(c).
2.3 EXCLUSIVITY: During the period from the date of this Agreement
until the earlier of termination of this Agreement or the Effective Time, each
party agrees that without the other's prior written consent, it shall not and it
shall not allow anyone acting on their behalf to, (A) directly or indirectly
merge or consolidate with another entity or engage in a sale of substantial
assets, sale of shares of capital stock (including without limitation by way of
a tender offer, but excluding sales pursuant to any exercise of outstanding
stock options) or similar transaction other than the transactions contemplated
or expressly permitted by this Agreement and (B) solicit, entertain or encourage
inquiries or proposals, or enter into, pursue, continue or carry on any
discussions or negotiations, with respect to any transaction of the types
referred to in clause (A) above with any person or entity. Each party signing
this Agreement will immediately cease and cause to be terminated any existing
activities, discussions or negotiations with any parties conducted heretofore in
respect of any such transaction. Notwithstanding the foregoing, if an offer
unsolicited by a party hereto ("Recipient"), their investment bankers or their
representatives, agents or others is received prior to the Effective Time,
consistent with the fiduciary obligation that Recipient may then owe to its
shareholders, but only to the extent required by applicable law, such offer may
be communicated to the Board of Directors of Recipient and approved by the Board
consistent with their fiduciary duty, provided, however, that Recipient will
not, except as required by applicable law, provide information to such offeror;
and provided, however, that should the foregoing occur and the Merger is not
consummated, Recipient shall reimburse the other party (RAE Systems or Nettaxi,
as the case may be) in an amount equal to Two Hundred and Fifty Thousand Dollars
($250,000). Recipient will promptly (within 24 hours of receipt of any proposal
or request for non-public information in connection with a potential proposal)
advise such other party of the identity of such offeror, communicate to it the
terms of any proposal which it may receive and deliver to it a copy of any such
offer or request in writing.
2.4 FILING OF CURRENT REPORTS ON FORM 8-K: Promptly after execution of
this Agreement, Nettaxi shall file a Current Report on Form 8-K with the
Commission to report the proposed Merger and the terms thereof.
2.5 VOTING AGREEMENTS: The shareholders of Nettaxi identified in
Schedule 2.5 hereto shall execute agreements in the form of Exhibit D-1 hereto
- ------------ -----------
to vote their shares of Nettaxi stock at any meeting of the shareholders of
Nettaxi, at which this Agreement is placed before the shareholders for approval,
in favor of the Agreement and in favor of the consummation of the Merger.
2.6 VOTING AGREEMENTS: The shareholders of RAE Systems identified in
Schedule 2.6 hereto shall execute agreements in the form of Exhibit D-2 hereto
- ------------ -----------
A-7
to vote their shares of RAE Systems stock at any meeting of the shareholders of
RAE Systems, at which this Agreement is placed before the shareholders for
approval, in favor of the Agreement and in favor of the consummation of the
Merger.
3. REPRESENTATIONS AND WARRANTIES OF RAE SYSTEMS. Except as set forth
in the RAE Systems Disclosure Schedule, RAE Systems represents and warrants, as
of the date hereof and as of the Closing, to Nettaxi and RSCA as follows, with
the knowledge and understanding that Nettaxi and RSCA are relying materially
upon such representations and warranties (The term "Knowledge" as used in this
Agreement with respect to a party's awareness of the presence or absence of a
fact, event or condition shall mean (a) actual knowledge, or (b) the knowledge
that would be obtained if such party conducted itself faithfully and exercised a
sound discretion in the management of his own affairs):
3.1 ORGANIZATION AND STANDING: RAE Systems is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California. RAE Systems has all requisite corporate power to carry on its
business as it is now being conducted and is duly qualified to do business as a
foreign corporation and is in good standing in each jurisdiction where such
qualification is necessary under applicable law except where the failure to
qualify (individually or in the aggregate) will not have any material adverse
effect on the business or prospects of RAE Systems. The copies of the Articles
of Incorporation, By-laws and minute books of RAE Systems, as amended to date
and delivered to Nettaxi, are true and complete copies of these documents as now
in effect. The minute books of RAE Systems are accurate in all material
respects.
3.2 CAPITALIZATION:
(a) RAE Systems is authorized to issue 40,000,000 shares of Common
Stock, par value $.01 per share, of which 16,492,960 are issued and outstanding,
700,000 shares of Series A Preferred Stock, all of which are issued and
outstanding, and 1,000,000 shares of Series B Preferred Stock, all of which are
issued and outstanding. The record holders thereof are as set forth in the RAE
Systems Disclosure Schedule. All of such shares of capital stock that are issued
and outstanding are duly authorized, validly issued and outstanding, fully paid
and nonassessable, and were not issued in violation of the preemptive rights of
any person. Other than as set forth in the RAE Systems Disclosure Schedule,
there are no subscriptions, warrants, rights or calls or other commitments or
agreements to which RAE Systems is a party or by which it is bound, calling for
any issuance, transfer, sale or other disposition of any class of securities of
RAE Systems. Other than as set forth in the RAE Systems Disclosure Schedule,
there are no outstanding securities convertible into or exchangeable for Common
Stock or any other securities of RAE Systems. The RAE Systems Disclosure
Schedule sets forth the following information with respect to each RAE Systems
Option outstanding as of the date of this Agreement: (i) the name of the
optionee; and (ii) the number of shares of RAE Systems Common Stock subject to
such RAE Systems Option. RAE Systems has delivered to Nettaxi accurate and
complete copies of all stock option plans pursuant to which the RAE Systems has
ever granted stock options. There are no outstanding warrants to purchase RAE
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Systems Common Stock and, except as set forth in this Section 3.2(a), there are
no other securities convertible or exchangeable into RAE Common Stock or other
securities.
(b) All outstanding shares of RAE Systems Common Stock and all
outstanding RAE Systems Options and other securities have been issued and
granted in compliance with (i) all applicable securities laws and other
applicable legal requirements, and (ii) all material requirements set forth in
applicable Contracts (as hereinafter defined).
3.3 SUBSIDIARIES: RAE Systems owns no subsidiaries nor does it own or
have an interest in any other corporation, partnership, joint venture or other
entity.
3.4 AUTHORITY: RAE Systems has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been, or will have
been by the Closing, duly authorized by all necessary corporate action on the
part of RAE Systems subject to the approval of the Merger by RAE Systems'
shareholders. The Board of Directors of RAE Systems has unanimously (i)
approved this Agreement and the Merger, (ii) determined that in its opinion the
Merger is in the best interests of the shareholders of RAE Systems, and is on
terms that are fair to such shareholders (iii) recommended that the shareholders
of RAE Systems approve this Agreement and the Merger. This Agreement
constitutes, and all other agreements contemplated hereby will constitute, when
executed and delivered by RAE Systems in accordance herewith, the valid and
binding obligations of RAE Systems, enforceable in accordance with their
respective terms, except as such enforceability may be limited by (i)
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to creditors' rights generally, and (ii) general principles of equity.
3.5 ASSETS: RAE Systems has good and marketable title to or licenses to
all of the assets and properties, which it purports to own as reflected on the
most recent balance sheet comprising a portion of the RAE Systems Financial
Statements (as hereinafter defined), or thereafter acquired, or are otherwise
useful in the business of RAE Systems. No material portion of the assets of RAE
Systems is subject to any governmental decree or order to be sold or is being
condemned, expropriated or otherwise taken by any public authority with or
without payment of compensation therefore, nor, to its Knowledge, has any such
condemnation, expropriation or taking been proposed. None of the material assets
of RAE Systems is subject to any restriction that would prevent continuation of
the use currently made thereof or materially adversely affect the value thereof.
3.6 CONTRACTS AND OTHER COMMITMENTS:
(a) Schedule 3.6 of the RAE Systems Disclosure Schedule consists
------------
of a true and complete list of all material contracts, agreements, commitments
and other instruments (whether oral or written) ("Contracts") to which RAE
Systems is a party that involve a receipt or an expenditure by RAE Systems its
subsidiaries or require the performance of services or delivery of goods to, by,
through, on behalf of or for the benefit of RAE Systems, which in each case,
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relates to a contract, agreement, commitment or instrument that requires
payments or receipts in excess of $50,000 per year.
(b) All of the Contracts described in Schedule 3.6 of the RAE
------------
Systems Disclosure Schedule are valid and binding upon RAE Systems and, to its
Knowledge, the other parties thereto and are in full force and effect and
enforceable, in accordance with their respective terms, and neither RAE Systems,
nor to its Knowledge, any other party to any Contract has breached any provision
of, and no event has occurred which, with the lapse of time or action by a third
party, could result in a material default under, the terms thereof. To the
Knowledge of RAE Systems, no shareholder of RAE Systems has received any payment
from any contracting party in connection with or as an inducement for causing
RAE Systems to enter into any Contract described on Schedule 3.6.
------------
(c) RAE Systems has delivered or made available to Nettaxi and to
Silicon Valley Law Group an accurate and complete copy of each of the Contracts.
3.7 LITIGATION: There is no claim, action, proceeding, or investigation
pending or, to its Knowledge, threatened against or affecting RAE Systems before
or by any court, arbitrator or governmental agency or authority which, in its
reasonable judgment, could have a material adverse effect on the operations or
prospects of RAE Systems. There is no strike or unresolved labor dispute
relating to RAE Systems' employees who, in its judgment, could have a material
adverse effect on the business or prospects of RAE Systems. There are no
decrees, injunctions or orders of any court, governmental department, agency or
arbitration outstanding against RAE Systems or asserted against RAE Systems that
has not been paid.
3.8 TAXES: For purposes of this Agreement, (A) "Tax" (and, with
correlative meaning, Taxes") shall mean any federal, state, local or foreign
income, alternative or add- on minimum, business, employment, franchise,
occupancy, payroll, property, sales, transfer, use, value added, withholding or
other tax, levy, impost, fee, imposition, assessment or similar charge together
with any related addition to tax, interest, penalty or fine thereon; and (B)
"Returns" shall mean all returns (including, without limitation, information
returns and other material information), reports and forms relating to Taxes.
(a) RAE Systems has duly filed all Returns required to be filed by
it other than Returns (individually and in the aggregate) where the failure to
file would have no material adverse effect on the business or prospects of RAE
Systems. All such Returns were, when filed, and to the Knowledge of RAE Systems
are, accurate and complete in all material respects and were prepared in
conformity with applicable laws and regulations. RAE Systems has paid or will
pay in full or has adequately reserved against all Taxes otherwise assessed
against it through the Closing Date.
(b) RAE Systems is not a party to any pending action or proceeding
by any governmental authority for the assessment of any Tax, and, to the
Knowledge of RAE Systems, no claim for assessment or collection of any Tax
related to RAE Systems has been asserted against RAE Systems that has not been
paid. There are no Tax liens upon the assets of RAE Systems (other than liens
for taxes not yet due and payable).
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(c) Neither RAE Systems nor any of its subsidiaries has taken,
agreed to take or will take any action that would reasonably be expected to
prevent the Merger from constituting a reorganization within the meaning of
Section 368(a) of the Code.
3.9 COMPLIANCE WITH LAWS AND REGULATIONS: RAE Systems has complied and
is presently complying, in all material respects, with all laws, rules,
regulations, orders and requirements (federal, state local and foreign)
applicable to it in all jurisdictions where the business of RAE Systems is
conducted or to which RAE Systems is subject, including, without limitation, all
applicable federal and state securities laws, civil rights and equal opportunity
employment laws and regulations, and all federal, antitrust, antimonopoly and
fair trade practice laws, except where the failure to comply could not
reasonably be expected to have a material adverse effect on RAE Systems. There
has been no assertion by any party that RAE Systems is in violation in any
material respect of any such laws, rules, regulations, orders, restrictions or
requirements with respect to its operations and no notice in that regard has
been received by RAE Systems.
3.10 ENVIRONMENTAL MATTERS:
(a) Except as to the extent that it has not had, and could not
reasonably be expected to have, individually or in the aggregate, a material
adverse affect on RAE Systems or its subsidiaries, (i) neither RAE Systems nor
its subsidiaries are in violation of any Environmental Law applicable to either
of them; (ii) none of the properties currently or formerly owned, leased or
operated by RAE Systems or its subsidiaries (including, without limitation,
soils and surfaces and ground waters) are contaminated with any Hazardous
Substance; (iii) neither RAE Systems nor its subsidiaries are liable for any
off-site contamination by Hazardous Substances; (iv) neither RAE Systems nor its
subsidiaries are liable for any violation under any Environmental Law
(including, without limitation, pending or threatened liens); (v) RAE Systems
and its subsidiaries have all material permits, licenses and other
authorizations required under any Environmental Law ("Environmental Permits");
and (vi) neither the execution of this Agreement nor the consummation of the
transactions contemplated herein will require any investigation, remediation or
other action with respect to Hazardous Substances, or any notice to or consent
of governmental entities or third parties, pursuant to any applicable
Environmental Law or Environmental Permit.
(b) For purposes of this Agreement, "Environmental Law" means any
federal, state, local or foreign laws and any enforceable judicial or
administrative interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to: (A) releases or threatened
releases of Hazardous Substances or materials containing Hazardous Substances;
(B) the manufacture, handling, transport, use, treatment, storage or disposal of
Hazardous Substances or materials containing Hazardous Substances; or (C)
otherwise relating to pollution or protection of the environment, health, safety
or natural resources.
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(c) For purposes of this Agreement, "Hazardous Substances" means: (i)
those substances defined in or regulated under the following federal statutes
and their state counterparts and all regulations thereunder: the Hazardous
Materials Transportation Act, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response, Compensation and Liability Act, the Clean
Water Act, the Safe Drinking Water Act, the Atomic Energy Act, the Federal
Insecticide, Fungicide, and Rodenticide Act and the Clean Air Act; (ii)
petroleum and petroleum products, including crude oil and any fractions thereof;
(iii) natural gas, synthetic gas, and any mixtures thereof; (iv) polychlorinated
biphenyls, asbestos and radon; (v) any other contaminant; and (vi) any
substance, material or waste regulated by any federal, state, local or foreign
Governmental Entity pursuant to any Environmental Law.
3.11 NO CONFLICTS: The making and performance of this Agreement will
not (i) conflict with or violate the Articles of Incorporation or the By-laws of
RAE Systems, (ii) violate any laws, ordinances, rules, or regulations, or any
order, writ, injunction or decree to which RAE Systems is a party or by which
RAE Systems or any of its businesses, or operations may be bound or affected or
(iii) result in any breach or termination of, or constitute a default under, or
constitute an event which, with notice or lapse of time, or both, would become a
default under, or result in the creation of any encumbrance upon any material
asset of RAE Systems under, or create any rights of termination, cancellation or
acceleration in any person under, any Contract, except in the case of (ii) or
(iii) for any such conflicts, violations, defaults, terminations, cancellations
or accelerations which would not have a material adverse effect on RAE Systems.
3.12 EMPLOYEES: RAE Systems has no employees that are represented by
any labor union or collective bargaining unit.
3.13 FINANCIAL STATEMENTS: The RAE Systems Disclosure Schedule contains
an unaudited balance sheet of RAE Systems as of December 31, 2000 and related
unaudited income statement of RAE Systems for the year then ended and an
unaudited balance sheet dated as of September 30, 2001 and related unaudited
income statement of RAE Systems for the period ended at such date (collectively
the "Financial Statements"). The Financial Statements present fairly, in all
material respects, the financial position on the dates thereof and results of
operations of RAE Systems for the periods indicated, prepared in accordance with
generally accepted accounting principles ("GAAP") consistently applied. There
are no assets of RAE Systems, the value of which is materially overstated in
said balance sheets.
3.14 ABSENCE OF CERTAIN CHANGES OR EVENTS: Since September 30, 2001
(the "RAE Balance Sheet Date"), there has not been:
(a) any material adverse change in the financial condition,
properties, assets, liabilities or business of RAE Systems;
(b) any material damage, destruction or loss of any material
properties of RAE Systems, whether or not covered by insurance;
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(c) any material adverse change in the manner in which the
business of RAE Systems has been conducted;
(d) any material adverse change in the treatment and protection of
trade secrets or other confidential information of RAE Systems; and
(e) any occurrence not included in paragraphs (a) through (d) of
this Section 3.14 which has resulted, or which RAE Systems has reason to
believe, might be expected to result in a material adverse change in the
business or prospects of RAE Systems.
3.15 GOVERNMENT LICENSES, PERMITS, AUTHORIZATIONS: RAE Systems has all
material governmental licenses, permits, authorizations and approvals necessary
for the conduct of its business as currently conducted ("Licenses and Permits").
3.16 EMPLOYEE BENEFIT PLANS:
(a) The RAE Systems Disclosure Schedule identifies each salary,
bonus, material deferred compensation, material incentive compensation, stock
purchase, stock option, severance pay, termination pay, hospitalization,
medical, insurance, supplemental unemployment benefits, profit-sharing, pension
or retirement plan, program or material agreement.
(b) RAE Systems has not maintained, sponsored or contributed to,
any employee pension benefit plan (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) or any similar
pension benefit plan under the laws of any foreign jurisdiction.
(c) Neither the execution, delivery or performance of this
Agreement, nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any bonus, golden parachute,
severance or other similar payment or obligation to any current or former
employee or director of RAE Systems, or result in any acceleration of the time
of payment, provision or vesting of any such benefits. Without limiting the
generality of the foregoing the consummation of the Merger will not result in
the acceleration of vesting of any unvested RAE Systems Options.
3.17 BUSINESS LOCATIONS: Other than as set forth in the RAE Systems
Disclosure Schedule, RAE Systems does not own or lease any material real or
personal property in any state or country.
3.18 INTELLECTUAL PROPERTY: Schedule 3.18 of the RAE Systems Disclosure
-------------
Schedule sets forth a complete and correct list and summary description of all
material intellectual property, including computer software, trademarks, trade
names, service marks, service names, brand names, copyrights and patents,
registrations thereof and applications therefore, applicable to or used in the
business of RAE Systems, together with a complete list of all material licenses
granted by or to RAE Systems with respect to any of the above. All such
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trademarks, trade names, service marks, service names, brand names, copyrights
and patents are owned by RAE Systems, free and clear of all liens, claims,
security interests and encumbrances of any nature whatsoever. RAE Systems is not
currently in receipt of any notice of any violation or infringements of, and RAE
Systems is not knowingly violating or infringing, the rights of others in any
trademark, trade name, service mark, copyright, patent, trade secret, know-how
or other intangible asset. The proprietary assets listed on Schedule 3.18
-------------
constitute all the proprietary assets necessary to enable RAE Systems to conduct
their business in the manner in which such business has been and is being
conducted. RAE Systems has not (i) licensed any of the material proprietary
assets to any person or entity on an exclusive basis, or (ii) entered into any
covenant not to compete or agreement limiting its ability to exploit fully any
proprietary asset or to transact business in any market or geographical area or
with any person or entity.
3.19 EXISTING ARRANGEMENTS: RAE Systems has no Knowledge that, either
as a result of the actions contemplated hereby or for any other reason
(exclusive of expiration of a contract upon the passage of time), any entity
having an arrangement with RAE Systems identified in Schedule 3.19 will not
-------------
continue to conduct business with Nettaxi after the Closing Date in
substantially the same manner as it has conducted business with RAE Systems in
the past.
3.20 GOVERNMENTAL APPROVALS: Except as set forth in Section 1.2 as to
the filing of the Agreement of Merger, no authorization, license, permit,
franchise, approval, order or consent of, and no registration, declaration or
filing by RAE Systems with, any governmental authority, domestic or foreign,
federal, state or local, is required in connection with RAE Systems' execution,
delivery and performance of this Agreement.
3.21 TRANSACTIONS WITH AFFILIATES: RAE Systems is not indebted for
money borrowed, either directly or indirectly, from any of its officers,
directors, or any Affiliate (as defined below), in any amount whatsoever; nor
are any of its officers, directors, or Affiliates indebted for money borrowed
from RAE Systems; nor are there any transactions of a continuing nature between
RAE Systems and any of its officers, directors, or Affiliates not subject to
cancellation which will continue beyond the Effective Time, including, without
limitation, use of the assets of RAE Systems for personal benefit with or
without adequate compensation. For purposes of this Agreement, the term
"Affiliate" shall mean any person that, directly or indirectly, through one or
more intermediaries, controls or is controlled by, or is under common control
with, the person specified. As used in the foregoing definition, the term (i)
"control" shall mean the power through the ownership of voting securities,
contract or otherwise to direct the affairs of another person and (ii) "person"
shall mean an individual, firm, trust, association, corporation, partnership,
government (whether federal, state, local or other political subdivision, or any
agency or bureau of any of them) or other entity.
3.22 NO DISTRIBUTIONS: RAE Systems has not made nor has any intention
of making any distribution or payment to any of its shareholders in respect of
RAE Systems stock.
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3.23 LIABILITIES: RAE Systems has no material direct or indirect
indebtedness, liability, claim, loss, damage, deficiency, obligation or
responsibility, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, secured or unsecured, accrued, absolute, contingent or otherwise
("Liabilities"), whether or not of a kind required by generally accepted
accounting principles to be set forth on a financial statement, other than (i)
Liabilities fully and adequately reflected or reserved against on the RAE
Systems Balance Sheet, (ii) Liabilities incurred since the RAE Balance Sheet
Date in the ordinary course of the business of RAE Systems, or (iii) Liabilities
otherwise disclosed in this Agreement, including the exhibits hereto and the RAE
Systems Disclosure Schedule.
3.24 ACCOUNTS RECEIVABLE: All accounts receivable of RAE Systems
reflected on the Balance Sheet are valid receivables subject to no material
setoffs or counterclaims and are current and, to the Knowledge of RAE Systems,
collectible (within 90 days after the date on which it first became due and
payable), net of the applicable reserve for bad debts reflected in the financial
statements provided to Nettaxi or in the RAE Systems Disclosure Schedule. To RAE
Systems' Knowledge, all accounts receivable reflected in the financial or
accounting records of RAE Systems are valid receivables and are collectible
subject to no material setoffs or counterclaims.
3.25 NO OMISSIONS OR UNTRUE STATEMENTS: To the best of its Knowledge,
no representation or warranty made by RAE Systems to Nettaxi or RSAC in this
Agreement, the RAE Systems Disclosure Schedule or in any certificate of a RAE
Systems officer required to be delivered to Nettaxi pursuant to the terms of
this Agreement contains any untrue statement of a material fact, or omits to
state a material fact necessary to make the statements contained herein or
therein not misleading as of the date hereof.
3.26 INSURANCE: Schedule 3.26 of the RAE Systems Disclosure Schedule
-------------
sets forth summaries of all material insurance policies and all material self
insurance programs and arrangements relating to the business, assets and
operations of RAE Systems. Each of such insurance policies is in full force and
effect.
4. REPRESENTATIONS AND WARRANTIES OF NETTAXI AND RSAC. Except as set forth
in the Nettaxi Disclosure Schedule, Nettaxi, Nettaxi Online Communities, Inc.
("Nettaxi Online") and RSAC represent and warrant to RAE Systems as follows, as
of the date hereof, and as of the Closing Date:
4.1 ORGANIZATION AND STANDING OF NETTAXI: Nettaxi is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada, and has the corporate power to carry on its business as now conducted
and to own its assets and is duly qualified to transact business as a foreign
corporation in each state where such qualification is necessary except where the
failure to qualify will not have a material adverse effect on the business or
prospects of Nettaxi. The copies of the Articles of Incorporation, By-laws and
minutes of Nettaxi, as amended to date, and delivered to RAE Systems, are true
and complete copies of those documents as now in effect. The minute books of
Nettaxi are accurate in all material respects
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4.2 ORGANIZATION AND STANDING OF SUBSIDIARIES: Nettaxi Online and RSAC
are corporations duly organized, validly existing and in good standing under the
laws of the State of Delaware and California, respectively, and have the
corporate power to carry on their business as now conducted and to own their
assets and are duly qualified to transact business as a foreign corporation in
each state where such qualification is necessary except where the failure to
qualify will not have a material adverse effect on the business or prospects of
either Nettaxi Online or RSAC. The copies of the Certificate of Incorporation,
By-laws and minutes of Nettaxi Online and the Articles of Incorporation, By-laws
and minutes of RSAC, as amended to date, and delivered to RAE Systems, are true
and complete copies of those documents as now in effect. Since its
incorporation, RSAC has not conducted and currently is not conducting any
business. The minute books of Nettaxi Online and RSAC are accurate in all
material respects
4.3 SUBSIDIARIES: Other than RSAC and Nettaxi Online, Nettaxi owns no
subsidiaries nor does it own or have an interest in any other corporation,
partnership, joint venture or other entity.
4.4 CAPITALIZATION OF NETTAXI:
(a) The authorized capital stock of Nettaxi consists of 200,000,000
shares of Common Stock, par value $.001 and 1,000,000 shares of Preferred Stock,
par value $.001. As of the date hereof, 43,124,586 shares of Common Stock and no
shares of Preferred stock were issued and outstanding. Such outstanding shares
of Common Stock are duly authorized, validly issued, fully paid, and
non-assessable. The Nettaxi Merger Stock to be issued pursuant to this
Agreement, when issued in accordance with the terms of this Agreement, will be
duly authorized, validly issued, fully paid and non-assessable. Other than as
set forth in the Nettaxi Disclosure Schedule, there are no subscriptions,
warrants, rights or calls or other commitments or agreements to which Nettaxi is
a party or by which it is bound, calling for any issuance, transfer, sale or
other disposition of any class of securities of Nettaxi, and there are no
obligations with respect to the registration of outstanding securities or
otherwise. Other than as set forth in the Nettaxi Disclosure Schedule, there are
no outstanding securities convertible into or exchangeable for Common Stock or
any other securities of Nettaxi. The Nettaxi Disclosure Schedule sets forth the
following information with respect to each option to purchase Nettaxi common
stock ("Nettaxi Option") outstanding as of the date of this Agreement: (i) the
particular plan (if any) pursuant to which such Nettaxi Option was granted; (ii)
the name of the optionee; (iii) the number of shares of Nettaxi Common Stock
subject to such Nettaxi Option; (iv) the exercise price of such Nettaxi Option;
(v) the date on which such Nettaxi Option was granted; and (vi) the applicable
vesting schedules (which applicable vesting schedule may be provided by means of
a general description of the vesting schedules applicable to outstanding Nettaxi
Options). Nettaxi has delivered to RAE Systems accurate and complete copies of
all stock option plans pursuant to which the Nettaxi has ever granted stock
options. Nettaxi has delivered to RAE Systems accurate and complete copies of
the all outstanding warrants to purchase Nettaxi Common Stock or other
securities (the "Nettaxi Warrants"). The exercise price of each Nettaxi Warrant
is set forth in the Nettaxi Disclosure Schedule.
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(b) All outstanding shares of Nettaxi Common Stock, Nettaxi
Options, Nettaxi Warrants or other shares of Nettaxi capital stock or securities
convertible or exchangeable therefore have been issued and granted in compliance
with (i) all applicable securities laws and other applicable legal requirements,
and (ii) all material requirements set forth in applicable Contracts.
4.5 CAPITALIZATION SUBSIDIARIES: The authorized capital stock of
Nettaxi Online consists of 6,000,000 shares of Common Stock, par value $.001,
and 1,000,000 shares of preferred stock, par value $.001. As of the date
hereof, 4,731,590 shares of Common Stock were issued and outstanding, all of
which are issued to Nettaxi, and no shares of preferred stock were issued or
outstanding. Such outstanding shares of Common Stock are duly authorized,
validly issued, fully paid, and non-assessable. As of the date hereof, there
were no outstanding options, warrants or rights of conversion or other rights,
agreements, arrangements or commitments relating to the capital stock of Nettaxi
Online or obligating Nettaxi Online to issue or sell an aggregate number of
shares of Common Stock. The authorized capital stock of RSAC consists of
1,000,000 shares of Common Stock, par value $.001. As of the date hereof, one
hundred (100) shares of Common Stock were issued and outstanding, all of which
are issued to Nettaxi. Such outstanding shares of Common Stock are duly
authorized, validly issued, fully paid, and non-assessable. As of the date
hereof, there were no outstanding options, warrants or rights of conversion or
other rights, agreements, arrangements or commitments relating to the capital
stock of RSAC or obligating RSAC to issue or sell an aggregate number of shares
of Common Stock.
4.6 AUTHORITY: Each of Nettaxi and RSAC has all requisite corporate
power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been, or will
have been by the Closing, duly authorized by all necessary corporate action on
the part of Nettaxi and RSAC subject to the approval of the Merger by Nettaxi's
and RSAC's shareholders. The Board of Directors of Nettaxi and RSAC have
unanimously (i) approved this Agreement and the Merger, (ii) determined that in
its opinion the Merger, subject to the terms of this Agreement, is in the best
interests of the shareholders of Nettaxi and RSAC, respectively, and is on terms
that are fair to such shareholders (iii) recommended that the shareholders of
Nettaxi and RSAC approve this Agreement and the Merger. This Agreement
constitutes, and all other agreements contemplated hereby will constitute, when
executed and delivered by each of Nettaxi and RSAC in accordance herewith, the
valid and binding obligations of Nettaxi and RSAC, enforceable in accordance
with their respective terms, except as such enforceability may be limited by (i)
bankruptcy, insolvency, moratorium or other similar laws affecting or relating
to creditors' rights generally, and (ii) general principles of equity.
4.7 ASSETS: Nettaxi, Nettaxi Online and RSAC have good and marketable
title to all of the respective party's assets and properties which it purports
to own as reflected on the balance sheet included in the Nettaxi Financial
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Statements (as hereinafter defined), or thereafter acquired. No material portion
of the assets of Nettaxi or Nettaxi Online is subject to any governmental decree
or order to be sold or is being condemned, expropriated or otherwise taken by
any public authority with or without payment of compensation therefore, nor, to
its Knowledge, has any such condemnation, expropriation or taking been proposed.
None of the material assets of Nettaxi or Nettaxi Online is subject to any
restriction that would prevent continuation of the use currently made thereof or
materially adversely affect the value thereof.
4.8 CONTRACTS AND OTHER COMMITMENTS:
(a) Schedule 4.8 of the Nettaxi Disclosure Schedule consists of a
------------
true and complete list of all contracts, agreements, commitments and other
instruments (whether oral or written) to which Nettaxi or Nettaxi Online is a
party ("Nettaxi Contracts") that (i) involve a receipt or an expenditure by
Nettaxi or its subsidiaries or require the performance of services or delivery
of goods to, by, through, on behalf of or for the benefit of Nettaxi or its
subsidiaries, or (ii) involves an obligation for the performance of services or
delivery of goods by Nettaxi or its subsidiaries.
(b) All of the Nettaxi Contracts described in Schedule 4.8 of the
------------
Nettaxi Disclosure Schedule are valid and binding upon Nettaxi or Nettaxi
Online, as applicable, and, to its Knowledge, the other parties thereto and are
in full force and effect and enforceable, in accordance with their respective
terms, and neither Nettaxi or Nettaxi Online, nor to their Knowledge, any other
party to any Nettaxi Contract has breached any provision of, and no event has
occurred which, with the lapse of time or action by a third party, could result
in a material default under, the terms thereof.
(c) Nettaxi has delivered or made available to RAE Systems and to Gray
Cary Ware & Freidenrich LLP an accurate and complete copy of each Nettaxi
Contract.
4.9 LITIGATION: There is no material claim, action, proceeding, or
investigation pending or, to their Knowledge, threatened against or affecting
Nettaxi, Nettaxi Online or RSAC before or by any court, arbitrator or
governmental agency or authority. There are no material decrees, injunctions or
orders of any court, governmental department, agency or arbitration outstanding
against Nettaxi, Nettaxi Online or RSAC.
4.10 TAXES: Nettaxi and Nettaxi Online have duly filed all Returns
required to be filed by them other than Returns which the failure to file would
have no material adverse effect on the business of Nettaxi or Nettaxi Online.
All such Returns were, when filed, and to Nettaxi's Knowledge are, accurate and
complete in all material respects and were prepared in conformity with
applicable laws and regulations. Nettaxi has paid or will pay in full prior to
the Effective Time, or has adequately reserved against all Taxes otherwise
assessed against it through the Closing Date. Neither Nettaxi nor Nettaxi Online
is a party to any pending action or proceeding by any governmental authority for
the assessment of any Tax, and, to the Knowledge of Nettaxi, no claim for
assessment or collection of any Tax has been asserted against Nettaxi that have
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not been paid. There are no Tax liens upon the assets of Nettaxi or Nettaxi
Online. Neither Netaxxi nor any of its subsidiaries has taken, agreed to take or
will take any action that would reasonably be expected to prevent the Merger
from constituting a reorganization within the meaning of Section 368(a) of the
Code.
4.11 COMPLIANCE WITH LAWS AND REGULATIONS: Nettaxi, Nettaxi Online and
RSAC have complied and are presently complying, in all material respects, with
all laws, rules, regulations, orders and requirements (federal, state local and
foreign) applicable to them in all jurisdictions in which their operations are
conducted or to which they are subject, including, without limitation, all
applicable federal and state securities laws, civil rights and equal opportunity
employment laws and regulations, and all federal, antitrust, antimonopoly and
fair trade practice laws. There has been no assertion by any party that Nettaxi,
Nettaxi Online or RSAC is in violation in any material respect of any such laws,
rules, regulations, orders, restrictions or requirements with respect to its
operations and no notice in that regard has been received by Nettaxi, Nettaxi
Online or RSAC.
4.12 ENVIRONMENTAL MATTERS: (i) Neither Nettaxi nor its subsidiaries
are in violation of any Environmental Law applicable to either of them; (ii)
none of the properties formerly owned, leased or operated by Nettaxi or its
subsidiaries (including, without limitation, soils and surfaces and ground
waters) are contaminated with any Hazardous Substance; (iii) neither Nettaxi nor
its subsidiaries are liable for any off-site contamination by Hazardous
Substances; (iv) neither Nettaxi nor its subsidiaries are liable for any
violation under any Environmental Law (including, without limitation, pending or
threatened liens); (v) Nettaxi and its subsidiaries have all material
Environmental Permits; and (vi) neither the execution of this Agreement nor the
consummation of the transactions contemplated herein will require any
investigation, remediation or other action with respect to Hazardous Substances,
or any notice to or consent of Governmental Entities or third parties, pursuant
to any applicable Environmental Law or Environmental Permit.
4.13 NO CONFLICT: The making and performance of this Agreement will not
(i) conflict with the Articles of Incorporation, Certificate of Incorporation or
the By-laws of Nettaxi, Nettaxi Online or RSAC, (ii) violate any laws,
ordinances, rules, or regulations, or any order, writ, injunction or decree to
which Nettaxi, Nettaxi Online or RSAC is a party or by which Nettaxi or Nettaxi
Online or any of their material assets, business, or operations may be bound or
affected or (iii) result in any breach or termination of, or constitute a
default under, or constitute an event which, with notice or lapse of time, or
both, would become a default under, or result in the creation of any encumbrance
upon any material asset of Nettaxi, Nettaxi Online or RSAC, or create any rights
of termination, cancellation, or acceleration in any person under, any material
agreement, arrangement, or commitment, or violate any provisions of any laws,
ordinances, rules or regulations or any order, writ, injunction, or decree to
which Nettaxi, Nettaxi Online or RSAC is a party or by which Nettaxi, Nettaxi
Online or RSAC, or any of their material assets may be bound, except in the case
of (ii) or (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which would not have a material adverse effect on
Nettaxi, Nettaxi Online or RSAC.
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4.14 EMPLOYEES: Neither Nettaxi nor its subsidiaries have any employees
that are represented by any labor union or collective bargaining unit.
4.15 BUSINESS LOCATIONS: Neither Nettaxi nor its subsidiaries owns or
leases any real or personal property in any state or country.
4.16 INTELLECTUAL PROPERTY: Neither Nettaxi nor its subsidiaries is
currently in receipt of any notice of any violation or infringements of, and
neither Nettaxi nor its subsidiaries is knowingly violating or infringing, the
rights of others in any trademark, trade name, service mark, copyright, patent,
trade secret, know-how or other intangible asset.
4.17 GOVERNMENTAL APPROVALS: Except as set forth in Section 1.2 as to
the filing of the Agreement of Merger, no authorization, license, permit,
franchise, approval, order or consent of, and no registration, declaration or
filing by Nettaxi or its subsidiaries with, any governmental authority, domestic
or foreign, federal, state or local, is required in connection with Nettaxi's
and RSAC's execution, delivery and performance of this Agreement.
4.18 TRANSACTIONS WITH AFFILIATES: Neither Nettaxi nor its subsidiaries
is indebted for money borrowed, either directly or indirectly, from any
Affiliate, in any amount whatsoever; nor are any of its officers, directors, or
Affiliates indebted for money borrowed from Nettaxi or its subsidiaries; nor are
there any transactions of a continuing nature between Nettaxi or its
subsidiaries and any of its officers, directors, or Affiliates not subject to
cancellation which will continue beyond the Effective Time, including, without
limitation, use of the assets of Nettaxi or its subsidiaries for personal
benefit with or without adequate compensation.
4.19 EXISTING ARRANGEMENTS: Nettaxi and its subsidiaries have no
Knowledge that, either as a result of the actions contemplated hereby or for any
other reason (exclusive of expiration of a contract upon the passage of time),
any entity having an arrangement with Nettaxi or its subsidiaries identified in
Schedule 4.8 will not continue to conduct business with Nettaxi or its
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subsidiaries after the Closing Date in substantially the same manner as it has
conducted business with Nettaxi or its subsidiaries in the past.
4.20 NO DISTRIBUTIONS: Neither Nettaxi nor its subsidiaries has made
nor has any intention of making any distribution or payment to any of its
shareholders in respect of Nettaxi stock.
4.21 ACCOUNTS RECEIVABLE: All accounts receivable of Nettaxi and its
subsidiaries reflected on the Nettaxi Balance Sheet are valid receivables
subject to no material setoffs or counterclaims and are current and, to
Nettaxi's Knowledge, collectible (within 90 days after the date on which it
first became due and payable), net of the applicable reserve for bad debts
reflected in the financial statements provided to RAE Systems or in the Nettaxi
Disclosure Schedule. To the Knowledge of Nettaxi and its subsidiaries, all
accounts receivable reflected in the financial or accounting records of Nettaxi
and its subsidiaries are valid receivables and are collectible subject to no
material setoffs or counterclaims.
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4.22 SEC DISCLOSURES:
(a) Nettaxi has delivered or made available to RAE Systems
(including through the SEC EDGAR system) accurate and complete copies (excluding
copies of exhibits) of each report, registration statement and definitive proxy
statement filed by Nettaxi with the SEC between August 13, 1999 and the date of
this Agreement (the "Nettaxi SEC Documents"). Since August 13, 1999, all
statements, reports, schedules, forms and other documents required to have been
filed by Nettaxi with the SEC have been so filed. As of the time it was filed
with the SEC (or, if amended or superseded by a filing prior to the date of this
Agreement, then on the date of such filing): (i) each of the Nettaxi SEC
Documents complied in all material respects with the applicable requirements of
the Securities Act of 1933 (the "Securities Act") or the Securities and Exchange
Act of 1934 (the "Exchange Act") (as the case may be); and (ii) none of the
Nettaxi SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(b) The consolidated financial statements (including any related
notes) contained in the Nettaxi SEC Documents: (i) complied as to form in all
material respects with the published rules and regulations of the SEC applicable
thereto; (ii) were prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods covered (except
as may be indicated in the notes to such financial statements and, in the case
of unaudited statements, as permitted by Form 10-Q of the SEC, and except that
unaudited financial statements may not contain footnotes and are
subject to year-end audit adjustments); and (iii) fairly present the
consolidated financial position of Nettaxi and its subsidiaries as of the
respective dates thereof and the consolidated results of operations of Nettaxi
and its subsidiaries for the periods covered thereby.
4.23 ABSENCE OF CERTAIN CHANGES OR EVENTS: Since September 30, 2001
(the "Nettaxi Balance Sheet Date"), other than in connection with the
termination of Nettaxi's operations, there has not been:
(a) any material adverse change in the financial condition,
properties, assets, liabilities or business of Nettaxi or its subsidiaries;
(b) any material damage, destruction or loss of any material
properties of Nettaxi or its subsidiaries, whether or not covered by insurance;
(c) any material adverse change in the manner in which the
business of Nettaxi or its subsidiaries has been conducted;
(d) any material adverse change in the treatment and protection of
trade secrets or other confidential information of Nettaxi or its subsidiaries;
and
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(e) any occurrence not included in paragraphs (a) through (d) of
this Section 4.19 which has resulted, or which Nettaxi or its subsidiaries has
reason to believe, might be expected to result in a material adverse change in
the business or prospects of Nettaxi or its subsidiaries.
4.24 LIABILITIES: Neither Nettaxi, Nettaxi Online nor RSAC have any
material direct or indirect Liabilities, as that term is defined in Section 3.23
("Nettaxi Liabilities"), whether or not of a kind required by generally accepted
accounting principles to be set forth on a financial statement, other than (i)
Nettaxi Liabilities fully and adequately reflected or reserved against on the
Nettaxi Balance Sheet and (ii) Nettaxi Liabilities otherwise disclosed in this
Agreement, including the exhibits hereto and the Nettaxi Disclosure Schedule.
4.25 GOVERNMENTAL LICENSES, PERMITS AND AUTHORIZATIONS: Nettaxi,
Nettaxi Online and RSAC have all governmental licenses, permits, authorizations
and approvals necessary for the conduct of its business as currently conducted.
All such licenses, permits, authorizations and approvals are in full force and
effect, and no proceedings for the suspension or cancellation of any thereof is
pending or threatened.
4.26 EMPLOYEE BENEFIT PLANS:
(a) The Nettaxi Disclosure Schedule identifies each salary, bonus,
material deferred compensation, material incentive compensation, stock purchase,
stock option, severance pay, termination pay, hospitalization, medical,
insurance, supplemental unemployment benefits, profit-sharing, pension or
retirement plan, program or material agreement.
(b) Neither Nettaxi, Nettaxi Online nor RSAC has maintained,
sponsored or contributed to, any employee pension benefit plan (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA") or any similar pension benefit plan under the laws of any foreign
jurisdiction.
(c) Neither the execution, delivery or performance of this
Agreement, nor the consummation of the Merger or any of the other transactions
contemplated by this Agreement, will result in any bonus, golden parachute,
severance or other similar payment or obligation to any current or former
employee or director of Nettaxi, Nettaxi Online or RSAC, or result in any
acceleration of the time of payment, provision or vesting of any such benefits.
Without limiting the generality of the foregoing the consummation of the Merger
will not result in the acceleration of vesting of any unvested Nettaxi Options.
4.27 INSURANCE: Schedule 4.25 of the Nettaxi Disclosure Schedule sets
-------------
forth summaries of all material insurance policies and all material self
insurance programs and arrangements relating to the business, assets and
operations of Nettaxi or its subsidiaries. Each of such insurance policies is in
full force and effect.
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4.28 NO OMISSION OR UNTRUE STATEMENT: To the best of their Knowledge no
representation or warranty made by Nettaxi, Nettaxi Online or RSAC to RAE
Systems in this Agreement, in the Nettaxi Disclosure Schedule or in any
certificate of a Nettaxi officer required to be delivered to RAE Systems
pursuant to the terms of this Agreement contains any untrue statement of a
material fact, or omits to state a material fact necessary to make the
statements contained herein or therein not misleading as of the date hereof.
5. CLOSING
5.1 DATE AND TIME: Subject to this Agreement and the Merger receiving
all requisite shareholder approvals and subject to the other provisions of this
Agreement, the parties shall hold a closing (the "Closing") on the next business
day (or such later date as the parties hereto may agree) following the later of
(a) the date of the meeting of shareholders of Nettaxi to consider and vote upon
this Agreement and the Merger, or receipt by RAE Systems of consent approving
the Merger, or (b) the business day on which the last of the conditions set
forth in Sections 6 and 7 hereof is fulfilled or waived (such later date, the
"Closing Date"), at the offices of Silicon Valley Law Group, 152 N. Third
Street, Suite 900, San Jose, California 95112 or such other time and place as
the parties may agree upon.
5.2 RAE SYSTEMS' CLOSING DELIVERIES: At the Closing, in addition to
documents referred to elsewhere, RAE Systems shall deliver, or cause to be
delivered, to Nettaxi:
(a) a certificate, dated as of the Closing Date, executed by the
Chief Executive Officer of RAE Systems, to the effect that the representations
and warranties contained in this Agreement are true and correct in all material
respects at and as of the Closing Date and that RAE Systems has complied with or
performed in all material respects all terms, covenants and conditions to be
complied with or performed by RAE Systems on or prior to the Closing Date;
(b) Certified Resolutions of the Board of Directors and a majority
of the Shareholders of RAE Systems approving the transactions set forth herein;
(c) The RAE Systems Disclosure Schedule;
(d) an opinion of RAE Systems' counsel, dated as of the Closing
Date, substantially in form attached hereto as Exhibit E;
---------
(e) such other documents as Nettaxi or its counsel may reasonably
require.
5.3 NETTAXI CLOSING: At the Closing, in addition to documents referred
to elsewhere, Nettaxi shall deliver to RAE Systems:
(a) a certificate of Nettaxi, dated as of the Closing Date,
executed by the President or Chief Executive Officer of Nettaxi to the effect
that the representations and warranties of Nettaxi and its subsidiaries
contained in this Agreement are true and correct in all material respects and
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that Nettaxi has complied with or performed in all material respects all terms,
covenants, and conditions to be complied with or performed by Nettaxi or prior
to the Closing Date;
(b) The Nettaxi Disclosure Schedule; and
(c) an opinion of Nettaxi's counsel, dated as of the Closing Date,
substantially in form attached hereto as Exhibit F;
---------
6. CONDITIONS TO OBLIGATIONS OF RAE SYSTEMS. The obligation of RAE Systems
to consummate the Closing is subject to the following conditions, any of which
may be waived by it in its sole discretion:
6.1 COMPLIANCE BY NETTAXI: On or before the Closing, Nettaxi shall have
performed and complied in all material respects with the following:
(a) All present directors of Nettaxi shall tender their resignations
effective upon the Closing; and
(b) Nettaxi shall have preformed and complied in all material respects
with all other agreements and conditions required by this Agreement to be
performed or complied with by Nettaxi prior to or on the Closing Date.
6.2 ACCURACY OF NETTAXI'S REPRESENTATIONS: Nettaxi's representations
and warranties contained in this Agreement (including the Nettaxi Disclosure
Schedule and the Nettaxi SEC Documents) or any schedule, certificate, or other
instrument delivered pursuant to the provisions hereof or in connection with the
transactions contemplated hereby shall be true and correct in all material
respects at and as of the Closing Date (except for such changes permitted by
this Agreement).
6.3 MATERIAL ADVERSE CHANGE: No material adverse change shall have
occurred subsequent to September 30, 2001 in the financial position, results of
operations, assets, liabilities, or prospects of Nettaxi or its subsidiaries,
nor shall any event or circumstance have occurred which would result in a
material adverse change in the financial position, results of operations,
assets, liabilities, or prospects of Nettaxi or its subsidiaries; provided,
however, that the following events or occurrences shall not be deemed to be
events or occurrences having a material adverse effect for purposes of this
Section 6.3: (i) reductions or increases in the trading price of Nettaxi Common
Stock between the date hereof and the Closing Date; (ii) events or occurrences
related directly to the Merger or the other transactions contemplated by this
Agreement; or (iii) the cessation of operations as contemplated by Section
2.2(c).
6.4 DOCUMENTS: All documents and instruments required hereunder to be
delivered by Nettaxi to RAE Systems at the Closing shall be delivered in form
and substance reasonably satisfactory to RAE Systems and its counsel.
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6.5 LITIGATION: No litigation, temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint seeking to enjoin the
transactions contemplated by this Agreement or to obtain damages on account
hereof shall be pending or to RAE System's Knowledge be threatened.
6.6 APPROVAL OF SHAREHOLDERS: RAE Systems shall have received the
approval of a majority of its shareholders of this Agreement and the
transactions contemplated.
6.7 NETTAXI NET CASH: Nettaxi's Net Cash shall be at least seven
million five hundred thousand dollars ($7,500,000); provided however, that if
the Closing has takes place between March 15, 2002 and April 1, 2002 Nettaxi's
Net Cash shall be at least seven million four hundred seventy five thousand
dollars ($7,475,000).
6.8 NETTAXI LOCK-UP AGREEMENTS: RAE Systems shall have received an
executed Lock-Up Agreement, substantially in the form of Exhibit G hereto, from
---------
each of the persons listed on Schedule 6.8 hereto.
------------
6.9 NETTAXI REINCORPORATION: Nettaxi shall have effectuated a
reincorporation of its jurisdiction of incorporation to the State of Delaware as
contemplated by Section 1.1.
6.10 CONSENTS: All other authorizations, consents, orders or approvals
of, or declarations or filings with, or expirations of waiting periods imposed
by, any governmental entity the failure to obtain or comply with which would be
reasonably likely to have a material adverse effect on RAE Systems or a material
adverse effect on the consummation of the transactions contemplated hereby shall
have been filed, occurred or been obtained.
7. CONDITIONS TO NETTAXI'S OBLIGATIONS. Nettaxi and RSAC's obligation to
consummate the Closing is subject to the following conditions, any of which may
be waived by either party in its sole discretion:
7.1 COMPLIANCE BY RAE SYSTEMS: RAE Systems shall have performed and
complied in all material respects with all agreements and conditions required by
this Agreement to be performed or complied with by RAE Systems prior to or on
the Closing Date.
7.2 ACCURACY OF REPRESENTATIONS OF RAE SYSTEMS: The representations and
warranties of RAE Systems contained in this Agreement (including the exhibits
hereto and the RAE Systems Disclosure Schedule) or any schedule, certificate, or
other instrument delivered pursuant to the provisions hereof or in connection
with the transactions contemplated hereby shall be true and correct in all
material respects at and as of the Closing Date (except for changes permitted by
this Agreement).
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7.3 MATERIAL ADVERSE CHANGE: No material adverse change shall have
occurred subsequent to September 30, 2001 in the financial position, results of
operations, assets, liabilities, or prospects of RAE Systems, nor shall any
event or circumstance have occurred which would result in a material adverse
change in the financial position, results of operations, assets, liabilities, or
prospects of RAE Systems (including but not limited to a material deviation in
the audited financial statements of RAE Systems from the unaudited financial
statements provided by RAE Systems to Nettaxi; provided, however, that the
following shall not be deemed to be material deviations: (a) material deviations
which do not materially affect RAE Systems' revenues, net income, costs of goods
sold, inventory or accounts receivable; and (b) deviations in the tax provisions
of such financials relating to transactions involving its foreign subsidiaries
and the appropriate reserve with respect to any tax liabilities relating
thereto; provided, however, that deviations materially affecting net income in
part (a) of the foregoing shall not include those as a result of such tax
provisions of such financials relating to transactions involving its foreign
subsidiaries and the tax liabilities relating thereto). Notwithstanding
anything to the contrary set forth herein, the following events or occurrences
shall not be deemed to be events or occurrences having a material adverse effect
for purposes of this Section 7.3: (i) events or occurrences affecting the
environmental, health and safety industry that do not have a disproportionate
impact on RAE Systems, taken as a whole; or (ii) events or occurrences related
directly to the Merger or the other transactions contemplated by this Agreement.
7.4 LITIGATION: No litigation, temporary restraining order, preliminary
or permanent injunction or other order issued by any court of competent
jurisdiction or other legal or regulatory restraint seeking to enjoin the
transactions contemplated by this Agreement or to obtain damages on account
hereof shall be pending or to Nettaxi's Knowledge be threatened.
7.5 DOCUMENTS: All documents and instruments required hereunder to be
delivered by RAE Systems to Nettaxi at the Closing shall be delivered in form
and substance reasonably satisfactory to Nettaxi and its counsel.
7.6 SHAREHOLDER APPROVAL: This Agreement shall have been duly adopted
and approved, and the Merger shall have been duly approved, by the shareholders
of RAE Systems. The holders of not more than 10% of the shares of RAE Systems'
Common Stock shall have exercised dissenters' rights pursuant to CGCL.
7.7 APPROVAL OF SHAREHOLDERS OF NETTAXI: Nettaxi shall have received
the approval of a majority of its shareholders of this Agreement and the
transactions contemplated hereby.
7.8 FINANCIAL STATEMENTS: RAE Systems shall have provided Nettaxi with
financial statements and other information satisfactory in all respects to allow
Nettaxi to comply with any and all applicable requirements under the Securities
Act and the Exchange Act.
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7.9 INSURANCE. With respect to that certain pending litigation known
as Lanell Owens, Individually and as the representative of the estate of Virgil
Johnson, deceased, Wilma Johnson, Bobby Johnson, Steven Johnson, Roger Johnson
and Virgil Johnson, Jr. v. RAE Systems, Inc. Total Safety, Inc. Global
Intermodal Systems pending in the District Court of Harris County Texas
(2001-54565), RAE Systems shall have received a letter from its insurance
carrier either (i) accepting the obligation to insure RAE Systems against the
claim; or (ii) reserving its rights with respect to the claim, subject to the
reasonable satisfaction of Nettaxi; provided, however, that such letter
reserving rights with respect to such claim shall automatically be deemed
reasonably satisfactory to Nettaxi if substantially similar in coverage
certainty to that certain letter dated July 25, 2001 from Hanson & Peters to
Silicon Valley Law Group with respect to Thomas Lahey, et al. v. Nettaxi, Inc.,
et. al.
7.10 CONSENTS: All other authorizations, consents, orders or approvals
of, or declarations or filings with, or expirations of waiting periods imposed
by, any governmental entity the failure to obtain or comply with which would be
reasonably likely to have a material adverse effect on Nettaxi or a material
adverse effect on the consummation of the transactions contemplated hereby shall
have been filed, occurred or been obtained.
8. TERMINATION
8.1 TERMINATION PRIOR TO CLOSING:
(a) If the Closing has not occurred by April 1, 2002 (as may be
extended as set forth below, the "Termination Date") any party may terminate
this Agreement at any time thereafter by giving written notice of termination to
the other, provided, however, that no party may terminate this Agreement if such
party has willfully or materially breached any of the terms and conditions
hereof. Notwithstanding the above, the parties may extend the deadline provided
herein by mutual written consent. If the Closing has not occurred by April 1,
2002 and Nettaxi's Proxy Statement as referenced in Section 11 hereof is then
under review from the SEC (as defined) or the Closing was unable to occur by
April 1, 2002 due to a delay caused by such review, such Termination Date shall
be automatically extended until the date thirty (30) business days following the
date on which the SEC advises Nettaxi that it has no further comments with
respect to such Proxy Statement.
(b) Prior to the Termination Date, any party may terminate this
Agreement following the insolvency or bankruptcy of the other party hereto, or
if any one or more of the conditions to Closing set forth in Section 6 or 7
shall become incapable of fulfillment or there shall have occurred a breach of
this Agreement which breach would reasonably be expected to have a material
adverse effect on the other party hereto and either such condition or breach
shall not have been waived by the party for whose benefit the condition,
representation or warranty was established, then either RAE Systems (in the case
of a condition in Section 6) or Nettaxi (in the case of a condition specified in
Section 7) may terminate this Agreement.
8.2 BREAK-UP FEE: If the votes in favor of the Nettaxi Proposals (as
defined in Section 11.3(a)) do not constitute the minimum number of votes
required for approval and adoption of such proposals, and in such case, this
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Agreement is terminated pursuant to Section 8 hereof, Nettaxi shall pay to RAE
Systems within five days of the date of termination an amount equal to Two
Hundred and Fifty Thousand Dollars ($250,000).
8.3 CONSEQUENCES OF TERMINATION: Upon termination of this Agreement in
accordance with this Section 8 or any other express right of termination
provided elsewhere in this Agreement, the parties shall be relieved of any
further obligation to the others except as specified in Section 8.2 or 13.4;
provided, however, that no termination of this Agreement, in accordance with
this Section 8 hereof or under any other express right of termination provided
elsewhere in this Agreement shall operate to release any party from any
liability to any other party incurred before the date of such termination or
from any liability resulting from any willful misrepresentation made in
connection with this Agreement or willful breach hereof.
9. ADDITIONAL COVENANTS
9.1 MUTUAL COOPERATION: The parties hereto will cooperate with each
other, and will use all reasonable efforts to cause the fulfillment of the
conditions to the parties' obligations hereunder and to obtain as promptly as
possible all consents, authorizations, orders or approvals from each and every
third party, whether private or governmental, required in connection with the
transactions contemplated by this Agreement.
9.2 CHANGES IN REPRESENTATIONS AND WARRANTIES OF A PARTY: A party shall
promptly give written notice to the other party upon becoming aware of (A) any
fact which, if known on the date hereof, would have been required to be set
forth or disclosed pursuant to this Agreement and (B) any impending or
threatened breach in any material respect of any of the representations and
warranties contained in this Agreement and with respect to the latter shall use
all reasonable efforts to remedy same.
9.3 REGISTRATION STATEMENTS: Following the Effective Time, Nettaxi
shall use commercially reasonable efforts to continue to maintain the
effectiveness of its registration statements filed with the Securities and
Exchange Commission and identified on Schedule 9.3(a), attached hereto, until
such date as is the earlier of (i) the date on which the securities registered
under the registration statements have been sold; or (ii) the date on which the
securities registered under the registration statements may be sold to the
public without registration or restriction (including, without limitation,
restrictions as to volume). Notwithstanding the above, the registration
statements may be converted to registration statements on Form S-3, Form S-2 (or
any successor form), if permitted by law. In addition, Nettaxi shall within a
reasonable time period after the Effective Time file a registration statement on
Form S-1 or on such other form as is then available under the Securities Act
covering the securities identified on Schedule 9.3(b), attached hereto so as to
facilitate the resale thereof, to be kept effective until such date as is the
earlier of (i) the date on which the securities registered under such
registration statement have been sold; or (ii) the date on which the securities
registered under such registration statement may be sold to the public without
registration or restriction (including without limitation, restrictions as to
volume). Notwithstanding the above, such registration statement may be converted
to a registration statement on Form S-3, Form S-2 (or any successor form), if
permitted by law.
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9.4 STOCK OPTION PLANS AND WARRANTS: Following the Effective Time,
Nettaxi shall continue to maintain its 1998 and 1999 Stock Option Plans for a
period of at least four (4) years. After the Effective Time, Nettaxi will
continue to honor the terms of the options and warrants of Nettaxi referenced on
Schedule 3.2 of the Nettaxi Disclosure Schedule in accordance with the
respective terms of such options and warrants.
10. BROKERS
10.1 BROKERS: Other than Baytree and Harter Financial, Inc. there is no
investment banker, broker, finder or other intermediary entitled to a fee or
other compensation for bringing the parties together to effect the Merger. At
the Effective Time, Baytree's fee shall be equal to 960,000 shares of the Common
Stock of Nettaxi plus three-year warrants to purchase 1,750,000 shares of the
Nettaxi's Common Stock (pursuant to a form of warrant agreement agreed to
between Nettaxi and Baytree) after giving effect to the stock split contemplated
in Section 1.1 having an exercise price of $1.19 per share. The surviving
corporation shall have the option to redeem the warrants if the surviving
corporation's Common Stock trades at a price equal to or greater than $6.00 per
share for 20 consecutive trading days. The redemption price shall be $0.05 per
share. At the Effective Time, Harter's fee shall be as described on Schedule
3.6 of RAE Systems Disclosure Schedule.
11. SECURITIES; SHAREHOLDER APPROVAL
11.1 RAE SYSTEMS: RAE Systems, acting through its board of directors,
in accordance with applicable law, its Articles of Incorporation, as amended,
and Bylaws, as amended, will:
(a) duly call, give notice of, convene and hold a special meeting
of its shareholders, to be held as soon as practicable after the date of this
Agreement, for the purpose of submitting this Agreement, the Merger and the
other transactions contemplated hereby, as a single proposal (the "RAE
Proposal") for adoption and approval by the required vote of the holders of RAE
Common Stock;
(b) cooperate with Nettaxi in preparing and filing with the
Securities and Exchange Commission (the "SEC") as promptly as practicable after
the date of this Agreement the Proxy Statement with respect to such shareholders
meeting satisfying the requirements of the Securities Act and the Exchange Act,
respond promptly to any comments raised by the SEC with respect to the
preliminary version of the Proxy Statement, use all its reasonable efforts to
cause the definitive version of the Proxy Statement to be mailed to its
shareholders as soon as it is legally permitted to do so;
(c) provide Nettaxi with the information concerning RAE Systems
required to be included in the Proxy Statement;
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(d) and include in the Proxy Statement the recommendation of the
board of directors of RAE Systems that the shareholders of RAE Systems vote in
favor of adoption and approval of the RAE Proposal.
11.2 INFORMATION OF RAE SYSTEMS IN PROXY STATEMENT: The information
supplied by RAE Systems for inclusion in the Proxy Statement shall not, at (i)
the time the Proxy Statement (or any amendment thereof or supplement thereto) is
first mailed to the shareholders of Nettaxi, (ii) the time of each of the
shareholders' meetings and (iii) the Effective Time, contain any untrue
statement of a material fact or fail to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. If, at any time
prior to the Effective Time, any event or circumstance relating to RAE Systems
or any subsidiary of RAE Systems, or their respective officers or directors,
that should be set forth in an amendment or a supplement to the Proxy Statement
is discovered by RAE Systems, RAE Systems shall promptly inform Nettaxi.
11.3 NETTAXI: Nettaxi, acting through its board of directors, in
accordance with applicable law, its Articles of Incorporation and Bylaws, will:
(a) duly call, give notice of, convene and hold an annual meeting
of its shareholders, to be held as soon as practicable after the date of this
Agreement, for the purpose of submitting, each as a single proposal, the
proposals adopted by the board of directors of Nettaxi to (i) effectuate the
Merger and issue the Nettaxi Merger Stock pursuant to the Merger (the "Share
Issuance"), (ii) change the jurisdiction of Nettaxi's incorporation to the State
of Delaware and (iii) amend the name of Nettaxi to "RAE Systems Inc."
(collectively, the "Nettaxi Proposals") for adoption and approval by the
required vote of the holders of Nettaxi Common Stock;
(b) file with the SEC as promptly as practicable after the date of
this Agreement the Proxy Statement complying in all material respects with the
Securities Act and the Exchange Act, respond promptly to any comments raised by
the SEC with respect to the preliminary version of the Proxy Statement, use all
its reasonable efforts to cause the definitive version of the Proxy Statement to
be mailed to its shareholders as soon as it is legally permitted to do so;
(c) provide RAE Systems with the information concerning Nettaxi
and RSAC required to be included in the Proxy Statement; and
(d) include in the Proxy Statement the recommendation of the board
of directors of Nettaxi that the shareholders of Nettaxi vote in favor of
adoption and approval of the Nettaxi Proposals.
11.4 INFORMATION OF NETTAXI IN PROXY STATEMENT: The information on
Nettaxi in the Proxy Statement shall not, at (i) the time the Proxy Statement
(or any amendment thereof or supplement thereto) is first mailed to the
shareholders of RAE Systems, (ii) the time of each of the shareholders' meetings
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and (iii) the Effective Time, contain any untrue statement of a material fact or
fail to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading. If, at any time prior to the Effective Time, any
event or circumstance relating to Nettaxi or any subsidiary of Nettaxi, or their
respective officers or directors, that should be set forth in an amendment or a
supplement to the Proxy Statement is discovered by Nettaxi, Nettaxi shall
promptly inform RAE Systems.
11.5 COOPERATION: Each party will promptly advise the other of its
receipt of, and will promptly furnish the other party with copies of, all
comments received from the SEC with respect to the Proxy Statement and will
consult with the other party in responding to such comments.
11.6 RESTRICTION ON TRANSFER: RAE Systems acknowledges that the shares
of Nettaxi Common Stock are restricted securities and may only be sold pursuant
to an effective registration statement under the Securities Act or an exemption
therefrom. The Restricted Securities and any shares of capital stock received in
respect thereof, whether by reason of a stock split or share reclassification
thereof, a stock dividend thereon or otherwise, shall not be transferable except
upon the conditions specified herein.
11.7 RESTRICTIVE LEGENDS: Each certificate for the Nettaxi Common Stock
issued in the Merger and any shares of capital stock received in respect
thereof, whether by reason of a stock split or share reclassification thereof, a
stock dividend thereon or otherwise, and each certificate for any such
securities issued to subsequent transferees of any such certificate shall
contain a legend to the effect that:
"The Restricted Securities covered by this certificate have not been
registered under the Securities Act of 1933, as amended, and may not
be sold, offered for sale, assigned, transferred or otherwise disposed
of, unless registered pursuant to the provisions of that Act or an
opinion of counsel to Nettaxi is obtained stating that such
disposition is in compliance with an available exemption from such
registration."
12. INDEMNIFICATION
12.1 DIRECTORS' AND OFFICERS' INDEMNIFICATION INSURANCE.
(a) The Articles of Incorporation of Nettaxi shall contain the
respective provisions that are set forth, as of the date of this Agreement, in
Article VII "Indemnification", which provisions shall not be amended, repealed
or otherwise modified for a period of three (3) years from the Effective Time in
any manner that would affect adversely the rights thereunder of individuals who
at or at any time prior to the Effective Time were directors, officers,
employees, fiduciaries or agents of Nettaxi. The Indemnity Agreements between
Nettaxi and its officers and directors shall remain in full force and effect
after the Effective Time.
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(b) After the Effective Time, Nettaxi and RAE Systems shall, to
the extent set forth under their respective Articles of Incorporation and
Bylaws, or any Indemnity Agreements, indemnify and hold harmless, each current
and former director or officer of Nettaxi and its subsidiaries and each person
who served at the request of Nettaxi or any subsidiary of the Nettaxi as a
director, officer, trustee, partner, fiduciary, employee or agent of another
corporation, partnership, joint venture, trust, pension or other employee
benefit plan or enterprise (collectively, the "Indemnified Parties") against all
costs and expenses (including reasonable attorneys' fees), judgments, fines,
losses, claims, damages, liabilities, and settlement amounts paid in connection
with any claim, action, suit proceeding or investigation (whether arising before
or after the Effective Time), whether civil, administrative, criminal or
investigative, arising out of or pertaining to any action or omission in their
capacities as officers or directors, in each case occurring before the Effective
Time (including transactions contemplated by this Agreement). Without limiting
the foregoing, in the event that any such claim, action, suit, proceeding or
investigation, (i) Nettaxi and RAE Systems, as the case may be, shall pay the
reasonable fees and expenses of one (1) counsel selected by any Indemnified
Party, which counsel shall be reasonably satisfactory to Nettaxi and RAE
Systems, as the case may be, promptly after statements therefore are received
(unless RAE Systems shall elect to defend such action) and (ii) Nettaxi and RAE
Systems shall reasonably cooperate in the defense of any such matter, provided,
however, that none of Nettaxi or RAE Systems shall be liable for any settlement
effected without its written consent (which consent shall not be unreasonably
withheld or delayed). In the event that any claim or claims for indemnification
are asserted or made, all rights to indemnification in respect of any such claim
or claims shall continue until the disposition of any and all such claims.
(c) For a period of three (3) years after the Effective Time,
Nettaxi shall cause to be maintained in effect the current directors and
officers liability insurance policies maintained by Nettaxi (provided that
coverage limits in the aggregate for the entire three (3) year period are not
less than the current annual limits, and provided further that Nettaxi may
substitute policies reasonably satisfactory to the Indemnified Parties of at
least the same coverage with other terms and conditions that are no less
advantageous to the Indemnified Parties) with respect to claims arising from
facts or events that occurred prior to the Effective Time; provided, however,
that in no event shall Nettaxi be required to expand, pursuant to this Section
12.1(c), more than an amount per year equal to 110% of current annual premiums
paid by Nettaxi for such insurance; provided further, however, that if the
premiums for such coverage exceed such amount, Nettaxi shall purchase a policy
with the greatest coverage available for such 110% of the current annual
premiums spent by Nettaxi for its fiscal year ending December 31, 2001. Prior
to the Effective Time, Nettaxi shall submit a quote from its insurance broker
for the coverage required by this Section 12.1(c). The quote will describe the
cost of coverage before and after the Effective Time. Notwithstanding anything
to the contrary contained in this Agreement, Nettaxi shall purchase the
insurance policy. Nettaxi's Net Cash (as it applies to NV defined in Section
1.4(a)) shall be increased by the cost of the coverage under such insurance
policy attributable to after the Effective Time, which offset shall not exceed
110% of the current annual premiums paid by Nettaxi for such insurance for its
fiscal year ending December 31, 2001.
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(d) In the event Nettaxi or RAE Systems or any of their respective
successors or assigns (i) consolidates with or merges into another person and
shall not be continuing or surviving corporation or entity in such consolidation
or merger or (ii) transfers all or substantially all of its properties and
assets to any person, then, and in each case, proper provision shall be made so
that the successor and assigns of Nettaxi, or RAE Systems, as the case may be,
honor the indemnification obligations set forth in this Section 12.1.
13. MISCELLANEOUS
13.1 EXPENSES: RAE Systems, Nettaxi and RSAC shall each pay its own
expenses incident to the negotiation, preparation, and carrying out of this
Agreement, including legal and accounting and audit fees.
13.2 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS: All
statements contained in this Agreement or in any certificate delivered by or on
behalf of RAE Systems or Nettaxi pursuant hereto, or in connection with the
actions contemplated hereby shall be deemed representations, warranties and
covenants by Nettaxi or RAE Systems, as the case may be, hereunder. All
representations, warranties, and covenants made by RAE Systems or Nettaxi in
this Agreement, or pursuant hereto, shall terminate at the Closing.
13.3 PUBLICITY: Nettaxi and RAE Systems shall not issue any press
release or make any other public statement, in each case, relating to, in
connection with or arising out of this Agreement or the transactions
contemplated hereby, without obtaining the prior approval of the other, which
shall not be unreasonably withheld or delayed, except that prior approval shall
not be required if, in the reasonable judgment of Nettaxi, prior approval by RAE
Systems would prevent the timely dissemination of such release or statement in
violation of applicable Federal securities laws, rules or regulations or
policies of the NASD OTC Bulletin Board.
13.4 NON DISCLOSURE: RAE Systems and Nettaxi shall be governed by the
confidentiality and nondisclosure provisions set forth in that certain Mutual
Nondisclosure Agreement dated November 29, 2001 by and between RAE Systems and
Nettaxi.
13.5 SUCCESSION AND ASSIGNMENTS AND THIRD PARTY BENEFICIARIES: This
Agreement may not be assigned (either voluntarily or involuntarily) by any party
hereto without the express written consent of the other party. Any attempted
assignment in violation of this Section shall be void and ineffective for all
purposes. In the event of an assignment permitted by this Section, this
Agreement shall be binding upon the heirs, successors and assigns of the parties
hereto. There shall be no third party beneficiaries of this Agreement.
13.6 NOTICES: All notices, requests, demands, or other communications
with respect to this Agreement shall be in writing and shall be (i) sent by
facsimile transmission, (ii) sent by the United States Postal Service,
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registered or certified mail, return receipt requested, or (iii) personally
delivered by a nationally recognized express overnight courier service, charges
prepaid, to the following addresses (or such other addresses as the parties may
specify from time to time in accordance with this Section)
(a) TO NETTAXI/RSAC: Nettaxi.com
1875 South Bascom Ave., No. 116
Campbell, California 95008
Phone No: (408) 879-9880
Fax No: (408) 879-9907
Attn: Robert A. Rositano, Jr., CEO
with copy to: Silicon Valley Law Group
Attn: James C. Chapman
152 N. Third Street, Suite 900
San Jose, California 95112
Phone No: (408) 286-6100
Fax No: (408) 286-1400
(b) TO RAE SYSTEMS: RAE Systems Inc.
1339 Moffett Park Drive
Sunnyvale, California 94089
Phone No: (408) 585-3500
Fax No: (408) 585-3505
Attn: Robert I. Chen, Chairman and CEO
with copy to: Gray Cary Ware & Freidenrich LLP
Attn: Peter M. Astiz
400 Hamilton Avenue
Palo Alto, California 94301-1833
(650) 833-2000
(650) 833-2001
Any such notice shall, when sent in accordance with the preceding sentence, be
deemed to have been given and received on the earliest of (i) the day delivered
to such address or sent by facsimile transmission, (ii) the fifth (5th) business
day following the date deposited with the United States Postal Service, or (iii)
24 hours after shipment by a such courier service.
13.7 CONSTRUCTION: This Agreement shall be construed and enforced in
accordance with the internal laws of the State of California without giving
effect to the principles of conflicts of law thereof.
13.8 COUNTERPARTS: This Agreement may be executed in two (2) or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
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13.9 NO IMPLIED WAIVER; REMEDIES: No failure or delay on the part of
the parties hereto to exercise any right, power, or privilege hereunder or under
any instrument executed pursuant hereto shall operate as a waiver nor shall any
single or partial exercise of any right, power, or privilege preclude any other
or further exercise thereof or the exercise of any other right, power, or
privilege. All rights, powers, and privileges granted herein shall be in
addition to other rights and remedies to which the parties may be entitled at
law or in equity.
13.10 ENTIRE AGREEMENT: This Agreement, including the Exhibits and
Disclosure Schedules attached hereto, sets forth the entire understandings of
the parties with respect to the subject matter hereof, and it incorporates and
merges any and all previous communications, understandings, oral or written as
to the subject matter hereof, and cannot be amended or changed except in
writing, signed by the parties.
13.11 HEADINGS: The headings of the Sections of this Agreement, where
employed, are for the convenience of reference only and do not form a part
hereof and in no way modify, interpret or construe the meanings of the parties.
13.12 SEVERABILITY: To the extent that any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted hereof and the
remainder of such provision and of this Agreement shall be unaffected and shall
continue in full force and effect.
13.13 ATTORNEYS FEES: In the event any legal action is brought to
interpret or enforce this Agreement, the party prevailing in such action shall
be entitled to recover its
attorneys' fees and costs in addition to any other relief that it is entitled.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
RSAC: RAES ACQUISITION CORPORATION
By: /s/ Robert A. Rositano, Jr.
-------------------------------
Robert A. Rositano, Jr., Chief Executive Officer
NETTAXI: NETTAXI.COM
By: /s/ Robert A. Rositano, Jr.
-------------------------------
Robert A. Rositano, Jr.
Chief Executive Officer
RAE SYSTEMS: RAE SYSTEMS INC.
By: /s/ Robert I. Chen
---------------------
Robert I. Chen
Chairman and Chief Executive Officer
TABLE OF EXHIBITS
EXHIBIT A: FORM OF DELAWARE CERTIFICATE OF INCORPORATION
EXHIBIT B: FORM OF DELAWARE BYLAWS
EXHIBIT C: AGREEMENT OF MERGER
EXHIBIT D: VOTING AGREEMENT
EXHIBIT E: FORM OF LEGAL OPINION OF COUNSEL TO NETTAXI AND RSAC
EXHIBIT F: FORM OF LEGAL OPINION OF COUNSEL TO RAE SYSTEMS
EXHIBIT G: FORM OF LOCK-UP AGREEMENT
[SIGNATURE PAGE TO MERGER AGREEMENT]
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APPENDIX B
VOTING AGREEMENT (NETTAXI SHAREHOLDERS)
THIS VOTING AGREEMENT (this "Agreement") is made as of _________, 200_, by
and between RAE Systems Inc. ("RAE Systems"), and ___________________ (in each
of the capacities set forth on the signature page hereto, "Shareholder").
RECITALS
WHEREAS, as of the date hereof, Shareholder beneficially owns the number of
shares of common stock, par value $0.001 per share ("Company Common Shares"), of
Nettaxi.com, a Nevada corporation (the "Company") set forth opposite his name on
Schedule I attached hereto (the "Shares" and, together with any other shares of
capital stock of the Company acquired by Shareholder on or after the date hereof
and during the term of this Agreement, the "Subject Shares");
WHEREAS, the Company, RAE Systems and RAES Acquisition Corporation, a
California corporation and a wholly owned subsidiary of the Company ("RSAC")
have entered into a Merger Agreement and Plan of Reorganization, dated as of the
date hereof (as the same may be amended or supplemented, the "Merger
Agreement"), providing for the merger of RAE Systems with and into RSAC (the
"Merger"), upon the terms and subject to the conditions set forth in the Merger
Agreement; and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, RAE Systems has requested that Shareholder enter into this Agreement
pursuant to which Shareholder shall, among other things, vote in favor of
adopting and approving the Merger Agreement and the Merger in accordance with
the terms hereof and thereof.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Representations and Warranties of Shareholder. Shareholder hereby
represents and warrants to RAE Systems as follows:
(a) Authority. Shareholder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Shareholder and,
assuming the due authorization, execution and delivery by RAE Systems,
constitutes a valid and binding obligation of Shareholder enforceable against
Shareholder in accordance with its terms.
(b) Subject Shares. Shareholder is the record and beneficial owner of
the Shares, and at the time of the Company Shareholder Meeting (as defined in
the Merger Agreement) will be the record and beneficial owner of the Subject
Shares, in each case free and clear of any Liens (as defined in the Merger
Agreement), other than such Liens that would not, individually or in the
aggregate, prevent or impair the ability of the Shareholder to perform its
obligations under this Agreement. Shareholder does not own, of record or
beneficially, any shares of capital stock of the Company other than the Shares.
Shareholder has the sole right to vote such Shares, and none of such Shares is,
and none of the Subject Shares will be, subject to any voting trust or other
agreement, arrangement or restriction with respect to the voting of such Shares
or Subject Shares, except as contemplated by this Agreement.
2. Representations and Warranties of RAE Systems. RAE Systems hereby
represents and warrants to Shareholder that RAE Systems has all requisite
corporate power and authority to enter into this Agreement and to consummate the
transactions contemplated hereby. This Agreement has been duly authorized,
executed and delivered by RAE Systems and, assuming the due authorization,
execution and delivery by Shareholder, constitutes a valid and binding
obligation of RAE Systems enforceable against RAE Systems in accordance with its
terms. The execution and delivery of this Agreement does not, and the
consummation of the transactions contemplated hereby and compliance with the
terms hereof will not, conflict with, result in any violation of, or constitute
(with or without notice or lapse of time or both) a default under, any
provisions of the restated Articles of Incorporation or Bylaws of RAE Systems.
3. Covenants of Shareholder. Subject to Section 6 hereof, Shareholder
agrees as follows:
(a) At any meeting of Shareholders of the Company, however called, or
at any adjournment thereof or in any other circumstances upon which a vote,
consent or other approval (including written consent) of shareholders of the
Company is sought with respect to any of the matters described in (i) or (ii)
below, or any actions related thereto, Shareholder shall vote (or cause to be
voted) the Subject Shares (which number of shares may be greater or less than
the number of shares as of the date hereof):
(i) in favor of the Merger, the approval and adoption by the
Company of the Merger Agreement and approval of the other transactions
contemplated by the Merger Agreement; and
(ii) against (A) any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale of
substantially all of the Company's assets, sale or issuance of securities of the
Company or its subsidiaries, reorganization, joint venture, recapitalization,
dissolution, liquidation or winding up of or by the Company or its subsidiaries
and (B) any amendment of the Company's articles of incorporation or bylaws, any
other proposal or transaction involving the Company or any of its subsidiaries
or any action or agreement which amendment, other proposal or transaction or
action or agreement would or could reasonably be expected to impede, frustrate,
delay, prevent, nullify or result in a breach in any material respect of any
covenant, representation or warranty or any other obligation or agreement of the
Company under or with respect to, the Merger, the Merger Agreement or any of the
transactions contemplated by the Merger Agreement or by this Agreement.
(b) Shareholder shall not, except as contemplated by this Agreement or
with the prior written consent of RAE Systems grant any proxies or powers of
attorney with respect to the Subject Shares, deposit the Subject Shares into a
voting trust or enter into a voting agreement with respect to the Subject
Shares.
4. Certain Events. Shareholder agrees that this Agreement and the
obligations hereunder shall attach to the Subject Shares and shall be binding
upon any person or entity to which legal or beneficial ownership of such Subject
Shares shall pass, whether by operation of law or otherwise, including
Shareholder's successors. In the event of any stock split, stock dividend,
merger, reorganization, recapitalization or other change in the capital
structure of the Company affecting the Company Common Shares, or the issuance to
or acquisition by Shareholder of additional Company Common Shares or other
voting securities of the Company (whether by purchase, conversion or otherwise),
the number of Subject Shares shall be adjusted appropriately and this Agreement
and the obligations hereunder shall attach to any additional or fewer Company
Common Shares or other voting securities of the Company issued to or acquired by
Shareholder.
5. Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by Shareholder, on the one hand,
without the prior written consent of RAE Systems nor by RAE Systems, on the
other hand, without the prior written consent of Shareholder. Subject to the
preceding sentence, this Agreement will be binding upon, inure to the benefit of
and be enforceable by the parties and their respective successors and assigns.
6. Termination. This Agreement shall terminate, and the provisions
hereof shall be of no further force or effect, and no party shall have any
further obligations or liabilities hereunder, upon the earlier of (i) the
Effective Time (as defined in the Merger Agreement) or (ii) the termination of
the Merger Agreement in accordance with its terms pursuant to Section 2.3 or
Section 8 thereof.
7. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices, requests and other communications given to
any party hereunder shall be in writing (including facsimile or similar writing)
and shall be effective upon receipt, by RAE Systems at the address specified in
accordance with Section 13.6 of the Merger Agreement or by Shareholder at its
address set forth on the Company's stock ledger (or at such other address for a
party as shall be specified by like notice).
(c) Counterparts; Effectiveness; No Third Party Beneficiaries. This
Agreement may be signed in counterparts, each of which shall be an original,
with the same effect as if the signatures on each counterpart were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by the other party hereto. No
provision of this Agreement is intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder.
(d) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof.
(e) Enforcement. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
(f) Severability. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (i) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (ii) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (iii)
the invalidity or unenforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Agreement. Each
provision of this Agreement is separable from every other provision of this
Agreement, and each part of each provision of this Agreement is separable from
every other part of such provision.
(g) Entire Agreement. This Agreement (together with the Schedules
hereto) constitutes the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both oral and written, between the parties with respect to the subject matter
hereof.
(h) Shareholder Capacity. Shareholder enters into this Agreement
solely in Shareholder's capacity as the record and beneficial owner of the
Shares. If Shareholder is or becomes during the term hereof a director or
officer of the Company, Shareholder makes no agreement or understanding in this
Agreement in Shareholder's capacity as such director or officer. Nothing in
this Agreement shall limit or affect any actions taken by Shareholder in
Shareholder's capacity as an officer or director of the Company.
(i) No Ownership Interest. Except as expressly set forth in this
Agreement, nothing contained in this Agreement shall be deemed to vest in RAE
Systems any direct or indirect ownership or incidence of ownership of or with
respect to any Subject Shares. All rights, ownership and economic benefits of
and relating to any Subject Shares shall remain and belong to Shareholder, and
RAE Systems shall not have any authority to exercise any power or authority to
manage, direct, superintend, restrict, regulate, govern or administer any of the
policies or operations of the Company or exercise any power or authority to
direct Shareholder in the voting of any of the Subject Shares, except as
otherwise expressly provided in this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed or caused this
Agreement to be duly executed as of the date first written above.
SHAREHOLDER: __________________________
Signature of Shareholder
__________________________
Print or Type Name of Shareholder
RAE SYSTEMS: RAE Systems Inc.
By:________________________
Name:______________________
Title:_____________________
SCHEDULE I
Schedule of Share Ownership
VOTING AGREEMENT (RAE SHAREHOLDERS)
THIS VOTING AGREEMENT (this "Agreement") is made as of December __, 200_,
by and between Nettaxi ("Nettaxi"), and ___________________ (in each of the
capacities set forth on the signature page hereto, "Shareholder").
RECITALS
WHEREAS, as of the date hereof, Shareholder beneficially owns the number of
shares of common stock, par value $0.01 per share ("Company Common Shares"), or
shares of preferred stock, par value $0.01 per share ("Company Preferred
Stock"), of RAE Systems Inc., a California corporation (the "Company"), set
forth opposite his name on Schedule I attached hereto (the "Shares" and,
together with any other shares of capital stock of the Company acquired by
Shareholder on or after the date hereof and during the term of this Agreement,
the "Subject Shares");
WHEREAS, the Company, Nettaxi and RAES Acquisition Corporation, a
California corporation and a wholly owned subsidiary of Nettaxi ("RSAC") have
entered into a Merger Agreement and Plan of Reorganization, dated as of the date
hereof (as the same may be amended or supplemented, the "Merger Agreement"),
providing for the merger of the Company with and into RSAC (the "Merger"), upon
the terms and subject to the conditions set forth in the Merger Agreement; and
WHEREAS, as a condition to its willingness to enter into the Merger
Agreement, Nettaxi has requested that Shareholder enter into this Agreement
pursuant to which Shareholder shall, among other things, vote in favor of
adopting and approving the Merger Agreement and the Merger in accordance with
the terms hereof and thereof.
AGREEMENT
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties agree as follows:
1. Representations and Warranties of Shareholder. Shareholder hereby
represents and warrants to Nettaxi as follows:
(a) Authority. Shareholder has all requisite power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Shareholder and,
assuming the due authorization, execution and delivery by Nettaxi, constitutes a
valid and binding obligation of Shareholder enforceable against Shareholder in
accordance with its terms.
(b) Subject Shares. Shareholder is the record and beneficial owner of
the Shares, and at the time of the Company Shareholder Meeting (as defined in
the Merger Agreement) will be the record and beneficial owner of the Subject
Shares, in each case free and clear of any Liens (as defined in the Merger
Agreement), other than such Liens that would not, individually or in the
aggregate, prevent or impair the ability of the Shareholder to perform its
obligations under this Agreement. Shareholder does not own, of record or
beneficially, any shares of capital stock of the Company other than the Shares.
Shareholder has the sole right to vote such Shares, and none of such Shares is,
and none of the Subject Shares will be, subject to any voting trust or other
agreement, arrangement or restriction with respect to the voting of such Shares
or Subject Shares, except as contemplated by this Agreement.
2. Representations and Warranties of Nettaxi. Nettaxi hereby represents
and warrants to Shareholder that Nettaxi has all requisite corporate power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. This Agreement has been duly authorized, executed and
delivered by Nettaxi and, assuming the due authorization, execution and delivery
by Shareholder, constitutes a valid and binding obligation of Nettaxi
enforceable against Nettaxi in accordance with its terms. The execution and
delivery of this Agreement does not, and the consummation of the transactions
contemplated hereby and compliance with the terms hereof will not, conflict
with, result in any violation of, or constitute (with or without notice or lapse
of time or both) a default under, any provisions of the restated Articles of
Incorporation or Bylaws of Nettaxi.
3. Covenants of Shareholder. Subject to Section 6 hereof, Shareholder
agrees as follows:
(a) At any meeting of Shareholders of the Company, however called, or
at any adjournment thereof or in any other circumstances upon which a vote,
consent or other approval (including written consent) of shareholders of the
Company is sought with respect to any of the matters described in (i) or (ii)
below, or any actions related thereto, Shareholder shall vote (or cause to be
voted) the Subject Shares (which number of shares may be greater or less than
the number of shares as of the date hereof):
(i) in favor of the Merger, the approval and adoption by the
Company of the Merger Agreement and approval of the other transactions
contemplated by the Merger Agreement; and
(ii) against (A) any merger agreement or merger (other than the
Merger Agreement and the Merger), consolidation, combination, sale of
substantially all of the Company's assets, sale or issuance of securities of the
Company or its subsidiaries, reorganization, joint venture, recapitalization,
dissolution, liquidation or winding up of or by the Company or its subsidiaries
and (B) any amendment of the Company's articles of incorporation or bylaws, any
other proposal or transaction involving the Company or any of its subsidiaries
or any action or agreement which amendment, other proposal or transaction or
action or agreement would or could reasonably be expected to impede, frustrate,
delay, prevent, nullify or result in a breach in any material respect of any
covenant, representation or warranty or any other obligation or agreement of the
Company under or with respect to, the Merger, the Merger Agreement or any of the
transactions contemplated by the Merger Agreement or by this Agreement.
(b) Shareholder shall not, except as contemplated by this Agreement or
with the prior written consent of Nettaxi grant any proxies or powers of
attorney with respect to the Subject Shares, deposit the Subject Shares into a
voting trust or enter into a voting agreement with respect to the Subject
Shares.
4. Certain Events. Shareholder agrees that this Agreement and the
obligations hereunder shall attach to the Subject Shares and shall be binding
upon any person or entity to which legal or beneficial ownership of such Subject
Shares shall pass, whether by operation of law or otherwise, including
Shareholder's successors. In the event of any stock split, stock dividend,
merger, reorganization, recapitalization or other change in the capital
structure of the Company affecting the Company Common Shares or Company
Preferred Shares, or the issuance to or acquisition by Shareholder of additional
Company Common Shares or Company Preferred Shares or other voting securities of
the Company (whether by purchase, conversion or otherwise), the number of
Subject Shares shall be adjusted appropriately and this Agreement and the
obligations hereunder shall attach to any additional or fewer Company Common
Shares or Company Preferred Shares or other voting securities of the Company
issued to or acquired by Shareholder.
5. Assignment. Neither this Agreement nor any of the rights, interests
or obligations hereunder shall be assigned by Shareholder, on the one hand,
without the prior written consent of Nettaxi nor by Nettaxi, on the other hand,
without the prior written consent of Shareholder. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
6. Termination. This Agreement shall terminate, and the provisions
hereof shall be of no further force or effect, and no party shall have any
further obligations or liabilities hereunder, upon the earlier of (i) the
Effective Time (as defined in the Merger Agreement) or (ii) the termination of
the Merger Agreement in accordance with its terms pursuant to Section 2.3 or
Section 8 thereof.
7. General Provisions.
(a) Amendments. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
(b) Notice. All notices, requests and other communications given to
any party hereunder shall be in writing (including facsimile or similar writing)
and shall be effective upon receipt, by Nettaxi at the address specified in
accordance with Section 13.6 of the Merger Agreement or by Shareholder at its
address set forth on the Company's stock ledger (or at such other address for a
party as shall be specified by like notice).
(c) Counterparts; Effectiveness; No Third Party Beneficiaries. This
Agreement may be signed in counterparts, each of which shall be an original,
with the same effect as if the signatures on each counterpart were upon the same
instrument. This Agreement shall become effective when each party hereto shall
have received counterparts hereof signed by the other party hereto. No
provision of this Agreement is intended to confer upon any Person other than the
parties hereto any rights or remedies hereunder.
(d) Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California, regardless of the laws
that might otherwise govern under applicable principles of conflicts of law
thereof.
(e) Enforcement. The parties agree that irreparable damage would occur
in the event that any of the provisions of this Agreement were not performed in
accordance with their specific terms. It is accordingly agreed that the parties
shall be entitled to specific performance of the terms hereof, this being in
addition to any other remedy to which they are entitled at law or in equity.
(f) Severability. If any provision of this Agreement or any part of
any such provision is held under any circumstances to be invalid or
unenforceable in any jurisdiction, then (i) such provision or part thereof
shall, with respect to such circumstances and in such jurisdiction, be deemed
amended to conform to applicable laws so as to be valid and enforceable to the
fullest possible extent, (ii) the invalidity or unenforceability of such
provision or part thereof under such circumstances and in such jurisdiction
shall not affect the validity or enforceability of such provision or part
thereof under any other circumstances or in any other jurisdiction, and (iii)
the invalidity or unenforceability of such provision or part thereof shall not
affect the validity or enforceability of the remainder of such provision or the
validity or enforceability of any other provision of this Agreement. Each
provision of this Agreement is separable from every other provision of this
Agreement, and each part of each provision of this Agreement is separable from
every other part of such provision.
(g) Entire Agreement. This Agreement (together with the Schedules
hereto) constitutes the entire agreement between the parties with respect to the
subject matter hereof and supersedes all prior agreements and understandings,
both oral and written, between the parties with respect to the subject matter
hereof.
(h) Shareholder Capacity. Shareholder enters into this Agreement
solely in Shareholder's capacity as the record and beneficial owner of the
Shares. If Shareholder is or becomes during the term hereof a director or
officer of the Company, Shareholder makes no agreement or understanding in this
Agreement in Shareholder's capacity as such director or officer. Nothing in
this Agreement shall limit or affect any actions taken by Shareholder in
Shareholder's capacity as an officer or director of the Company.
(i) No Ownership Interest. Except as expressly set forth in this
Agreement, nothing contained in this Agreement shall be deemed to vest in
Nettaxi any direct or indirect ownership or incidence of ownership of or with
respect to any Subject Shares. All rights, ownership and economic benefits of
and relating to any Subject Shares shall remain and belong to Shareholder, and
Nettaxi shall not have any authority to exercise any power or authority to
manage, direct, superintend, restrict, regulate, govern or administer any of the
policies or operations of the Company or exercise any power or authority to
direct Shareholder in the voting of any of the Subject Shares, except as
otherwise expressly provided in this Agreement.
IN WITNESS WHEREOF, the parties hereto have duly executed or caused this
Agreement to be duly executed as of the date first written above.
SHAREHOLDER: __________________________
Signature of Shareholder
__________________________
Print or Type Name of Shareholder
NETTAXI: NETTAXI.COM
By:________________________
Name:______________________
Title:_____________________
SCHEDULE I
Schedule of Share Ownership
APPENDIX C
FORM OF
AGREEMENT OF MERGER
This Agreement of Merger (the "Agreement") is entered into as of
_____________, 2002 by and among RAE Systems Inc., a California corporation
("RAE Systems"), RAES Acquisition Corporation, a California corporation ("RSAC",
and together with RAE Systems, the "Constituent Corporations") and RAE Systems
Inc., a Delaware corporation (formerly Nettaxi.com, a Nevada corporation
("Nettaxi")).
RECITALS
A. The Constituent Corporations and Nettaxi have entered into a Merger
Agreement and Plan of Reorganization dated January 9, 2002 (the "Merger
Agreement"), providing, among other things, for the execution and filing of this
Agreement of Merger;
B. The respective Board of Directors of each of the Constituent
Corporations and Nettaxi deem it advisable and in the best interests of such
corporation and its respective shareholders that RSAC be merged with and into
RAE Systems and such Board of Directors have approved this Agreement and the
Merger (as hereinafter defined);
C. The Merger Agreement and Plan of Reorganization, the Merger, and
this Agreement have been approved by the respective shareholders of RAE Systems,
RSAC and Nettaxi;
D. RAE Systems and RSAC have agreed to merge RAE Systems into RSAC
according to the terms and conditions set forth herein.
AGREEMENT
For good and valuable consideration, the receipt of which is hereby
acknowledged, the parties agree as follows:
1.1 THE CONSTITUENT CORPORATIONS.
(a) RSAC: RSAC is a California corporation duly incorporated and
existing under the laws of the State of California.
(b) RAE SYSTEMS: RSAC is a California corporation duly
incorporated and existing under the laws of the State of California.
1.2 MERGER AND SURVIVAL OF RAE SYSTEMS: Upon the satisfaction or
waiver of all of the conditions precedent to the obligations of each of the
parties to the Merger Agreement and upon the filing of this Agreement with the
Secretary of State of California (the "Effective Time"), RAE Systems shall be
merged with and into RSAC in accordance with the provisions of, and with the
effect provided in the Delaware General Corporation Law and California General
Corporation Law (the "CGCL"). RAE Systems shall be the surviving corporation
after the Merger with RSAC and shall continue to exist as a wholly-owned
subsidiary of Nettaxi, created and governed by the laws of the State of
California (the "Merger").
1.3 CONSIDERATION FOR THE MERGER.
(a) SHARES OF THE CONSTITUENT AND SURVIVING CORPORATIONS: At the
Effective Time, each share of RAE Systems Common Stock and each share of RAE
Systems Preferred Stock issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares (as hereinafter defined)) shall, by
virtue of the Merger and without any action on the part of Nettaxi, RAE Systems
or RSAC or any holder thereof, be converted into and be exchangeable for the
right to receive that number of fully paid and non-assessable shares of Nettaxi
Common Stock ("Nettaxi Merger Stock") equal to the Exchange Ratio.
For purposes of this Agreement, the "Exchange Ratio" shall be determined in
accordance with the following formula:
E = VPS (RAE)
---------
VPS (Nettaxi)
where E = the Exchange Ratio
VPS (RAE) = 1.48113
VPS (Nettaxi) = (NV+100,000+T)/7,605,747
NV = Nettaxi's net cash plus cash equivalents minus (i) an
amount equal to all payables and other fixed
obligations (excluding the four (4) liabilities
described in Nettaxi Disclosure Schedule 4.24) and (ii)
an appropriate reserve for payables and any other
contingencies (including a reasonable reserve to be
mutually agreed upon for the two (2) litigation matters
described in Section 2.2(c)) (collectively, "Net
Cash"), each calculated as of the Effective Time;
provided, however, that if such amount is greater than
$7,500,000, NV shall nonetheless equal $7,500,000.
T = The dollar amount, if any, by which the tax reserve
relating to transactions involving RAE System's foreign
subsidiaries in the audited financial statements of RAE
Systems exceeds $2,000,000 for taxes payable relative
to foreign income for the years 1998 through 2001.
For illustrative purposes only, if NV was $7,500,000 and T was 0 at the
Effective Time,
E = VPS (RAE)
---------
VPS (Nettaxi)
= 1.48113
----------------------------
(7,500,000 + 100,000+0)/7,605,747
= 1.48225
and whereby there would be 43,091,835 shares of Nettaxi common stock
outstanding immediately after the Effective Time, with
7,605,747 shares of Nettaxi common stock, constituting 17.65% of the
outstanding shares of Nettaxi common stock at the Effective Time,
being held by the Nettaxi shareholders that were Nettaxi
shareholders immediately prior to the Effective Time;
34,526,088 shares of Nettaxi common stock, constituting 80.12% of the
outstanding shares of Nettaxi common stock at the Effective Time,
being held by shareholders of RAE Systems immediately prior to
the Effective Time ("RAE Systems Ownership"); and
960,000 shares of Nettaxi common stock, constituting 2.23% of the
outstanding shares of Nettaxi common stock at the Effective Time,
being held by BayTree Capital Associates ("Baytree") ("Baytree
Ownership").
Notwithstanding the foregoing, if RAE Systems or Nettaxi shall issue any shares
of its capital stock between the date hereof and the Effective Time (other than
shares of RAE Systems common stock issued with respect to the conversion of its
preferred stock), the Exchange Ratio shall be adjusted such that the Nettaxi
Ownership, the RAE Systems Ownership and the Baytree Ownership are 17.65%,
80.12% and 2.23%, as adjusted appropriately if NV is less than $7,500,000.
Subject to Section 1.5 hereof, all of such shares of RAE Systems Common Stock or
Preferred Stock, when so converted, shall otherwise no longer be outstanding and
shall automatically be canceled and retired and shall cease to exist, and each
holder of a certificate representing any such shares shall cease to have any
rights with respect thereto, except the right to receive Nettaxi Merger Stock as
set forth above and any cash in lieu of fractional shares of RAE Common Stock or
Preferred Stock if required to be issued or paid in consideration therefor upon
the surrender of such certificate in accordance with the Merger Agreement and
pursuant to Section 407 of the CGCL.
(b) OPTIONS OF THE CONSTITUENT AND SURVIVING CORPORATIONS: At the
Effective Time, each option to purchase RAE Systems Common Stock ("RAE Systems
Option"), whether vested or unvested, will be assumed by Nettaxi. Each such
option so assumed by Nettaxi under this Agreement shall continue to have, and be
subject to, the same terms and conditions set forth in the RAE Systems Inc. 1993
Stock Plan (the "RAE Systems Stock Plan") and any other document governing such
option immediately prior to the Effective Time, except that (a) such option will
be exercisable for that number of whole shares of Nettaxi Common Stock equal to
the product of the number of shares of RAE Systems Common Stock that were
issuable upon exercise of such option immediately prior to the Effective Time
multiplied by the Exchange Ratio and rounded down to the nearest whole number of
shares of Nettaxi Common Stock, (b) the per share exercise price for the shares
of Nettaxi Common Stock issuable upon exercise of such assumed option will be
equal to the quotient determined by dividing the exercise price per share of RAE
Systems Common Stock at which such option was exercisable immediately prior to
the Effective Time by the Exchange Ratio, rounded up to the nearest whole tenth
of a cent and (c) any restriction on the exercisability of such RAE System
Option shall continue in full force and effect, and the term, exercisability,
vesting schedule and other provisions of such RAE System Option shall remain
unchanged.
(c) NO FRACTIONAL SHARES OR OPTIONS: Unless otherwise required by
Section 407 of the CGCL, no fractional shares of Nettaxi Common Stock shall be
issued in connection with the Merger, and no certificate or scrip for any such
fractional shares shall be issued.
1.4 EFFECT OF MERGER: As of the Effective Time, the effect of the
Merger shall be as provided in this Agreement, the Agreement of Merger and the
applicable provisions of the CGCL, and each of the following shall occur:
(a) The separate existence and corporate organization of RSAC
shall cease and RAE Systems as the corporation surviving the Merger with RSAC
(the "Surviving Corporation"), shall possess the rights, privileges, powers and
franchises, and be subject to all the restrictions, disabilities and duties of,
the constituent corporations in the manner specified in the CGCL.
(b) Except as otherwise agreed by the parties, the Articles of
Incorporation of RAE Systems, as in effect immediately prior to the Effective
Time, shall be amended and restated to read as set forth on Exhibit A attached
hereto.
(c) The By-laws RAE Systems, as in effect immediately prior to the
Effective Time, shall continue in effect without change or amendment.
(d) The directors and officers of the RAE Systems immediately
after the Closing Date shall be the respective individuals who are directors and
officers of RAE Systems immediately prior to the Effective Time.
1.5 DISSENTING SHARES: Notwithstanding anything to the contrary
contained in this Agreement, any shares of capital stock of RAE Systems that, as
of the Effective Time, are or may become "dissenting shares" under the CGCL
("Dissenting Shares"), shall not be converted into or represent the right to
receive Nettaxi Merger Stock in accordance with this Agreement, and the holder
or holders of such shares shall be entitled only to such rights as may be
granted to such holder or holders under the CGCL; provided, however, that if the
status of any such shares as "dissenting shares" shall not be perfected, or if
any such shares shall lose their status as "dissenting shares," then, as of the
later of the Effective Time or the time of the failure to perfect such status or
the loss of such status, such shares shall automatically be converted into and
shall represent only the right to receive (upon the surrender of the certificate
or certificates representing such shares) Nettaxi Common Stock in accordance
with this Agreement.
1.6 FURTHER ACTION: If, at any time after the Effective Time, any
further action is determined by Nettaxi to be necessary or desirable to carry
out the purposes of this Agreement, the officers and directors of Nettaxi shall
be fully authorized (in the name of RAE Systems) to take such action.
1.7 MISCELLANEOUS.
(a) AMENDMENTS: This Agreement cannot be amended or changed except
in writing, signed by the parties.
(b) COUNTERPARTS: This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original, but all of which
shall together constitute one and the same Agreement.
(c) CONSTRUCTION: This Agreement shall be construed and enforced
in accordance with the internal laws of the State of California without giving
effect to the principles of conflicts of law thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
RAE SYSTEMS INC.
a California corporation
- ---------------------------------
Robert Chen
Chief Executive Officer and Secretary
RAES ACQUISITION CORPORATION
a California corporation
- ---------------------------------
Dean Rositano, President
- ---------------------------------
Robert A. Rositano, Jr., Secretary
RAE SYSTEMS INC.:
a Delaware corporation
- ---------------------------------
Dean Rositano, President
- ---------------------------------
Robert A. Rositano, Jr., Secretary
APPENDIX D
DELAWARE CODE
TITLE 8. CORPORATIONS
CHAPTER 1. GENERAL CORPORATION LAW
SUBCHAPTER IX. MERGER, CONSOLIDATION OR CONVERSION
(S) 262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to (S) 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to (S) 251 (other than a merger effected pursuant to (S)
251(g) of this title), (S) 252, (S) 254, (S) 257, (S) 258, (S) 263 or (S) 264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which
stock, or depository receipts in respect thereof, at the record date fixed
to determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no
appraisal rights shall be available for any shares of stock of the
constituent corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving corporation
as provided in subsection (f) of (S) 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to (S)(S)
251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
D-1
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of
record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under (S) 253 of this title is not owned by the parent
corporation immediately prior to the merger, appraisal rights shall be available
for the shares of the subsidiary Delaware corporation. (c) Any corporation may
provide in its certificate of incorporation that appraisal rights under this
section shall be available for the shares of any class or series of its stock as
a result of an amendment to its certificate of incorporation, any merger or
consolidation in which the corporation is a constituent corporation or the sale
of all or substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this section,
including those set forth in subsections (d) and (e) of this section, shall
apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to (S) 228 or (S)
253 of this title, each constituent corporation, either before the effective
date of the merger or consolidation or within ten days thereafter, shall notify
each of the holders of any class or series of stock of such constituent
corporation who are entitled to appraisal rights of the approval of the merger
or consolidation and that appraisal rights are available for any or all shares
of such class or series of stock of such constituent corporation, and shall
include in such notice a copy of this section; provided that, if the notice is
given on or after the effective date of the merger or consolidation, such notice
shall be given by the surviving or resulting corporation to all such holders of
any class or series of stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after the effective date
of the merger or consolidation, shall, also notify such stockholders of the
D-2
effective date of the merger or consolidation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation the appraisal of
such holder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a second
notice before the effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such constituent corporation
that are entitled to appraisal rights of the effective date of the merger or
consolidation or (ii) the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after such effective
date; provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only be sent
to each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
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the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
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provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
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APPENDIX E
EXCERPT FROM THE CALIFORNIA GENERAL CORPORATION LAW CONCERNING DISSENTERS'
RIGHTS
CORPORATIONS CODE
TITLE 1. CORPORATIONS
DIVISION 1. GENERAL CORPORATION LAW
CHAPTER 13. DISSENTERS' RIGHTS
Sec.1300. Reorganization or short-form merger; dissenting shares;
corporate purchase at fair market value; definitions
(a) If the approval of the outstanding shares (Section 152) of a corporation
is required for a reorganization under subdivisions (a) and (b) or subdivision
(e) or (f) of Section 1201, each shareholder of the corporation entitled to vote
on the transaction and each shareholder of a subsidiary corporation in a
short-form merger may, by complying with this chapter, require the corporation
in which the shareholder holds shares to purchase for cash at their fair market
value the shares owned by the shareholder which are dissenting shares as defined
in subdivision (b). The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed reorganization or
short-form merger, excluding any appreciation or depreciation in consequence of
the proposed action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
(b) As used in this chapter, "dissenting shares" means shares which come
within all of the following descriptions:
1) Which were not immediately prior to the reorganization or
short-form merger either (A) listed on any national securities exchange
certified by the Commissioner of Corporations under subdivision (0) of
Section 25100 or (B) listed on the list of OTC margin stocks issued by the
Board of Governors of the Federal Reserve System, and the notice of meeting
of shareholders to act upon the reorganization summarizes this section and
Sections 1301, 1302, 1303 and 1304; provided, however, that this provision
does not apply to any shares with respect to which there exists any
restriction on transfer imposed by the corporation or by any law or
regulation; and provided, further, that this provision does not apply to
any class of shares described in subparagraph (A) or (B) if demands for
payment are filed with respect to 5 percent or more of the outstanding
shares of that class.
2) Which were outstanding on the date for the determination of
shareholders entitled to vote on the reorganization and (A) were not voted
in favor of the reorganization or, (B) if described in subparagraph (A) or
(B) of paragraph (1) (without regard to the provisions in that paragraph),
were voted against the reorganization, or which were held of record on the
effective date of a short-form merger; provided, however, that subparagraph
(A) rather than subparagraph (B) of this paragraph applies in any case
where the approval required by Section 1201 is sought by written consent
rather than at a meeting.
3) Which the dissenting shareholder has demanded that the corporation
purchase at their fair market value, in accordance with Section 1301.
4) Which the dissenting shareholder has submitted for endorsement, in
accordance with Section 1302.
(a) As used in this chapter, "dissenting shareholder" means the recordholder
of dissenting shares and includes a transferee of record.
Sec.1301. Notice to holders of dissenting shares in reorganizations;
demand for purchase; time; contents
(a) If, in the case of a reorganization, any shareholders of a corporation
have a right under Section 1300, subject to compliance with paragraphs (3) and
(4) of subdivision (b) thereof, to require the corporation to purchase their
shares for cash, such corporation shall mail to each such shareholder a notice
of the approval of the reorganization by its outstanding shares (Section 152)
within 10 days after the date of such approval, accompanied by a copy of
Sections 1300, 1302, 1303, 1304 and this section, a statement of the price
determined by the corporation to represent the fair market value of the
dissenting shares, and a brief description of the procedure to be followed if
the shareholder desires to exercise the shareholder's right under such sections.
The statement of price constitutes an offer by the corporation to purchase at
the price stated any dissenting shares as defined in subdivision (b) of Section
1300, unless they lose their status as dissenting shares under Section 1309.
(b) Any shareholder who has a right to require the corporation to purchase
the shareholder's shares for cash under Section 1300, subject to compliance with
paragraphs (3) and (4) of subdivision (b) thereof, and who desires the
corporation to purchase such shares shall make written demand upon the
corporation for the purchase of such shares and payment to the shareholder in
cash of their fair market value. The demand is not effective for any purpose
unless it is received by the corporation or any transfer agent thereof (1) in
the case of shares described in clause (i) or (ii) of paragraph (1) of
subdivision (b) of Section 1300 (without regard to the provisos in that
paragraph), not later than the date of the shareholders' meeting to vote upon
the reorganization, or (2) in any other case within 30 days after the date on
which the notice of the approval by the outstanding shares pursuant to
subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder.
(c) The demand shall state the number and class of the shares held of record
by the shareholder which the shareholder demands that the corporation purchase
and shall contain a statement of what such shareholder claims to be the fair
market value of those shares as of the day before the announcement of the
proposed reorganization or short-form merger. The statement of fair market value
constitutes an offer by the shareholder to sell the shares at such price.
Sec.1302. Submission of share certificates for endorsement;
uncertificated securities
(a) Within 30 days after the date on which notice of the approval by the
outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was
mailed to the shareholder, the shareholder shall submit to the corporation at
its principal office or at the office of any transfer agent thereof, (a) if the
shares are certificated securities, the shareholder's certificates representing
any shares which the shareholder demands that the corporation purchase, to be
stamped or endorsed with a statement that the shares are dissenting shares or to
be exchanged for certificates of appropriate denomination so stamped or endorsed
or (b) if the shares are uncertificated securities, written notice of the number
of shares which the shareholder demands that the corporation purchase. Upon
subsequent transfers of the dissenting shares on the books of the corporation,
the new certificates, initial transaction statement, and other written
statements issued therefor shall bear a like statement, together with the name
of the original dissenting holder of the shares.
Sec.1303. Payment of agreed price with interest; agreement fixing fair
market value; filing; time of payment
(a) If the corporation and the shareholder agree that the shares are
dissenting shares and agree upon the price of the shares, the dissenting
shareholder is entitled to the agreed price with interest thereon at the legal
rate on judgments from the date of the agreement. Any agreements fixing the fair
market value of any dissenting shares as between the corporation and the holders
thereof shall be filed with the secretary of the corporation.
(b) Subject to the provisions of Section 1306, payment of the fair market
value of dissenting shares shall be made within 30 days after the amount thereof
has been agreed or within 30 days after any statutory or contractual conditions
to the reorganization are satisfied, whichever is later, and in the case of
certificated securities, subject to surrender of the certificates therefor,
unless provided otherwise by agreement.
Sec.1304. Action to determine whether shares are dissenting shares or
fair market value; limitation; joinder; consolidation; determination of
issues; appointment of appraisers
(a) If the corporation denies that the shares are dissenting shares, or the
corporation and the shareholder fail to agree upon the fair market value of the
shares, then the shareholder demanding purchase of such shares as dissenting
shares or any interested corporation, within six months after the date on which
notice of the approval by the outstanding shares (Section 152) or notice
pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but
not thereafter, may file a complaint in the superior court of the proper county
praying the court to determine whether the shares are dissenting shares or the
fair market value of the dissenting shares or both or may intervene in any
action pending on such a complaint.
(b) Two or more dissenting shareholders may join as plaintiffs or be joined
as defendants in any such action and two or more such actions may be
consolidated.
(c) On the trial of the action, the court shall determine the issues. If the
status of the shares as dissenting shares is in issue, the court shall first
determine that issue. If the fair market value of the dissenting shares is in
issue, the court shall determine, or shall appoint one or more impartial
appraisers to determine, the fair market value of the shares.
Sec.1305. Report of appraisers; confirmation; determination by court;
judgment payment; appeal; costs
(a) If the court appoints an appraiser or appraisers, they shall proceed
forthwith to determine the fair market value per share. Within the time fixed by
the court, the appraisers, or a majority of them, shall make and file a report
in the office of the clerk of the court. Thereupon, on the motion of any party,
the report shall be submitted to the court and considered on such evidence as
the court considers relevant. If the court finds the report reasonable, the
court may confirm it.
(b) If a majority of the appraisers appointed fail to make and file a report
within 10 days from the date of their appointment or within such further time as
may be allowed by the court or the report is not confirmed by the court, the
court shall determine the fair market value of the dissenting shares.
(c) Subject to the provisions of Section 1306, judgment shall be rendered
against the corporation for payment of an amount equal to the fair market value
of each dissenting share multiplied by the number of dissenting shares which any
dissenting shareholder who is a party, or who has intervened, is entitled to
require the corporation to purchase, with interest thereon at the legal rate
from the date on which judgment was entered.
(d) Any such judgment shall be payable forthwith with respect to
uncertificated securities and, with respect to certificated securities, only
upon the endorsement and delivery to the corporation of the certificates for the
shares described in the judgment. Any party may appeal from the judgment.
(e) The costs of the action, including reasonable compensation to the
appraisers to be fixed by the court, shall be assessed or apportioned as the
court considers equitable, but, if the appraisal exceeds the price offered by
the corporation, the corporation shall pay the costs (including in the
discretion of the court attorneys' fees, fees of expert witnesses and interest
at the legal rate on judgments from the date of compliance with Sections 1300,
1301 and 1302 if the value awarded by the court for the shares is more than 125
percent of the price offered by the corporation under subdivision (a) of Section
1301).
Sec.1306. Prevention of immediate payment; status as creditors;
interest
(f) To the extent that the provisions of Chapter 5 prevent the payment to
any holders of dissenting shares of their fair market value, they shall become
creditors of the corporation for the amount thereof together with interest at
the legal rate on judgments until the date of payment, but subordinate to all
other creditors in any liquidation proceeding, such debt to be payable when
permissible under the provisions of Chapter 5.
Sec.1307. Dividends on dissenting shares
Cash dividends declared and paid by the corporation upon the dissenting
shares after the date of approval of the reorganization by the outstanding
shares (Section 152) and prior to payment for the shares by the corporation
shall be credited against the total amount to be paid by the corporation
therefor.
Sec.1308. Rights of dissenting shareholders pending valuation;
withdrawal of demand for payment
Except as expressly limited in this chapter, holders of dissenting shares
continue to have all the rights and privileges incident to their shares, until
the fair market value of their shares is agreed upon or determined. A dissenting
shareholder may not withdraw a demand for payment unless the corporation
consents thereto.
Sec.1309. Termination of dissenting share and shareholder status
Dissenting shares lose their status as dissenting shares and the holders
thereof cease to be dissenting shareholders and cease to be entitled to require
the corporation to purchase their shares upon the happening of any of the
following:
(j) The corporation abandons the reorganization. Upon abandonment of the
reorganization, the corporation shall pay on demand to any dissenting
shareholder who has initiated proceedings in good faith under this chapter all
necessary expenses incurred in such proceedings and reasonable attorneys' fees.
(k) The shares are transferred prior to their submission for endorsement in
accordance with Section 1302 or are surrendered for conversion into shares of
another class in accordance with the articles.
(l) The dissenting shareholder and the corporation do not agree upon the
status of the shares as dissenting shares or upon the purchase price of the
shares, and neither files a complaint or intervenes in a pending action as
provided in Section 1304, within six months after the date on which notice of
the approval by the outstanding shares or notice pursuant to subdivision (i) of
Section 1110 was mailed to the shareholder.
(m) The dissenting shareholder, with the consent of the corporation,
withdraws the shareholder's demand for purchase of the dissenting shares.
Sec.1310. Suspension of right to compensation or valuation
proceedings; litigation of shareholders' approval
(a) If litigation is instituted to test the sufficiency or regularity of the
votes of the shareholders in authorizing a reorganization, any proceedings under
Sections 1304 and 1305 shall be suspended until final determination of such
litigation.
Sec.1311. Exempt shares
This chapter, except Section 1312, does not apply to classes of shares whose
terms and provisions specifically set forth the amount to be paid in respect to
such shares in the event of a reorganization or merger.
Sec.1312. Right of dissenting shareholders to attack, set aside or
rescind merger or reorganization; restraining order or injunction;
conditions
(a) No shareholder of a corporation who has a right under this chapter to
demand payment of cash for the shares held by the shareholder shall have any
right at law or in equity to attack the validity of the reorganization or
short-form merger, or to have the reorganization or short-form merger set aside
or rescinded, except in an action to test whether the number of shares required
to authorize or approve the reorganization have been legally voted in favor
thereof; but any holder of shares of a class whose terms and provisions
specifically set forth the amount to be paid in respect to them in the event of
a reorganization or short-form merger is entitled to payment in accordance with
those terms and provisions or, if the principal terms of the reorganization are
approved pursuant to subdivision (b) of Section 1202, is entitled to payment in
accordance with the terms and provisions of the approved reorganization.
(b) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, subdivision (a) shall not
apply to any shareholder of such party who has not demanded payment of cash for
such shareholder's shares pursuant to this chapter; but if the shareholder
institutes any action to attack the validity of the reorganization or short-form
merger or to have the reorganization or short-form merger set aside or
rescinded, the shareholder shall not thereafter have any right to demand payment
of cash for the shareholder's shares pursuant to this chapter. The court in any
action attacking the validity of the reorganization or short-form merger or to
have the reorganization or short-form merger set aside or rescinded shall not
restrain or enjoin the consummation of the transaction except upon 10 days'
prior notice to the corporation and upon a determination by the court that
clearly no other remedy will adequately protect the complaining shareholder or
the class of shareholders of which such shareholder is a member.
(c) If one of the parties to a reorganization or short-form merger is
directly or indirectly controlled by, or under common control with, another
party to the reorganization or short-form merger, in any action to attack the
validity of the reorganization or short-form merger or to have the
reorganization or short-form merger set aside or rescinded, (1) a party to a
reorganization or short-form merger which controls another party to the
reorganization or short-form merger shall have the burden of proving that the
transaction is just and reasonable as to the shareholders of the controlled
party, and (2) a person who controls two or more parties to a reorganization
shall have the burden of proving that the transaction is just and reasonable as
to the shareholders of any party so controlled.
APPENDIX F
BOARD RESOLUTIONS OF NETTAXI'S BOARD OF DIRECTORS IN CONNECTION WITH THE REVERSE
STOCK SPLIT
WHEREAS, the Merger Agreement contemplates that Nettaxi undergo a reverse
stock split of its common stock, such that each five and sixty-seven hundredths
(5.67) shares of Nettaxi's common stock is converted into one (1) share of its
common stock (the "Reverse Stock Split").
WHEREAS, Section 78.2055 of the Nevada Revised Statutes permits a
corporation to effect a reverse stock split following shareholder approval of
the action by board resolution if the action has no effect on the corporation's
authorized shares.
WHEREAS, the Reverse Stock Split would have no effect on Nettaxi's two
hundred million (200,000,000) authorized shares of common stock.
After motion duly made and seconded, the Board unanimously adopted the
following resolutions:
RESOLVED, that the board of directors hereby deems the Reverse Stock Split
to be in the best interests of Nettaxi, approves of the Reverse Stock Split,
declares the Reverse Stock Split advisable and recommends that the stockholders
of Nettaxi approve of the Reverse Stock Split.
RESOLVED, that following shareholder approval of the Reverse Stock Split,
and effective as of the date of closing of the Merger, Nettaxi shall effect a
reverse stock split of its common stock, such that five and sixty-seven
hundredths (5.67) issued and outstanding shares of Nettaxi's common stock is
converted into one (1) issued and outstanding share of its common stock.
RESOLVED FURTHER, that the Reverse Stock Split shall have no effect on the
number of shares authorized in the Company's Articles of Incorporation.
RESOLVED FURTHER, that the officers of Nettaxi are hereby authorized and
directed to take such actions and sign such documents as they deem necessary or
proper to carry out the following resolutions.
APPENDIX G
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Merger Agreement") is entered into
as of ______________, 2002 by and between Nettaxi.com, a Nevada corporation
("Nettaxi"), and RAE Systems Inc. a Delaware corporation ("RAE Delaware").
RECITALS
WHEREAS, RAE Delaware is a corporation duly organized and existing under
the laws of the State of RAE Delaware;
WHEREAS, Nettaxi is a corporation duly organized and existing under the
laws of the State of Nevada;
WHEREAS, on the date of this Merger Agreement, RAE Delaware has authority
to issue 200,000,000 shares of Common Stock, $0.001 par value per share (the
"RAE Delaware Common Stock"), of which 1,000 shares are issued and outstanding
and owned by Nettaxi and 1,000,000 shares of Preferred Stock, $0.001 par value
per share (the "RAE Delaware Preferred Stock"), of which no shares are issued or
outstanding;
WHEREAS, on the date of this Merger Agreement, Nettaxi has authority to
issue 200,000,000 shares of Common Stock (the "Nettaxi Common Stock"), of which
__________ shares are issued and outstanding and 1,000,000 shares of Preferred
Stock (the "Nettaxi Preferred Stock"), of which no shares are issued and
outstanding;
WHEREAS, the respective Boards of Directors for RAE Delaware and Nettaxi
have determined that, for the purpose of effecting the reincorporation of
Nettaxi in the State of RAE Delaware, it is advisable and to the advantage of
said two corporations and their shareholders that Nettaxi merge with and into
RAE Delaware upon the terms and conditions herein provided; and
WHEREAS, the respective Boards of Directors of RAE Delaware and Nettaxi,
the shareholders of Nettaxi, and the sole stockholder of RAE Delaware have
adopted and approved this Merger Agreement;
AGREEMENT
NOW, THEREFORE, in consideration of the mutual agreements and covenants set
forth herein, Nettaxi and RAE Delaware hereby agree to merge as follows:
1. Merger. Nettaxi shall be merged with and into RAE Delaware, and RAE
------
Delaware shall survive the merger ("Merger"), effective upon the date of filing
of a Certificate of Merger with the State of Delaware and Articles of Merger
with the State of Nevada made effective in accordance with applicable law (the
"Effective Date").
G-1
2. Governing Documents. The Certificate of Incorporation of RAE
-------------------
Delaware, attached hereto as Exhibit A (the "Certificate of Incorporation")
---------
shall continue to be the Certificate of Incorporation of RAE Delaware as the
surviving Corporation, unless and until thereafter changed or amended in
accordance with the provisions thereof and applicable laws.
The Bylaws of RAE Delaware, in effect on the Effective Date, shall continue
to be the Bylaws of RAE Delaware as the surviving Corporation without change or
amendment until further amended in accordance with the provisions thereof and
applicable laws.
3. Directors and Officers. The directors and officers of Nettaxi shall
----------------------
become the directors and officers of RAE Delaware upon the Effective Date and
any committee of the Board of Directors of Nettaxi shall become the members of
such committees for RAE Delaware.
4. Succession. On the Effective Date, RAE Delaware shall succeed to
----------
Nettaxi in the manner of and as more fully set forth in Section 259 of the
General Corporation Law of the State of RAE Delaware.
5. Further Assurances. From time to time, as and when required by RAE
------------------
Delaware or by its successors and assigns, there shall be executed and delivered
on behalf of Nettaxi such deeds and other instruments, and there shall be taken
or caused to be taken by it such further and other action, as shall be
appropriate or necessary in order to vest, perfect or confirm, of record or
otherwise, in RAE Delaware the title to and possession of all the property,
interests, assets, rights, privileges, immunities, powers, franchises and
authority of Nettaxi, and otherwise to carry out the purposes of this Merger
Agreement and the officers and directors of RAE Delaware are fully authorized in
the name and on behalf of Nettaxi or otherwise to take any and all such action
and to execute and deliver any and all such deeds and other instruments.
6. Stock of Nettaxi.
----------------
a. Common Stock. Upon the Effective Date, by virtue of the Merger
------------
and without any action on the part of the holder thereof, each one (1) share of
Nettaxi Common Stock outstanding immediately prior thereto shall be changed and
converted into one (1) fully paid and nonassessable share of RAE Delaware Common
Stock.
7. Stock Certificates. On and after the Effective Date, all of the
------------------
outstanding certificates which prior to that time represented shares of Nettaxi
stock shall be deemed for all purposes to evidence ownership of and to represent
the shares of RAE Delaware stock into which the shares of Nettaxi stock
represented by such certificates have been converted as herein provided. The
registered owner on the books and records of RAE Delaware or its transfer agent
of any such outstanding stock certificate shall, until such certificate shall
have been surrendered for transfer or otherwise accounted for to RAE Delaware or
its transfer agent, have and be entitled to exercise any voting and other rights
with respect to and to receive any dividend and other distributions upon the
shares of RAE Delaware stock evidenced by such outstanding certificate as above
provided.
8. Options, Warrants and All Other Rights to Purchase Stock. Upon the
--------------------------------------------------------
Effective Date, each outstanding option, warrant or other right to purchase
shares of Nettaxi stock, including those options granted under the Nettaxi Stock
Option Plan (the "Option Plan") of Nettaxi, shall be converted into and become
G-2
an option, warrant, or right to purchase the same number of shares of RAE
Delaware stock, at a price per share equal to the exercise price of the option,
warrant or right to purchase Nettaxi stock and upon the same terms and subject
to the same conditions as set forth in the Option Plan and other agreements
entered into by Nettaxi pertaining to such options, warrants, or rights. A
number of shares of RAE Delaware stock shall be reserved for purposes of such
options, warrants, and rights equal to the number of shares of Nettaxi stock so
reserved as of the Effective Date. As of the Effective Date, RAE Delaware shall
assume all obligations of Nettaxi under agreements pertaining to such options,
warrants, and rights, including the Option Plan, and the outstanding options,
warrants, or other rights, or portions thereof, granted pursuant thereto.
9. Other Employee Benefit Plans. As of the Effective Date, RAE
----------------------------
Delaware hereby assumes all obligations of Nettaxi under any and all employee
benefit plans in effect as of said date or with respect to which employee rights
or accrued benefits are outstanding as of said date.
10. Outstanding Common Stock of RAE Delaware. Forthwith upon the
----------------------------------------
Effective Date, the one thousand (1,000) shares of RAE Delaware Common Stock
presently issued and outstanding in the name of Nettaxi shall be canceled and
retired and resume the status of authorized and unissued shares of RAE Delaware
Common Stock, and no shares of RAE Delaware Common Stock or other securities of
RAE Delaware shall be issued in respect thereof.
11. Covenants of RAE Delaware. RAE Delaware covenants and agrees that
-------------------------
it will, on or before the Effective Date:
a. Qualify to do business as a foreign corporation in the State of
California, and in all other states in which Nettaxi is so qualified and in
which the failure so to qualify would have a material adverse impact on the
business or financial condition of RAE Delaware.
b. File any and all documents with the Delaware Franchise Tax
Board and the Nevada Franchise Tax Board necessary to the assumption by RAE
Delaware of all of the franchise tax liabilities of Nettaxi.
12. Amendment. At any time before or after approval and adoption by
---------
the stockholders of Nettaxi, this Merger Agreement may be amended in any manner
as may be determined in the judgment of the respective Boards of Directors of
RAE Delaware and Nettaxi to be necessary, desirable or expedient in order to
clarify the intention of the parties hereto or to effect or facilitate the
purposes and intent of this Merger Agreement.
13. Abandonment. At any time before the Effective Date, this Merger
-----------
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of either Nettaxi or RAE Delaware or both, notwithstanding approval of
this Merger Agreement by the sole stockholder of RAE Delaware and the
shareholders of Nettaxi.
14. Counterparts. In order to facilitate the filing and recording of
------------
this Merger Agreement, the same may be executed in any number of counterparts,
each of which shall be deemed to be an original.
G-3
IN WITNESS WHEREOF, this Merger Agreement, having first been duly approved
by resolution of the Board of Directors of Nettaxi and RAE Delaware, is hereby
executed on behalf of each of said two corporations by their respective officers
thereunto duly authorized.
RAE SYSTEMS INC., a Delaware corporation
By:
-------------------------------------
NETTAXI.COM, a Nevada corporation
By:
-------------------------------------
Robert A. Rositano, CEO and Secretary
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APPENDIX H
CERTIFICATE OF INCORPORATION
OF
RAE SYSTEMS INC.
FIRST: The name of the corporation (the "Corporation") is:
- -----
RAE Systems Inc.
SECOND: The address of its registered office in the State of Delaware is
- ------ 15 East North Street in the City of Dover, County of Kent. The
name of its registered agent at such address is Incorporating
Services, Ltd.
THIRD: The nature of the business or purposes to be conducted or
- ----- promoted is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law
of Delaware.
FOURTH: The total number of shares of all classes of stock which the
- ------ Corporation shall have authority to issue is (i) 200,000,000
shares of Common Stock, $0.001 par value per share ("Common
Stock"), and (ii) 1,000,000 shares of Preferred Stock, $0.001 par
value per share ("Preferred Stock"). The Board of Directors is
authorized, subject to any limitations prescribed by law, to
provide for the issuance of shares of Preferred Stock in series
and, by filing a certificate pursuant to the applicable law of
the State of Delaware, to establish from time to time the number
of shares to be included in each such series, and to fix the
designation, powers, preferences and rights of the shares of each
such series and any qualifications, limitations or restrictions
thereon. The number of authorized shares of Preferred Stock may
be increased or decreased (but not below the number of shares
thereof then outstanding) by the affirmative vote of the holders
of a majority of the Common Stock without a vote of the holders
of the Preferred Stock, or of any series thereof, unless a vote
of any such holders is required pursuant to the certificate or
certificates establishing the series of Preferred Stock.
FIFTH: The following provisions are inserted for the management of the
- ----- business and the conduct of the affairs of the Corporation, and
for further definition, limitation and regulation of the powers
of the Corporation and of its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to
the powers and authority expressly conferred upon them by statute
or by this Certificate of Incorporation or the Bylaws of the
Corporation, the directors are hereby empowered to exercise all
such powers and do all such acts and things as may be exercised
or done by the Corporation.
B. The directors of the Corporation need not be elected by written
ballot unless the Bylaws so provide.
C. Effective upon the closing of the Corporation's acquisition of
RAE Systems Inc., a California corporation (the "Effective
Time"), any action required or permitted to be taken by the
stockholders of the
Corporation must be effected at a duly called annual or special
meeting of stockholders of the Corporation and may not be
effected by any consent in writing by such stockholders. At all
times prior to the Effective Time, any action which may be taken
at any annual or special meeting of stockholders may be taken
without a meeting and without prior notice, if a consent in
writing, setting forth the actions so taken, is signed by the
holders of outstanding shares having not less than the minimum
number of votes which would be necessary to authorize or take
such action at a meeting at which all shares entitled to vote
thereon were present and voted. All such consents shall be filed
with the Secretary of the Corporation and shall be maintained in
the corporate records. Prompt notice of the taking of a corporate
action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in
writing.
D. Special meetings of stockholders may be called at any time only
by (i) the Board of Directors, the Chairman of the Board, the
President or the Chief Executive Officer or (ii) the holders of
not less than 10% of all shares entitled to cast votes at the
meeting, voting together as a single class.
SIXTH:
- -----
A. The number of directors shall initially be six (6) and thereafter
shall be fixed from time to time exclusively by the Board of
Directors pursuant to a resolution adopted by a majority of the
total number of authorized directors (whether or not there exist
any vacancies in previously authorized directorships at the time
any such resolution is presented to the Board of Directors for
adoption). Effective upon the Effective Time, the Board of
Directors shall be divided into three classes with the term of
office of the first class to expire at the first annual meeting
of the stockholders following the Effective Time, the term of
office of the second class to expire at the second annual meeting
of stockholders held following the Effective Time, the term of
office of the third class to expire at the third annual meeting
of stockholders following the Effective Time, and thereafter for
each such term to expire at each third succeeding annual meeting
of stockholders after such election. All directors shall hold
office until the expiration of the term for which elected, and
until their respective successors are elected, except in the case
of the death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, newly created directorships resulting
from any increase in the authorized number of directors or any
vacancies in the Board of Directors resulting from death,
resignation or other cause (including removal from office by a
vote of the stockholders) may be filled only by a majority vote
of the directors then in office, though less than a quorum, or by
the sole remaining director, and directors so chosen shall hold
office for a term expiring at the next annual meeting of
stockholders at which the term of office of the class to which
they have been elected expires, and until their respective
successors are elected, except in the case of the death,
resignation, or removal of any director.
H-2
C. Subject to the rights of the holders of any series of Preferred
Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, with or
without cause, by the affirmative vote of the holders of at least
a majority of the voting power of all of the outstanding shares
of capital stock entitled to vote generally in the election of
directors.
SEVENTH: The Board of Directors is expressly empowered to adopt, amend or
- ------- repeal Bylaws of the Corporation. The stockholders shall also
have power to adopt, amend or repeal the Bylaws of the
Corporation. Any adoption, amendment or repeal of Bylaws of the
Corporation by the stockholders shall require, in addition to any
vote of the holders of any class or series of stock of the
Corporation required by law or by this Certificate of
Incorporation, the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66-2/3%) of the voting power of
all of the then outstanding shares of the capital stock of the
Corporation entitled to vote generally in the election of
directors, voting together as a single class.
EIGHTH: The name and mailing address of the incorporator is:
- ------
Richard H. Taketa
400 Hamilton Ave
Palo Alto CA 94301
NINTH: A director of the Corporation shall not be personally liable to
- ----- the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involved intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the Delaware
General Corporation Law, or (iv) for any transaction from which
the director derived an improper personal benefit.
If the Delaware General Corporation Law is hereafter amended to
authorize the further elimination or limitation of the liability
of a director, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Any repeal or modification of the foregoing provisions of this
Article NINTH by the stockholders of the Corporation shall not
adversely affect any right or protection of a director of the
Corporation existing at the time of such repeal or modification.
TENTH: The Corporation reserves the right to amend or repeal any
- ----- provision contained in this Certificate of Incorporation in the
manner prescribed by the laws of the State of Delaware and all
rights conferred upon stockholders are granted subject to this
reservation; provided, however, that, notwithstanding any other
-------- -------
provision of this Certificate of Incorporation or any provision
of law which might otherwise permit a lesser vote or no vote, but
in addition to any vote of the holders of any class or series of
the stock of this Corporation required by law or by this
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Certificate of Incorporation, the affirmative vote of the holders
of at least 66-2/3% of the voting power of all of the then
outstanding shares of the capital stock of the Corporation
entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend or repeal
this (i) Article TENTH, (ii) Article SEVENTH or Article NINTH,
(ii) paragraphs A, B or C of Article FIFTH, or (iii) paragraphs A
or B of Article SIXTH.
[THE REST OF THIS PAGE LEFT INTENTIONALLY BLANK]
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THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of forming a corporation pursuant to the General Corporation Law of Delaware,
does make this certificate, hereby declaring and certifying that this is my act
and deed and the facts herein stated are true, and accordingly have hereunto set
my hand this __ day of February, 2002.
----------------------------------
Richard H. Taketa, Incorporator
H-5
APPENDIX I
FORM OF DELAWARE BYLAWS
Article 1. Stockholders
------------
1.1 Place of Meetings. All meetings of stockholders shall be held at
-----------------
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President and Chief Executive
Officer or, if not so designated, at the registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the
--------------
election of directors and for the transaction of such other business as may
properly be brought before the meeting shall be held on a date to be fixed by
the Board of Directors or the President and Chief Executive Officer at the time
and place to be fixed by the Board of Directors or the President and stated in
the notice of the meeting. If no annual meeting is held in accordance with the
foregoing provisions, the Board of Directors shall cause the meeting to be held
as soon thereafter as convenient.
1.3 Special Meetings. Special meetings of stockholders may be called
----------------
at any time by the Board of Directors, the Chairman of the Board or the
President and Chief Executive Officer. Business transacted at any special
meeting of stockholders shall be confined to the purpose or purposes stated in
the notice of meeting.
1.4 Notice of Meetings. Written notice of each meeting of
------------------
stockholders, whether annual or special, shall be given not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, except as otherwise
provided herein or as required by law (meaning here and hereafter, as required
from time to time by the Delaware General Corporation Law or the Certificate of
Incorporation). The notices of all meetings shall state the place, date and
hour of the meeting. The notice of a special meeting shall state, in addition,
the purpose or purposes for which the meeting is called. If mailed, notice is
given when deposited in the United States mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the corporation.
1.5 Voting List. The officer who has charge of the stock ledger of the
-----------
corporation shall prepare, at least ten (10) days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, at a place within the city where the meeting
is to be held, which place shall be specified in the notice of the meeting, or
if not so specified, at the place where the meeting is to be held. The list
shall also be produced and kept at the time and place of the meeting during the
whole time of the meeting, and may be inspected by any stockholder who is
present. This list shall preemptively determine the identity of the
stockholders entitled to vote at the meeting and the number of shares held by
each of then.
1.6 Quorum. Except as otherwise provided by law or these By-laws, the
------
holders of a majority of the shares of the capital stock of the corporation
entitled to vote at the meeting, present in person or represented by proxy,
shall constitute a quorum for the transaction of business. If a quorum shall
fail to attend any meeting, the chairman of the meeting or the holders of a
majority of the shares of stock entitled to vote who are present, in person or
by proxy, may adjourn the meeting to another place, date or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any
------------
other time and to any other place at which a meeting of stockholders may be held
under these By-laws by the holders of a majority of the shares of stock present
or represented at the meeting and entitled to vote, although less than a quorum,
or, if no stockholder is present, by any officer entitled to preside at or to
act as Secretary of such meeting. When a meeting is adjourned to another place,
date or time, written notice need not be given of the adjourned meeting if the
place, date and time thereof are announced at the meeting at which the
adjournment is taken; provided, however, that if the date of any adjourned
meeting is more than thirty (30) days after the date for which the meeting was
originally noticed, or if a new record date is fixed for the adjourned meeting,
written notice of the place, date, and time of the adjourned meeting shall be
given in conformity herewith. At the adjourned meeting, the corporation may
transact any business which might have been transacted at the original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each
------------------
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
by law. Each stockholder of record entitled to vote at a meeting of
stockholders, may vote in person or may authorize any other person or persons to
vote or act for him by written proxy executed by the stockholder or his
authorized agent or by a transmission permitted by law and delivered to the
Secretary of the corporation. No stockholder may authorize more than one proxy
for his shares. Any copy, facsimile telecommunication or other reliable
reproduction of the writing or transmission created pursuant to this Section may
be substituted or used in lieu of the original writing or transmission for any
and all purposes for which the original writing or transmission could be used,
provided that such copy, facsimile transmission or other reproduction shall be a
complete reproduction of the entire original writing or transmission.
1.9 Action at Meeting. When a quorum is present at any meeting, any
-----------------
election shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election, and all other matters shall be
determined by a majority of the votes cast affirmatively or negatively on the
matter (or if there are two or more classes of stock entitled to vote as
separate classes, then in the case of each such class, a majority of each such
class present or represented and voting affirmatively or negatively on the
matter) shall decide such matter, except when a different vote is required by
express provision of law, the Certificate of Incorporation or these By-laws.
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All voting, including on the election of directors, but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefor by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballots, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballots shall be counted by an inspector or inspectors
appointed by the chairman of the meeting. The corporation may, and to the
extent required by law, shall, in advance of any meeting of stockholders,
appoint one or more inspectors to act at the meeting and make a written report
thereof. The corporation may designate one or more persons as an alternate
inspector to replace any inspector who fails to act. If no inspector or
alternate is able to act at a meeting of stockholders, the person presiding at
the meeting may, and to the extent required by law, shall, appoint one or more
inspectors to act at the meeting. Each inspector, before entering upon the
discharge of his duties, shall take and sign an oath to faithfully execute the
duties of inspector with strict impartiality and according to the best of his or
her ability.
1.10 Notice of Stockholder Business. At an annual meeting of the
------------------------------
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (i) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, (ii) properly
brought before the meeting by or at the direction of the Board of Directors, or
(iii) properly brought before an annual meeting by a stockholder. For business
to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder proposal to be presented at an
annual meeting shall be received at the Corporation's principal executive
offices not less than 120 calendar days in advance of the date that the
Corporation's (or the Corporation's predecessor's) proxy statement was released
to stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
notice by the stockholders to be timely must be received not later than the
close of business on the tenth day following the day on which the date of the
annual meeting is publicly announced.
A stockholder's notice to the Secretary of the Corporation shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting, (ii) the name and address, as they appear on the Corporation's books,
of the stockholder proposing such business, (iii) the class and number of shares
of the Corporation which are beneficially owned by the stockholder, and (iv) any
material interest of the stockholder in such business.
1.11 Conduct of Business. At every meeting of the stockholders, the
-------------------
Chairman of the Board, if there is such an officer, or if not, the person
appointed by the Board of Directors, shall act as Chairman. The Secretary of
the corporation or a person designated by the Chairman of the meeting shall act
as Secretary of the meeting. Unless otherwise approved by the Chairman of the
meeting, attendance at the stockholders' meeting is restricted to stockholders
of record, persons authorized in accordance with Section 1.8 of these By-laws to
act by proxy, and officers of the corporation.
I-3
The Chairman of the meeting shall call the meeting to order, establish the
agenda, and conduct the business of the meeting in accordance therewith or, at
the Chairman's discretion, it may be conducted otherwise in accordance with the
wishes of the stockholders in attendance. The date and time of the opening and
closing of the polls for each matter upon which the stockholders will vote at
the meeting shall be announced at the meeting.
The Chairman shall also conduct the meeting in an orderly manner, rule on
the precedence of, and procedure on, motions and other procedural matters, and
exercise discretion with respect to such procedural matters with fairness and
good faith toward all those entitled to take part. The Chairman may impose
reasonable limits on the amount of time taken up at the meeting on discussion in
general or on remarks by any one stockholder. Should any person in attendance
become unruly or obstruct the meeting proceedings, the Chairman shall have the
power to have such person removed from participation. Notwithstanding anything
in the By-laws to the contrary, no business shall be conducted at a meeting
except in accordance with the procedures set forth in this Section 1.11 and
Section 1.10 above. The Chairman of a meeting shall if the facts warrant,
determine and declare to the meeting that any proposed item of business was not
brought before the meeting in accordance with the provisions of this Section
1.11 and Section 1.10, and if he should so determine, he shall so declare to the
meeting and any such business not properly brought before the meeting shall not
be transacted.
1.12 Stockholder Action Without Meeting. Effective upon the closing of
----------------------------------
the Corporation's acquisition of RAE Systems Inc., a California corporation (the
"Effective Time"), any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders. At all times prior to the
Effective Time, any action which may be taken at any annual or special meeting
of stockholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the actions so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes which
would be necessary to authorize or take such action at a meeting at which all
shares entitled to vote thereon were present and voted. All such consents shall
be filed with the Secretary of the Corporation and shall be maintained in the
corporate records. Prompt notice of the taking of a corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
Article 2. Board of Directors
------------------
2.1 General Powers. The business and affairs of the corporation shall
--------------
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2 Number and Term of Office. The number of directors shall initially
-------------------------
be six (6) and, thereafter, shall be fixed from time to time exclusively by the
Board of Directors pursuant to a resolution adopted by a majority of the total
number of authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolution is presented
to the Board for adoption). Effective upon the Effective Time, the directors
I-4
shall be divided into three classes, with the term of office of the first class
to expire at the first annual meeting of stockholders held after the Effective
Date; the term of office of the second class to expire at the second annual
meeting of stockholders held after the Effective Date; the term of office of the
third class to expire at the third annual meeting of stockholders held after the
Effective Date; and thereafter for each such term to expire at each third
succeeding annual meeting of stockholders after such election. All directors
shall hold office until the expiration of the term for which elected and until
their respective successors are elected, except in the case of the death,
resignation or removal of any director.
2.3 Vacancies and Newly Created Directorships. Subject to the rights
-----------------------------------------
of the holders of any series of Preferred Stock then outstanding, newly created
directorships resulting from any increase in the authorized number of directors
of any vacancies in the Board of Directors resulting from death, resignation,
retirement, disqualification or other cause (including removal from office by a
vote of the stockholders) may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the next annual meeting of stockholders at which
the term of office of the class to which they have been elected expires. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
2.4 Resignation. Any director may resign by delivering his written
-----------
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.5 Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held without notice at such time and place, either within or without the
State of Delaware, as shall be determined from time to time by the Board of
Directors; provided that any director who is absent when such a determination is
made shall be given notice of the determination. A regular meeting of the Board
of Directors may be held without notice immediately after and at the same place
as the annual meeting of stockholders.
2.6 Special Meetings. Special meetings of the Board of Directors may
----------------
be held at any time and place, within or without the State of Delaware,
designated in a call by the Chairman of the Board, the President and Chief
Executive Officer, two or more directors, or by one director in the event that
there is only a single director in office.
2.7 Notice of Special Meetings. Notice of any special meeting of
--------------------------
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone or
electronic voice message system at least 24 hours in advance of the meeting,
(ii) by sending a telegram, telecopy or telex, or delivering written notice by
hand, to his last known business or home address at least 24 hours in advance of
the meeting, or (iii) by mailing written notice to his last known business or
home address at least three (3) day in advance of the meeting. A notice or
waiver of notice of a meeting of the Board of Directors need not specify the
purposes of the meeting. Unless otherwise indicated in the notice thereof, any
and all business may be transacted at a special meeting.
I-5
2.8 Participation in Meetings by Telephone Conference Calls. Directors
-------------------------------------------------------
or any members of any committee designated by the directors may participate in a
meeting of the Board of Directors or such committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation by such
means shall constitute presence in person at such meeting.
2.9 Quorum. A majority of the total number of authorized directors
------
shall constitute a quorum at any meeting of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the number so fixed constitute a quorum. In the absence of a quorum at any
such meeting, a majority of the directors present may adjourn the meeting from
time to time without further notice other than announcement at the meeting,
until a quorum shall be present. Interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
at a meeting of a committee which authorizes a particular contract or
transaction.
2.10 Action at Meeting. At any meeting of the Board of Directors at
-----------------
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-laws.
2.11 Action by Consent. Any action required or permitted to be taken
-----------------
at any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing. Any such
written consents shall be filed with the minutes of proceedings of the Board or
committee.
2.12 Removal. Subject to the rights of the holders of any series of
-------
Preferred Stock then outstanding, any directors, or the entire Board of
Directors, may be removed from office at any time, but only for cause and only
by the affirmative vote of the holders of at least a majority of the voting
power of all of the outstanding shares of capital stock entitled to vote
generally in the election of directors, voting together as a single class.
2.13 Committees. The Board of Directors may designate one or more
----------
committees, each committee to consist of one or more of the directors of the
corporation, with such lawfully delegated powers and duties as it therefor
confers, to serve at the pleasure of the Board. The Board may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members of the
committee present at any meeting and not disqualified from voting, whether or
not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors and subject to the provisions of the
General Corporation Law of the State of Delaware, shall have and may exercise
all the powers and authority of the Board of Directors in the management of the
business and affairs of the corporation and may authorize the seal of the
corporation to be affixed to all papers which may require it. Each such
committee shall keep minutes and make such reports as the Board of Directors may
from time to time request. Except as the Board of Directors may otherwise
I-6
determine, any committee may make rules for the conduct of its business, but
unless otherwise provided by such rules, its business shall be conducted as
nearly as possible in the same manner as is provided in these By-laws for the
Board of Directors.
2.14 Compensation of Directors. Directors may be paid such
-------------------------
compensation for their services and such reimbursement for expenses of
attendance at meetings as the Board of Directors may from time to the determine.
No such payment shall preclude any director from serving the corporation or any
of its parent or subsidiary corporations in any other capacity and receiving
compensation for such service.
2.15 Nomination of Director Candidates. Subject to the rights of
---------------------------------
holders of any class or series of Preferred Stock then outstanding, nominations
for the election of Directors may be made by the Board of Directors or a proxy
committee appointed by the Board of Directors or by any stockholder entitled to
vote in the election of Directors generally. However, any stockholder entitled
to vote in the election of Directors generally may nominate one or more persons
for election as Directors at a meeting only if timely notice of such
stockholder's intent to make such nomination or nominations has been given in
writing to the Secretary of the Corporation. To be timely, a stockholder
nomination for a director to be elected at an annual meeting shall be received
at the corporation's principal executive offices not less than 120 calendar days
in advance of the date that the corporation's proxy statement was released to
stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date of the annual meeting has been advanced by more than 30 calendar days
from the date contemplated at the time of the previous year's proxy statement,
or in the event of a nomination for director to be elected at a special meeting,
notice by the stockholders to be timely must be received not later than the
close of business on the tenth day following the day on which such notice of the
date of the special meeting was mailed or such public disclosure was made. Each
such notice shall set forth: (a) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated; (b)
a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote for the election of directors on the date of such
notice and intends to appear in person or by proxy at the meeting to nominate
the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (e) the consent of each
nominee to serve as a director of the Corporation if so elected.
In the event that a person is validly designated as a nominee in accordance
with this Section 2.15 and shall thereafter become unable or unwilling to stand
for election to the Board of Directors, the Board of Directors or the
stockholder who proposed such nominee, as the case may be, may designate a
substitute nominee upon delivery, not fewer than five days prior to the date of
the meeting for the election of such nominee, of a written notice to the
Secretary, setting forth such information regarding such substitute nominee as
would have been required to be delivered to the Secretary pursuant to this
Section 2.15 had such substitute nominee been initially proposed as a nominee.
Such notice shall include a signed consent to serve as a director of the
Corporation, if elected, of each such substitute nominee.
I-7
If the chairman of the meeting for the election of Directors determines
that a nomination of any candidate for election as a Director at such meeting
was not made in accordance with the applicable provisions of this Section 2.15,
such nomination shall be void; provided, however, that nothing in this Section
2.15 shall be deemed to limit any voting rights upon the occurrence of dividend
arrearages provided to holders of Preferred Stock pursuant to the Preferred
Stock designation for any series of Preferred Stock.
Article 3. Officers
--------
3.1 Enumeration. The officers of the corporation shall consist of a
-----------
President and Chief Executive Officer, a Secretary, a Chief Financial Officer
and such other officers with such other titles as the Board of Directors shall
determine, including, at the discretion of the Board of Directors, a Chairman of
the Board, and one or more Vice Presidents and Assistant Secretaries. The Board
of Directors may appoint such other officers as it may deem appropriate.
3.2 Election. Officers shall be elected annually by the Board of
--------
Directors at its first meeting following the annual meeting of stockholders.
Officers may be appointed by the Board of Directors at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
-------------
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
------
Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote appointing him, or until his earlier death, resignation or removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
-----------------------
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event. Any officer may be removed at any time, with or without cause, by
the Board of Directors.
3.6 Chairman of the Board. The Board of Directors may appoint a
---------------------
Chairman of the Board. If the Board of Directors appoints a Chairman of the
Board, he shall perform such duties and possess such powers as are assigned to
him by the Board of Directors. Unless otherwise provided by the Board of
Directors, he shall preside at all meetings of the stockholders, and, if he is a
director, at all meetings of the Board of Directors.
3.7 President. The President shall, subject to the direction of the
---------
Board of Directors, have responsibility for the general management and control
of the business and affairs of the corporation and shall perform all duties and
have all powers which are commonly incident to the office of chief executive or
which are delegated to him or her by the Board of Directors. The President
shall be the Chief Executive Officer of the corporation, unless otherwise
designated by the Board of Directors. The President shall perform such other
I-8
duties and shall have such other powers as the Board of Directors may from time
to time prescribe. He or she shall have power to sign stock certificates,
contracts and other instruments of the corporation which are authorized and
shall have general supervision and direction of all of the other officers,
employees and agents of the corporation, other than the Chairman of the Board.
3.8 Vice Presidents. Any Vice President shall perform such duties and
---------------
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have at the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.9 Secretary and Assistant Secretaries. The Secretary shall perform
-----------------------------------
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
Secretary, including, without limitation, the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
keep a record of the proceedings of all meetings of stockholders and the Board
of Directors, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.10 Chief Financial Officer. Unless otherwise designated by the Board
-----------------------
of Directors, the Chief Financial Officer shall be the Treasurer. The Chief
Financial Officer shall perform such duties and shall have such powers as may
from time to time be assigned to him by the Board of Directors or the President.
In addition, the Chief Financial Officer shall perform such duties and have such
powers as are incident to the office of chief financial officer, including
without limitation, the duty and power to keep and be responsible for all funds
and securities of the corporation, to maintain the financial records of the
corporation, to deposit funds of the corporation in depositories as authorized,
to disburse such funds as authorized, to make proper accounts of such funds, and
to render as required by the Board of Directors accounts of all such
transactions and of the financial condition of the corporation.
3.11 Salaries. Officers of the corporation shall be entitled to such
--------
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
I-9
3.12 Delegation of Authority. The Board of Directors may from time to
-----------------------
time delegate the powers or duties of any officer to any other officers or
agents, notwithstanding any provision hereof.
Article 4. Capital Stock
-------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
-----------------
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation
---------------------
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or
in the name of the corporation by, the Chairman or Vice-Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a
facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-laws,
applicable securities laws or any agreement among any number of shareholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and
---------
regulations adopted by the Board of Directors, and subject to applicable law,
shares of stock may be transferred on the books of the corporation by the
surrender to the corporation or its transfer agent of the certificate
representing such shares properly endorsed or accompanied by a written
assignment or power of attorney properly executed, and with such proof of
authority or authenticity of signature as the corporation or its transfer agent
may reasonably require. Except as may be otherwise required by law, by the
Certificate of Incorporation or by the By-laws, the corporation shall be
entitled to treat the record holder of stock as shown on its books as the owner
of such stock for all purposes, including the payment of dividends and the right
to vote with respect to such stock, regardless of any transfer, pledge or other
disposition of such stock until the shares have been transferred on the books of
the corporation in accordance with the requirements of these By-laws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue
--------------------------------------
a new certificate of stock in place of any previously saved certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
I-10
4.5 Record Date. The Board of Directors may fix in advance a date as a
-----------
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, concession or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than sixty (60) nor less than ten
(10) days before the date of such meeting, nor more than sixty (60) days prior
to any other action to which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day before the day on which notice is given, or, if
notice is waived, at the close of business on the day before the day on which
the meeting is held. The record date for determining stockholders entitled to
express consent to corporate action in writing without a meeting when no prior
action by the Board of Directors is necessary, shall be the day on which the
first written consent is expressed. The record date for determining
stockholders for any other purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Article 5. General Provisions
------------------
5.1 Fiscal Year. The fiscal year of the corporation shall be as fixed
-----------
by the Board of Directors.
5.2 Corporate Seal. The corporate seal shall be in such form as shall
--------------
be approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
----------------
given by law, by the Certificate of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telecopy, telegraph, cable or any
other available method, whether before, at or after the time stated in such
waiver, or the appearance of such person or persons at such meeting in person or
by proxy, shall be deemed equivalent to such notice.
5.4 Actions with Respect to Securities of Other Corporations. Except
--------------------------------------------------------
as the Board of Directors may otherwise designate, the President or any officer
of the corporation authorized by the President shall have the power to vote and
otherwise act on behalf of the corporation, in person or proxy, and may waive
notice of, and act as, or appoint any person or persons to act as, proxy or
attorney-in-fact to this corporation (with or without power of substitution) at
any meeting of stockholders or shareholders (or with respect to any action of
stockholders) of any other corporation or organization, the securities of which
may be held by this corporation and otherwise to exercise any and all rights and
powers which this corporation may possess by reason of this corporations
ownership of securities in such other corporation or other organization.
I-11
5.5 Evidence of Authority. A certificate by the Secretary, or an
---------------------
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
5.6 Certificate of Incorporation. All references in these By-laws to
----------------------------
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Severability. Any determination that any provision of these
------------
By-laws is for any reason inapplicable, illegal or ineffective shall not affect
or invalidate any other provision of these By-laws.
5.8 Pronouns. All pronouns used in these By-laws shall be deemed to
--------
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
5.9 Notices. Except as otherwise specifically provided herein or
-------
required by law, all notices required to be given to any stockholder, director,
officer, employee or agent shall be in writing and may in every instance be
effectively given by hand delivery to the recipient thereof, by depositing such
notice in the mails, postage paid, or by sending such notice by prepaid
telegram, mailgram, telecopy or commercial courier service. Any such notice
shall be addressed to such stockholder, director, officer, employee or agent at
his or her last known address as the same appears on the books of the
Corporation. The time when such notice shall be deemed to be given shall be the
time such notice is received by such stockholder, director, officer, employee or
agent, or by any person accepting such notice on behalf of such person, if hand
delivered, or the time such notice is dispatched, if delivered through the mails
or be telegram or mailgram.
5.10 Reliance Upon Books, Reports and Records. Each director, each
----------------------------------------
member of any committee designated by the Board of Directors, and each officer
of the Corporation shall, in the performance of his duties, be fully protected
in relying in good faith upon the books of account or other records of the
Corporation, including reports made to the Corporation by any of its officers,
by an independent certified public accountant, or by an appraiser selected with
reasonable care.
5.11 Time Periods. In applying any provision of these By-laws which
------------
require that an act be done or not done a specified number of days prior to an
event or that an act be done during a period of a specified number of days prior
to an event, calendar days shall be used, the day of the doing of the act shall
be excluded, and the day of the event shall be included.
5.12 Facsimile Signatures. In addition to the provisions for use of
--------------------
facsimile signatures elsewhere specifically authorized in these By-laws,
facsimile signatures of any officer or officers of the Corporation may be used
whenever and as authorized by the Board of Directors or a committee thereof.
I-12
Article 6. Amendments
----------
6.1 By the Board of Directors. Except as is otherwise set forth in
-------------------------
these By-laws, these By-laws may be altered, amended or repealed or new By-laws
may be adopted by the affirmative vote of a majority of the directors present at
any regular or special meeting of the Board of Directors at which a quorum is
present.
6.2 By the Stockholders. Except as otherwise set forth in these
-------------------
By-laws, these By-laws may be altered, amended or repealed or new By-laws may be
adopted by the affirmative vote of the holders of at least sixty-six and
two-thirds percent (66-2/3%) of the shares of the capital stock of the
corporation issued and outstanding and entitled to vote at any annual meeting of
stockholders, or at any special meeting of stockholders, provided notice of such
alteration, amendment, repeal or adoption of new By-laws shall have been stated
in the notice of such special meeting.
Article 7. Indemnification of Directors and Officers
-----------------------------------------
7.1 Right to Indemnification. Each person who was or is made a party
------------------------
or is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person of whom he or
she is the legal representative, is or was a director or officer of the
corporation or is or was serving at the request of the corporation as a director
or officer of another corporation, or of a partnership, joint venture, trust or
other enterprise, including service with respect to employee benefit plans,
whether the basis of such proceeding is alleged action in an official capacity
as a director, officer or employee or in any other capacity while serving as a
director, officer or employee, shall be indemnified and held harmless by the
corporation to the fullest extent authorized by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (but, in the case of any
such amendment, only to the extent that such amendment permits the corporation
to provide broader indemnification rights than said Law permitted the
corporation to provide prior to such amendment) against all expenses, liability
and loss reasonably incurred or suffered by such person in connection therewith
and such indemnification shall continue as to a person who has ceased to be a
director, officer or employee and shall inure to the benefit of his or her
heirs, executors and administrators; provided, however, that except as provided
-------- -------
in Section 7.2 of this Article 7, the corporation shall indemnify any such
person seeking indemnity in connection with an action, suit or proceeding (or
part thereof) initiated by such person only if (a) such indemnification is
expressly required to be made by law, (b) the action, suit or proceeding (or
part thereof) was authorized by the Board of Directors of the corporation, (c)
such indemnification is provided by the corporation, in its sole discretion,
pursuant to the powers vested in the corporation under the Delaware General
Corporation Law, or (d) the action, suit or proceeding (or part thereof) is
brought to establish or enforce a right to indemnification under an indemnity
agreement or any other statute or law or otherwise as required under Section 145
of the Delaware General Corporation Law. Such right shall be a contract right
and shall include the right to be paid by the corporation expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
--------
however, that, unless the Delaware General Corporation Law then so prohibits,
- -------
the payment of such expenses incurred by a director or officer of the
Corporation in his or her capacity as a director or officer (and not in any
other capacity in which service was or is tendered by such person while a
I-13
director or officer, including, without limitation, service to an employee
benefit plan) in advance of the final disposition of such proceeding, shall be
made only upon delivery to the corporation of an undertaking, by or on behalf of
such director or officer, to repay all amounts so advanced if it should be
determined ultimately that such director or officer is not entitled to be
indemnified under this Section or otherwise.
7.2 Right of Claimant to Bring Suit. If a claim under Section 7.1 is
-------------------------------
not paid in full by the corporation within ninety (90) days after a written
claim has been received by the corporation, the claimant may at any time
thereafter bring suit against the corporation to recover the unpaid amount of
the claim and, if such suit is not frivolous or brought in bad faith, the
claimant shall be entitled to be paid also the expense of prosecuting such
claim. It shall be a defense to any such action (other than an action brought
to enforce a claim for expenses incurred in defending any proceeding in advance
of its final disposition where the required undertaking, if any, has been
tendered to this corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the corporation to indemnify the claimant for the amount claimed. Neither the
failure of the corporation (including its Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is proper in
the circumstances because he or she has met the applicable standard of conduct
set forth in the Delaware General Corporation Law, nor an actual determination
by the corporation (including its Board of Directors, independent legal counsel
or its stockholders) that the claimant has not met such applicable standard of
conduct, shall be a defense to the action or create a presumption that claimant
has not met the applicable standard of conduct.
7.3 Indemnification of Employees and Agents. The corporation may, to
---------------------------------------
the extent authorized from time to time by the Board of Directors, grant rights
to indemnification, and to the advancement of related expenses, to any employee
or agent of the corporation to the fullest extent of the provisions of this
Article with respect to the indemnification of and advancement of expenses to
directors and officers of the corporation.
7.4 Non-Exclusivity of Rights. The rights conferred on any person in
-------------------------
Sections 7.1 and 7.2 shall not be exclusive of any other right which such
persons may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
7.5 Indemnification Contracts. The Board of Directors is authorized to
-------------------------
enter into a contract with any director, officer, employee or agent of the
corporation, or any person serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, including employee benefit plans, providing
for indemnification rights equivalent to or, if the Board of Directors so
determines, greater than, those provided for in this Article 7.
7.6 Insurance. The corporation shall maintain insurance to the extent
---------
reasonably available, at its expense, to protect itself and any such director,
officer, employee or agent of the corporation or another corporation,
partnership, joint venture, trust or other enterprise against any such expense,
liability or loss, whether or not the corporation would have the power to
I-14
indemnify such person against such expense, liability or loss under the Delaware
General Corporation Law.
7.7 Effect of Amendment. Any amendment, repeal or modification of any
-------------------
provision of this Article 7 by the stockholders and the directors of the
corporation shall not adversely affect any right or protection of a director or
officer of the corporation existing at the time of such amendment, repeal or
modification.
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TABLE OF CONTENTS
PAGE
----
Article 1. Stockholders . . . . . . . . . . . . . . . . . . .. . . 1
1.1 Place of Meetings.. . . . . . . . . . . . . . . . . . . . 1
1.2 Annual Meeting. . . . . . . . . . . . . . . . . . . . . . 1
1.3 Special Meetings. . . . . . . . . . . . . . . . . . . . . 1
1.4 Notice of Meetings. . . . . . . . . . . . . . . . . . . . 1
1.5 Voting List.. . . . . . . . . . . . . . . . . . . . . . . 1
1.6 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.7 Adjournments. . . . . . . . . . . . . . . . . . . . . . . 2
1.8 Voting and Proxies. . . . . . . . . . . . . . . . . . . . 2
1.9 Action at Meeting.. . . . . . . . . . . . . . . . . . . . 2
1.10 Notice of Stockholder Business.. . . . . . . . . . . . . 3
1.11 Conduct of Business. . . . . . . . . . . . . . . . . . . 3
1.12 Stockholder Action Without Meeting.. . . . . . . . . . . 4
Article 2. Board of Directors . . . . . . . . . . . . . . . .. . . 4
2.1 General Powers. . . . . . . . . . . . . . . . . . . . . . 4
2.2 Number and Term of Office.. . . . . . . . . . . . . . . . 5
2.3 Vacancies and Newly Created Directorships.. . . . . . . . 5
2.4 Resignation.. . . . . . . . . . . . . . . . . . . . . . . 5
2.5 Regular Meetings. . . . . . . . . . . . . . . . . . . . . 5
2.6 Special Meetings. . . . . . . . . . . . . . . . . . . . . 5
2.7 Notice of Special Meetings. . . . . . . . . . . . . . . . 6
2.8 Participation in Meetings by Telephone Conference Calls.. 6
2.9 Quorum. . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.10 Action at Meeting. . . . . . . . . . . . . . . . . . . . 6
2.11 Action by Consent. . . . . . . . . . . . . . . . . . . . 6
2.12 Removal. . . . . . . . . . . . . . . . . . . . . . . . . 6
2.13 Committees.. . . . . . . . . . . . . . . . . . . . . . . 6
2.14 Compensation of Directors. . . . . . . . . . . . . . . . 7
2.15 Nomination of Director Candidates. . . . . . . . . . . . 7
Article 3. Officers . . . . . . . . . . . . . . . . . . . . .. . . 8
3.1 Enumeration.. . . . . . . . . . . . . . . . . . . . . . . 8
3.2 Election. . . . . . . . . . . . . . . . . . . . . . . . . 8
3.3 Qualification.. . . . . . . . . . . . . . . . . . . . . . 8
3.4 Tenure. . . . . . . . . . . . . . . . . . . . . . . . . . 8
3.5 Resignation and Removal.. . . . . . . . . . . . . . . . . 8
3.6 Chairman of the Board.. . . . . . . . . . . . . . . . . . 9
3.7 President.. . . . . . . . . . . . . . . . . . . . . . . . 9
3.8 Vice Presidents.. . . . . . . . . . . . . . . . . . . . . 9
3.9 Secretary and Assistant Secretaries.. . . . . . . . . . . 9
3.10 Chief Financial Officer. . . . . . . . . . . . . . . . . 10
3.11 Salaries.. . . . . . . . . . . . . . . . . . . . . . . . 10
3.12 Delegation of Authority. . . . . . . . . . . . . . . . . 10
Article 4. Capital Stock. . . . . . . . . . . . . . . . . . .. . . 10
4.1 Issuance of Stock.. . . . . . . . . . . . . . . . . . . . 10
4.2 Certificates of Stock.. . . . . . . . . . . . . . . . . . 10
4.3 Transfers.. . . . . . . . . . . . . . . . . . . . . . . . 11
4.4 Lost, Stolen or Destroyed Certificates. . . . . . . . . . 11
4.5 Record Date.. . . . . . . . . . . . . . . . . . . . . . . 11
i
TABLE OF CONTENTS
(continued)
PAGE
----
Article 5. General Provisions . . . . . . . . . . . . . . . .. . . 11
5.1 Fiscal Year.. . . . . . . . . . . . . . . . . . . . . . . 11
5.2 Corporate Seal. . . . . . . . . . . . . . . . . . . . . . 12
5.3 Waiver of Notice. . . . . . . . . . . . . . . . . . . . . 12
5.4 Actions with Respect to Securities of Other Corporations. 12
5.5 Evidence of Authority.. . . . . . . . . . . . . . . . . . 12
5.6 Certificate of Incorporation. . . . . . . . . . . . . . . 12
5.7 Severability. . . . . . . . . . . . . . . . . . . . . . . 12
5.8 Pronouns. . . . . . . . . . . . . . . . . . . . . . . . . 12
5.9 Notices.. . . . . . . . . . . . . . . . . . . . . . . . . 12
5.10 Reliance Upon Books, Reports and Records.. . . . . . . . 13
5.11 Time Periods.. . . . . . . . . . . . . . . . . . . . . . 13
5.12 Facsimile Signatures.. . . . . . . . . . . . . . . . . . 13
Article 6. Amendments . . . . . . . . . . . . . . . . . . . .. . . 13
6.1 By the Board of Directors.. . . . . . . . . . . . . . . . 13
6.2 By the Stockholders.. . . . . . . . . . . . . . . . . . . 13
Article 7. Indemnification of Directors and Officers . . . .. . . 13
7.1 Right to Indemnification. . . . . . . . . . . . . . . . . 13
7.2 Right of Claimant to Bring Suit.. . . . . . . . . . . . . 14
7.3 Indemnification of Employees and Agents.. . . . . . . . . 15
7.4 Non-Exclusivity of Rights.. . . . . . . . . . . . . . . . 15
7.5 Indemnification Contracts.. . . . . . . . . . . . . . . . 15
7.6 Insurance.. . . . . . . . . . . . . . . . . . . . . . . . 15
7.7 Effect of Amendment.. . . . . . . . . . . . . . . . . . . 15
ii
APPENDIX J
NETTAXI.COM
1999 STOCK OPTION PLAN
1. PURPOSES OF THE PLAN
-----------------------
The purposes of this 1999 Stock Option Plan (the "Plan") of Nettaxi.com, a
Nevada corporation (the "Company") are to:
(i) Encourage selected officers, directors, key employees and
consultants to improve operations and increase profits of the Company or its
Affiliates;
(ii) Encourage selected officers and key employees to accept or
continue employment with the Company or its Affiliates; and
(iii) Increase the interest of selected officers, directors, key
employees and consultants in the Company's welfare through participation in the
growth in value of the common stock of the Company ("Common Stock").
Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified
options" ("NQOs").
2. ELIGIBLE PERSONS
-----------------
Every person who at the date of grant of an Option is a key employee of the
Company or of any Affiliate (as defined below) (including employees who are also
officers or directors of the Company or of any Affiliate) is eligible to receive
NQOs or ISOs under this Plan. The term "Affiliate" as used in the Plan means a
parent or subsidiary corporation as defined in the applicable provisions
(currently Sections 424(e) and (f), respectively) of the Code. Every person who
is a director of or consultant to the Company or any Affiliate at the date of
grant of an Option is eligible to receive NQOs under this Plan.
3. STOCK SUBJECT TO THIS PLAN
------------------------------
Subject to the provisions of Section 6.1.1 of the Plan, the maximum
aggregate number of shares of stock which may be granted pursuant to this Plan
is three million three hundred thousand (3,300,000) shares of Common Stock. The
shares unexercised shall become available again for grants under the Plan.
4. ADMINISTRATION
--------------
4.1 Option Committee. This Plan shall be administered by the Board of
-----------------
Directors of the Company (the "Board") or by a committee of at least two Board
members, one of which is the President, (hereinafter referred to as the
"Committee Chairman") to which administration of the Plan is delegated (in
either case, the "Option Committee"). No member of the Option Committee shall
be liable for any decision, action, or omission respecting the Plan, any
options, or any option shares.
4.2 Disinterested Administration. From and after such time as the
-----------------------------
Company registers a class of equity securities under Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), this Plan
shall be administered in accordance with the disinterested administrative
requirements of Rule 16b-3 promulgated by the Securities and Exchange Commission
("Rule 16b-3"), or any successor rule thereto.
4.3 Authority of the Option Committee. Subject to the other
-------------------------------------
provisions of this Plan, the Options Committee shall have the authority, in its
discretion: (i) to grant Options; (ii) to determine the fair market of the
Common Stock subject to Options; (iii) to determine the exercise price of
Options granted; (iv) to determine the persons to whom, and the time or times at
which, Options shall be granted, and the number of shares subject to each
Option; (v) to interpret this Plan; (vi) to prescribe, amend, and rescind rules
and regulations relating to this Plan; (vii) to determine the terms and
provisions of each Option granted (which need not be identical), including but
not limited to, the time or times at which Options shall be exercisable; (viii)
with the consent of the optionee, to modify or amend any Option; (ix) to defer
(with the consent of the optionee) or accelerate the exercise date or vesting of
any Option; (x) to authorize any person to execute on behalf of the Company any
instrument evidencing the grant of an Option; and (xi) to make all other
determinations deemed necessary or advisable for the administration of this
Plan. The Option Committee may delegate nondiscretionary administrative duties
to such employees of the Company as it deems proper.
4.4 Determinations Final. All questions of interpretation,
---------------------
implementation, and application of this Plan shall be determined by the Board or
the Option Committee. Such determinations shall be final and binding on all
persons.
5. GRANTING OF OPTIONS: OPTION AGREEMENT
-----------------------------------------
5.1 Ten-Year Term. No Options shall be granted under this Plan after
--------------
ten years from the date of adoption of this Plan by the Board.
5.2 Option Agreement. Each Option shall be evidenced by a written
-----------------
stock option agreement, in form satisfactory to the Company, executed by the
Company and the person to whom such Option is granted; provided, however, that
the failure by the Company, the optionee, or both to execute such an agreement
shall not invalidate the granting of any Option.
5.3 Designation as ISO or NQO. The agreement shall specify whether
-----------------------------
each Option it evidences is a NQO or an ISO. Notwithstanding designation of any
Option as an ISO or a NQO, if the aggregate fair market value of the shares
under Options designated as ISOs which would become exercisable for the first
time by any Optionee at a rate in excess of $100,000 in any calendar year (under
all plans of the Company), then unless otherwise provided in the stock option
agreement or by the Option Committee, such Options shall be NQOs to the extent
of the excess above $100,000. For purposes of this Section 5.3, Options shall
be taken into account in the order in which they were granted, and the fair
market value of the shares shall be determined as of the time the Option, with
respect to such shares, is granted.
5.4 Grant to Prospective Employees. The Option Committee or the
---------------------------------
Committee Chairman may approve the grant of Options under this Plan to persons
who are expected to become employees of the Company, but who are not employees
at the date of approval. In such cases, the Option shall be deemed granted,
without further approval, on the date the optionee is first treated as an
employee for payroll purposes.
6. TERMS AND CONDITIONS OF OPTIONS
-----------------------------------
Each Option granted under this Plan shall be designated as a NQO or an ISO.
Each Option shall be subject to the terms and conditions set forth in Section
6.1. NQOs shall be also subject to the terms and conditions set forth in
Section 6.2, but not those set forth in Section 6.3. ISOs shall also be subject
to the terms and conditions set forth in Section 6.3, but not those set forth in
Section 6.2.
6.1 Terms and Conditions to Which Options Are Subject. Options granted
-------------------------------------------------
under this Plan shall, as provided in Section 6, be subject to the following
terms and conditions:
6.1.1 Changes in Capital Structure. The existence of outstanding
-----------------------------
Options shall not affect the Company's right to effect adjustments,
recapitalizations, reorganizations, or other changes in its or any other
corporation's capital structure or business, any merger or consolidation, any
issuance of bonds, debentures, preferred, or prior preference stock ahead of or
affecting Common Stock, the dissolution or liquidation of the Company's or any
other corporation's assets or business or any other corporate act whether
similar to the events described above or otherwise. Subject to Section 6.1.2,
if the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, recapitalization, or other event, or converted into or
exchanged for other securities as a result of a merger, consolidation,
reorganization, or other event, appropriate adjustments shall be made in (i) the
number and class of shares of stock subject to this Plan and each outstanding
Option; provided, however, that the Company shall not be required to issue
fractional shares as a result to any such adjustments. Each such adjustment
shall be subject to approval by the Option Committee in its sole discretion, and
may be made without regard to any resulting tax consequence to the optionee.
6.1.2 Corporate Transactions. In connection with (i) any merger,
-----------------------
consolidation, acquisition, separation, or reorganization in which more than
fifty percent (50%) of the shares of the Company outstanding immediately before
such event are converted into cash or into another security, (ii) any
dissolution or liquidation of the Company or any partial liquidation involving
fifty percent (50%) or more of the assets of the Company, (iii) any sale of more
than fifty percent (50%) of the Company's assets, or (iv) any like occurrence in
which the Company is involved, the Option Committee may, in its absolute
discretion, do one or more of the following upon ten days' prior written notice
to all optionees; (a) accelerate any vesting schedule to which an Option is
subject; (b) cancel Options upon payment to each optionee in cash, with respect
to each Option to the extent then exercisable, of any amount which, in the
absolute discretion of the Option Committee, is determined to be equivalent to
any excess of the market value (at the effective time of such event) of the
consideration that such optionee would have received if the Option had been
exercised before the effective time over the exercise price of the Option; (c)
shorten the period during which such Options are exercisable (provided they
remain exercisable, to the extent otherwise exercisable, for at least ten days
after the date the notice is given); or (d) arrange that new option rights be
substituted for the option rights granted under this Plan, or that the Company's
obligations as to Options outstanding under this Plan be assumed, by an employer
corporation other than the Company or by a parent or subsidiary of such employer
corporation. The actions described in this Section 6.1.2 may be taken without
regard to any resulting tax consequence to the optionee.
6.1.3 Time of Option Exercise. Except as necessary to satisfy the
-----------------------
requirements of Section 422 of the Code and subject to Section 5, Options
granted under this Plan shall be exercisable at such times as are specified in
the written stock option agreement relating to such Option: provided, however,
that so long as the optionee is a director or officer, as those terms are used
in Section 16 of the Exchange Act, such Option may not be exercisable, in whole
or in part, at any time prior to the six-month anniversary of the date of the
Option grant, unless the Option Committee determines that the foregoing
provision is not necessary to comply with the provisions of Rule 16b-3 or that
Rule 16b-3 is not applicable to the Plan. No Option shall be exercisable,
however, until a written stock option agreement in form satisfactory to the
Company is executed by the Company and the optionee. The Option Committee, in
its absolute discretion, may later waive any limitations respecting the time at
which an Option or any portion of an Option first becomes exercisable.
6.1.4 Option Grant Date. Except as provided in Section 5.4 or as
------------------
otherwise specified by the Option Committee, the date of grant of an Option
under this Plan shall be the date as of which the Option Committee approves the
grant.
6.1.5 Nonassignability of Option Rights. No Option granted under
----------------------------------
this Plan shall be assignable or otherwise transferable by the optionee except
by will, by the laws of descent and distribution, or pursuant to a qualified
domestic relations order (limited in the case of an ISO, to a qualified domestic
relations order that effects a transfer of an ISO that is community property as
part of a division of community property). During the life of the optionee, an
Option shall be exercisable only by the optionee.
6.1.6 Payment. Except as provided below, payment in full shall be
-------
made for all stock purchased at the time written notice of exercise of an Option
is given to the Company, and proceeds of any payment shall constitute general
funds of the Company. Payment may be made in cash, by promissory note, by
delivery to the Company of shares of Common Stock owned by the optionee (duly
endorsed in favor of the Company or accompanied by a duly endorsed stock power),
or by any other form of consideration and method of payment to the extent
permitted under applicable law. Any shares delivered shall be valued as of the
date of exercise of the Option in the manner set forth in Section 6.1.12.
Optionees may not exercise Options by delivery of shares more frequently than at
six-month intervals.
6.1.7 Termination of Employment. Unless determined otherwise by
---------------------------
the Option Committee in its absolute discretion to the extent not already
expired or exercised, every Option granted under this Plan shall terminate at
the earlier of (a) the Expiration Date (as defined in Section 6.1.12) or (b)
three months after termination of employment with the Company or any Affiliate;
provided, that an Option shall be exercisable after the date of termination of
employment only to the extent exercisable on the date of termination; and
provided further, that if termination of employment is due to the optionee's
"disability" (as determined in accordance with Section 22(e)(3) of the Code),
the optionee, or the optionee's personal representative, may at any time within
one (1) year after the termination of employment (or such lesser period as is
specified in the option agreement but in no event after the Expiration Date of
the Option), exercise the option to the extent it was exercisable at the date of
termination; and provided further that if termination of employment is due to
the Optionee's death, the Optionee's estate or a legal representative thereof,
may at any time within and including six (6) months after the date of death of
Optionee (or such lesser period as is specified in the option agreement but in
no event after the Expiration Date of the Option), exercise the option to the
extent it was exercisable at the date of termination. Transfer of an optionee
from the Company to an Affiliate or vice versa, or from one Affiliate to
another, or a leave of absence due to sickness, military service, or other cause
duly approved by the Company, shall not be deemed a termination of employment
for purposes of this Plan. For the purpose of this Section 6.1.7, "employment"
means engagement with the Company or any Affiliate of the Company either as an
employee, as a director, or as a consultant.
6.1.8 Repurchase of Stock. In addition to the right of first
---------------------
refusal set forth in Section 6.1.9, at the time it grants Options under this
Plan, the Company may retain, for itself or others, rights to purchase the
shares acquired under the Option or impose other restrictions on the transfer of
such shares. The terms and conditions of any such rights or other restrictions
shall be set forth in the option agreement evidencing the Option.
6.1.9 Company's Right of First Refusal.
------------------------------------
(i) Company's Right; Notice. Stock delivered pursuant to the
exercise of any option granted under this Plan shall be subject to a right of
first refusal by the Company in the event that the holder of such shares
proposes to sell, pledge, or otherwise transfer such shares or any interest in
such shares to any person or entity. Any holder of shares purchased under this
Plan desiring to transfer such shares or any interest in such shares shall give
a written notice (the "Offer Notice") to the Company describing the proposed
transfer, including the number of shares proposed to be transferred, the
proposed transfer price and terms, and the name and address of the proposed
transferee. The Company's rights under this Section 6.1.9 shall be freely
assignable.
(ii) Exercise. Except as provided under any repurchase right
imposed under Section 6.1.8, if the Company fails to exercise its right of first
refusal within 20 days from the date on which the Company receives the Offer
Notice, the shareholder may, within the next 90 days, conclude a transfer to the
proposed transferee of the exact number of shares covered by that notice on
terms not more favorable to the transferee than those described in the notice.
Any subsequent proposed transfer shall again be subject to the Company's right
of first refusal. If the Company exercises its right of first refusal, the
shareholder shall endorse and deliver to the Company the stock certificates
representing the shares being repurchased. The Company shall pay the
shareholder the total repurchase price for the shares no later than the later of
(a) sixty (60) days after receipt of the Offer Notice and (b) the end of such
period for payment offered by the bona fide third-party transferor. The holder
of the shares being repurchased shall cease to have any rights with respect to
such shares immediately upon receipt of the repurchase price.
(iii) Exceptions. Notwithstanding the foregoing provisions of
this Section 6.1.9, no notice of a proposed transfer shall be required and no
right of first refusal shall exist with respect to transfers, including sales,
to an optionee's children, grandchildren, or parents or to trusts, estates, or
custodianships of or for the account of an optionee or an optionee's children,
grandchildren, or parents; provided, however, that the transferee shall take
such shares subject to the provisions of Sections 6.1.8. and 6.1.9.
(iv) Termination of Company's Right. The right of first
refusal set forth in this Section 6.1.9 shall terminate upon the earlier of the
consummation of an underwritten public offering of the Company's Common Stock
registered under the Securities Act of 1933 or the date on which the Common
Stock is registered under Section 12 of the Exchange Act.
(v) No Limitation. Nothing in this Section 6.1.9 shall limit
the rights of the Company under any repurchase right imposed under Section
6.1.8.
(vi) Conflict. In the event that the terms of this paragraph
6.1.9 conflict or are inconsistent with any provision in the Bylaws of the
Company, the terms of the Bylaws shall control.
6.1.10 Withholding and Employment Taxes. At the time of exercise
---------------------------------
of an Option (or at such later time(s) as the Company may prescribe), the
optionee shall remit to the Company in cash all applicable (as determined by the
Company in its sole discretion) federal and state withholding taxes. The Option
Committee may, in the exercise of its sole discretion, permit an optionee to pay
some or all of such taxes by means of a promissory note on such terms as the
Option Committee deems appropriate. If authorized by the Option Committee in
its sole discretion, and if the Option has been held for six months or more, an
optionee may elect to have shares of Common Stock which are acquired upon
exercise of the Option withheld by the Company or to tender to the Company other
shares of Common Stock or other securities of the Company owned by the optionee
on the date of determination of the amount of tax to be withheld as a result of
the exercise of such Option (the "Tax Date") to pay the amount of tax that is
required by law to be withheld by the Company as a result of the exercise of
such Option, provided that the election satisfies the following requirements:
(i) the election shall be irrevocable, shall be made at least six
months before the Option exercise, and shall be subject to the disapproval of
the Option Committee at any time before consummation of the Option exercise; or
(ii) the election shall be made in advance to take effect in a
subsequent "window period" (as defined below) in which the Option is exercised,
and the Option Committee shall approve the election when it is made or at any
time thereafter up to consummation of the Option exercise; or
(iii) the election shall be made in a window period and the
approval of the Option Committee shall be given after the election is made and
within the same window period, and the Option exercise shall be consummated
within such window period; or
(iv) shares or other previously owned securities shall be
tendered (but stock shall not be withheld) at any time up to the consummation of
the Option exercise (in which event, neither a prior irrevocable election nor
window period timing shall be required).
Notwithstanding the foregoing, clauses (ii) and (iii) shall not be
available until the Company has been subject to the reporting requirements of
the Securities Exchange Act of 1934 for at least one year.
A "window period" is the period beginning on the third business day
following the date of release for publication of quarterly or annual summary
statements of sales and earnings and ending on the 12th business day following
such date. Any securities so withheld or tendered shall be valued by the
Company as of the Tax Date.
6.1.11 Other Provisions. Each Option granted under this Plan may
-----------------
contain such other terms, provisions, and conditions not consistent with this
Plan as may be determined by the Option Committee, and each ISO granted under
this Plan shall include such provisions and conditions as are necessary to
qualify the Option as an "incentive stock option" within the meaning of Section
422 of the Code.
6.1.12 Determination of Value. For purposes of the Plan, the
------------------------
value of Common Stock or other securities of the Company shall be determined as
follows:
(i) If the stock of the Company is listed on any established
stock exchange or a national market system, including without limitation the
National Market System of the National Association of Securities Dealers
Automated Quotation System, its fair market value shall be the closing sales
price for such stock or the closing bid if no sale was reported, as quoted on
such system or exchange (or the largest such exchange) for the date the value is
to be determined (or if there is no sale for such date, then for the last
preceding business day on which there was at least one sale), as reported in the
Wall Street Journal.
- ---------------------
(ii) If the stock of the Company is regularly quoted by a
recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there is no quoted price
for the date of grant, then for the last preceding business day on which there
was a quoted price).
(iii) If the stock of the Company is as described in Section
6.1.12(i) or (ii), but is restricted by law, contract, market conditions, or
otherwise as to salability or transferability, its fair market value shall be as
set forth in Section 6.1.12(i) or (ii), as appropriate, less, as determined by
the Option Committee, an appropriate discount, based on the nature and terms of
the restrictions.
(iv) In the absence of an established market for the stock, the
fair market value thereof shall be determined by the Option Committee, with
reference to the Company's net worth, prospective earning power, dividend-paying
capacity, and other relevant factors, including the goodwill of the Company, the
economic outlook in the Company's industry, the Company's position in the
industry and its management, and the values of stock of other corporations in
the same or a similar line of business.
6.1.13 Option Term. No Option shall be exercisable more than ten
-----------
years after the date of grant, or such lesser period of time as set forth in the
option agreement (the end of the maximum exercise period stated in the option
agreement is referred to in this Plan as the "Expiration Date"). No ISO granted
to any person who owns, directly or by attribution, stock possessing more than
ten percent of the total combined voting power of all classes of stock of the
Company of any Affiliate ( a "Ten Percent Stockholder") shall be exercisable
more than five years after the date of grant.
6.1.14 Exercise Price. The exercise price of any Option granted
--------------
to any Ten Percent Stockholder shall in no event be less than 110 percent of the
fair market value (determined in accordance with Section 6.1.12) of the stock
covered by the Option at the time the Option is granted.
6.1.15 Compliance with Securities Laws. The Company shall not be
-------------------------------
obligated to offer or sell any shares upon exercise of an Option unless the
shares are at that time effectively registered or exempt from registration under
the federal securities laws and the offer and sale of the shares are otherwise
in compliance with all applicable state and local securities laws. The Company
shall have no obligation to register the shares under the federal securities
laws or take whatever other steps may be necessary to enable the shares to be
offered and sold under federal or other securities laws. Upon exercising all or
any portion of an Option, an optionee may be required to furnish representations
or undertakings deemed appropriate by the Company to enable the offer and sale
of the Option shares or subsequent transfers of any interest in the shares to
comply with applicable securities laws. Stock certificates evidencing shares
acquired upon exercise of options shall bear any legend required by, or useful
for purposes of compliance with, applicable securities laws, this Plan, or the
option agreement evidencing the Option.
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options
---------------------------------------------------
granted under this Plan which are designated as NQOs shall be subject to the
following additional terms and conditions:
6.2.1 Exercise Price. Except as set forth in Section 6.1.14,
--------------
the exercise price of a NQO shall not be less than 85 percent of the fair market
value (determined in accordance with Section 6.1.12) of the stock subject to the
Option on the date of grant.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options
---------------------------------------------------
granted under this Plan which are designated as ISOs shall be subject to the
following additional terms and conditions:
6.3.1 Exercise Price. Except as set forth in Section 6.1.14,
--------------
the exercise price of an ISO shall be determined in accordance with the
applicable provisions of the Code and shall in no event be less than the fair
market value (determined in accordance with Section 6.1.12) of the stock covered
by the Option at the time the Option is granted.
6.3.2 Disqualifying Dispositions. If stock acquired upon
--------------------------
exercise of an ISO is disposed of in a "disqualifying disposition" within the
meaning of Section 422 of the Code, the holder of the stock immediately before
the disposition shall notify the Company in writing of the date and terms of the
disposition and comply with any other requirements imposed by the Company in
order to enable the Company to secure any related income tax deduction to which
it is entitled.
7. MANNER OF EXERCISE
------------------
7.1 Notice of Exercise. An optionee wishing to exercise an Option
------------------
shall give written notice to the Company at its principal executive office, to
the attention of the officer of the Company designated by the Option Committee,
accompanied by payment of the exercise price as provided in Section 6.1.6. The
date the Company receives written notice of an exercise hereunder accompanied by
payment of the exercise price and, if required, by payment of any federal or
state withholding or employment taxes required to be withheld by virtue of
exercise of the Option will be considered as the date such Option was exercised.
7.2 Issuance of Certificates. Promptly after receipt of written
------------------------
notice of exercise of an Option, the Company shall, without stock issue or
transfer taxes to the optionee or other person entitled to exercise the Option,
deliver to the optionee or such other person a certificate or certificates for
the requisite number of shares of stock. Unless the Company specifies
otherwise, an optionee or transferee of an optionee shall not have any
privileges as a shareholder with respect to any stock covered by the Option
until the date of issuance of a stock certificate. Subject to Section 6.1.1
hereof, no adjustment shall be made for dividends or other rights for which the
record date is prior to the date the certificates are delivered.
8. EMPLOYMENT RELATIONSHIP
-----------------------
Nothing in this Plan or any Option granted hereunder shall interfere with
or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment at any time, nor confer upon any optionee
any right to continue in the employ of the Company or any of its Affiliates.
9. AMENDMENTS TO PLAN
------------------
The Board may amend this Plan at any time. Without the consent of an
optionee, no amendment may affect outstanding Options except to conform this
Plan and ISOs granted under this Plan to federal or other tax laws relating to
incentive stock options. No amendment shall require shareholder approval unless
shareholder approval is required to preserve incentive stock option treatment
for tax purposes or the Board otherwise concludes that shareholder approval is
advisable.
10. SHAREHOLDER APPROVAL: TERM
--------------------------
The Board of Directors of the Company adopted this Plan as of January 14,
2000, and the Company's shareholders approved this Plan as of _____________.
This Plan shall terminate ten years after initial adoption by the Board unless
terminated earlier by the Board. The Board may terminate this Plan without
shareholder approval. No Options shall be granted after termination of this
Plan, but termination shall not affect rights and obligations under
then-outstanding Options.
FIRST AMENDMENT
TO
NETTAXI.COM, 1999 STOCK OPTION PLAN
This First Amendment (the "Amendment")to the Nettaxi.com, 1999 Stock
Option Plan (the "Plan") is adopted this ___ day of April, 2000.
1. Section 3 of the Plan is hereby amended to increase the number of shares
reserved for issuance under the Plan from 3,300,000 to 8,900,000.
3. Except as set forth in this Amendment, all terms and conditions of the
Plan shall remain in full force and effect.
SECOND AMENDMENT
TO
NETTAXI.COM, 1999 STOCK OPTION PLAN
This First Amendment (the "Amendment") to the Nettaxi.com, 1999 Stock
Option Plan (the "Plan") is adopted this 7th day of January, 2002.
1. Section 3 of the Plan is hereby amended to decrease the number of shares
reserved for issuance under the Plan to 3,053,000.
3. Except as set forth in this Amendment, all terms and conditions of the
Plan shall remain in full force and effect.
2
APPENDIX K
NETTAXI.COM
2002 STOCK OPTION PLAN
1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.
---------------------------------------
1.1 ESTABLISHMENT. The Nettaxi.com 2002 Stock Option Plan (the
"PLAN") is hereby established effective as of ___________, 2002.
1.2 PURPOSE. The purpose of the Plan is to advance the interests
of the Participating Company Group and its stockholders by providing an
incentive to attract, retain and reward persons performing services for the
Participating Company Group and by motivating such persons to contribute to the
growth and profitability of the Participating Company Group.
1.3 TERM OF PLAN. The Plan shall continue in effect until the
earlier of its termination by the Board or the date on which all of the shares
of Stock available for issuance under the Plan have been issued and all
restrictions on such shares under the terms of the Plan and the agreements
evidencing Options granted under the Plan have lapsed. However, all Options
shall be granted, if at all, within ten (10) years from the earlier of the date
the Plan is adopted by the Board or the date the Plan is duly approved by the
stockholders of the Company.
2. DEFINITIONS AND CONSTRUCTION.
----------------------------
2.1 DEFINITIONS. Whenever used herein, the following terms shall
have their respective meanings set forth below:
(a) "BOARD" means the Board of Directors of the Company. If
one or more Committees have been appointed by the Board to administer the Plan,
"BOARD" also means such Committee(s).
(b) "CODE" means the Internal Revenue Code of 1986, as
amended, and any applicable regulations promulgated thereunder.
(c) "COMMITTEE" means the Compensation Committee or other
committee of the Board duly appointed to administer the Plan and having such
powers as shall be specified by the Board. Unless the powers of the Committee
have been specifically limited, the Committee shall have all of the powers of
the Board granted herein, including, without limitation, the power to amend or
terminate the Plan at any time, subject to the terms of the Plan and any
applicable limitations imposed by law.
(d) "COMPANY" means Nettaxi.com, a Nevada corporation, or any
successor corporation thereto.
(e) "CONSULTANT" means a person engaged to provide consulting
or advisory services (other than as an Employee or a Director) to a
Participating Company, provided that the identity of such person, the nature of
such services or the entity to which such services are provided would not
K-1
preclude the Company from offering or selling securities to such person pursuant
to the Plan in reliance on registration on a Form S-8 Registration Statement
under the Securities Act.
(f) "DIRECTOR" means a member of the Board or of the board of
directors of any other Participating Company.
(g) "DISABILITY" means the inability of the Optionee, in the
opinion of a qualified physician acceptable to the Company, to perform the major
duties of the Optionee's position with the Participating Company Group because
of the sickness or injury of the Optionee.
(h) "EMPLOYEE" means any person treated as an employee
(including an Officer or a Director who is also treated as an employee) in the
records of a Participating Company and, with respect to any Incentive Stock
Option granted to such person, who is an employee for purposes of Section 422 of
the Code; provided, however, that neither service as a Director nor payment of a
director's fee shall be sufficient to constitute employment for purposes of the
Plan. The Company shall determine in good faith and in the exercise of its
discretion whether an individual has become or has ceased to be an Employee and
the effective date of such individual's employment or termination of employment,
as the case may be. For purposes of an individual's rights, if any, under the
Plan as of the time of the Company's determination, all such determinations by
the Company shall be final, binding and conclusive, notwithstanding that the
Company or any court of law or governmental agency subsequently makes a contrary
determination.
(i) "EXCHANGE ACT" means the Securities Exchange Act of 1934,
as amended.
(j) "FAIR MARKET VALUE" means, as of any date, the value of a
share of Stock or other property as determined by the Board, in its discretion,
or by the Company, in its discretion, if such determination is expressly
allocated to the Company herein, subject to the following:
(i) If, on such date, the Stock is listed on a national
or regional securities exchange or market system, the Fair Market Value of a
share of Stock shall be the closing price of a share of Stock (or the mean of
the closing bid and asked prices of a share of Stock if the Stock is so quoted
instead) as quoted on the Nasdaq National Market, The Nasdaq SmallCap Market or
such other national or regional securities exchange or market system
constituting the primary market for the Stock, as reported in The Wall Street
---------------
Journal or such other source as the Company deems reliable. If the relevant
- -------
date does not fall on a day on which the Stock has traded on such securities
exchange or market system, the date on which the Fair Market Value shall be
established shall be the last day on which the Stock was so traded prior to the
relevant date, or such other appropriate day as shall be determined by the
Board, in its discretion.
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(ii) If, on such date, the Stock is not listed on a
national or regional securities exchange or market system, the Fair Market Value
of a share of Stock shall be as determined by the Board in good faith without
regard to any restriction other than a restriction which, by its terms, will
never lapse.
(k) "INCENTIVE STOCK OPTION" means an Option intended to be
(as set forth in the Option Agreement) and which qualifies as an incentive stock
option within the meaning of Section 422(b) of the Code.
(l) "INSIDER" means an Officer, a Director of the Company or
other person whose transactions in Stock are subject to Section 16 of the
Exchange Act.
(m) "NONSTATUTORY STOCK OPTION" means an Option not intended
to be (as set forth in the Option Agreement) or which does not qualify as an
Incentive Stock Option.
(n) "OFFICER" means any person designated by the Board as an
officer of the Company.
(o) "OPTION" means a right to purchase Stock pursuant to the
terms and conditions of the Plan. An Option may be either an Incentive Stock
Option or a Nonstatutory Stock Option.
(p) "OPTION AGREEMENT" means a written agreement between the
Company and an Optionee setting forth the terms, conditions and restrictions of
the Option granted to the Optionee and any shares acquired upon the exercise
thereof. An Option Agreement may consist of a form of "Notice of Grant of Stock
Option" and a form of "Stock Option Agreement" incorporated therein by
reference, or such other form or forms as the Board may approve from time to
time.
(q) "OPTIONEE" means a person who has been granted one or
more Options.
(r) "PARENT CORPORATION" means any present or future "parent
corporation" of the Company, as defined in Section 424(e) of the Code.
(s) "PARTICIPATING COMPANY" means the Company or any Parent
Corporation or Subsidiary Corporation.
(t) "PARTICIPATING COMPANY GROUP" means, at any point in
time, all corporations collectively which are then Participating Companies.
(u) "RULE 16B-3" means Rule 16b-3 under the Exchange Act, as
amended from time to time, or any successor rule or regulation.
(v) "SECTION 162(M)" means Section 162(m) of the Code.
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(w) "SECURITIES ACT" means the Securities Act of 1933, as
amended.
(x) "SERVICE" means an Optionee's employment or service with
the Participating Company Group, whether in the capacity of an Employee, a
Director or a Consultant. An Optionee's Service shall not be deemed to have
terminated merely because of a change in the capacity in which the Optionee
renders Service to the Participating Company Group or a change in the
Participating Company for which the Optionee renders such Service, provided that
there is no interruption or termination of the Optionee's Service. Furthermore,
an Optionee's Service with the Participating Company Group shall not be deemed
to have terminated if the Optionee takes any military leave, sick leave, or
other bona fide leave of absence approved by the Company; provided, however,
that if any such leave exceeds ninety (90) days, on the ninety-first (91st) day
of such leave the Optionee's Service shall be deemed to have terminated unless
the Optionee's right to return to Service with the Participating Company Group
is guaranteed by statute or contract. Notwithstanding the foregoing, unless
otherwise designated by the Company or required by law, a leave of absence shall
not be treated as Service for purposes of determining vesting under the
Optionee's Option Agreement. The Optionee's Service shall be deemed to have
terminated either upon an actual termination of Service or upon the corporation
for which the Optionee performs Service ceasing to be a Participating Company.
Subject to the foregoing, the Company, in its discretion, shall determine
whether the Optionee's Service has terminated and the effective date of such
termination.
(y) "STOCK" means the common stock of the Company, as
adjusted from time to time in accordance with Section 4.2.
(z) "SUBSIDIARY CORPORATION" means any present or future
"subsidiary corporation" of the Company, as defined in Section 424(f) of the
Code.
(aa) "TEN PERCENT OWNER OPTIONEE" means an Optionee who, at
the time an Option is granted to the Optionee, owns stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
a Participating Company within the meaning of Section 422(b)(6) of the Code.
2.2 CONSTRUCTION. Captions and titles contained herein are for
convenience only and shall not affect the meaning or interpretation of any
provision of the Plan. Except when otherwise indicated by the context, the
singular shall include the plural and the plural shall include the singular.
Use of the term "or" is not intended to be exclusive, unless the context clearly
requires otherwise.
3. ADMINISTRATION.
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3.1 ADMINISTRATION BY THE BOARD. The Plan shall be administered
by the Board. All questions of interpretation of the Plan or of any Option
shall be determined by the Board, and such determinations shall be final and
binding upon all persons having an interest in the Plan or such Option.
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3.2 AUTHORITY OF OFFICERS. Any Officer shall have the authority
to act on behalf of the Company with respect to any matter, right, obligation,
determination or election which is the responsibility of or which is allocated
to the Company herein, provided the Officer has apparent authority with respect
to such matter, right, obligation, determination or election.
3.3 POWERS OF THE BOARD. In addition to any other powers set
forth in the Plan and subject to the provisions of the Plan, the Board shall
have the full and final power and authority, in its discretion:
(a) to determine the persons to whom, and the time or times
at which, Options shall be granted and the number of shares of Stock to be
subject to each Option;
(b) to designate Options as Incentive Stock Options or
Nonstatutory Stock Options;
(c) to determine the Fair Market Value of shares of Stock or
other property;
(d) to determine the terms, conditions and restrictions
applicable to each Option (which need not be identical) and any shares acquired
upon the exercise thereof, including, without limitation, (i) the exercise price
of the Option, (ii) the method of payment for shares purchased upon the exercise
of the Option, (iii) the method for satisfaction of any tax withholding
obligation arising in connection with the Option or such shares, including by
the withholding or delivery of shares of stock, (iv) the timing, terms and
conditions of the exercisability of the Option or the vesting of any shares
acquired upon the exercise thereof, (v) the time of the expiration of the
Option, (vi) the effect of the Optionee's termination of Service with the
Participating Company Group on any of the foregoing, and (vii) all other terms,
conditions and restrictions applicable to the Option or such shares not
inconsistent with the terms of the Plan;
(e) to approve one or more forms of Option Agreement;
(f) to amend, modify, extend, cancel or renew any Option or
to waive any restrictions or conditions applicable to any Option or any shares
acquired upon the exercise thereof;
(g) to accelerate, continue, extend or defer the
exercisability of any Option or the vesting of any shares acquired upon the
exercise thereof, including with respect to the period following an Optionee's
termination of Service with the Participating Company Group;
(h) to prescribe, amend or rescind rules, guidelines and
policies relating to the Plan, or to adopt supplements to, or alternative
versions of, the Plan, including, without limitation, as the Board deems
necessary or desirable to comply with the laws of, or to accommodate the tax
policy or custom of, foreign jurisdictions whose citizens may be granted
Options; and
K-5
(i) to correct any defect, supply any omission or reconcile
any inconsistency in the Plan or any Option Agreement and to make all other
determinations and take such other actions with respect to the Plan or any
Option as the Board may deem advisable to the extent not inconsistent with the
provisions of the Plan or applicable law.
3.4 COMMITTEE COMPLYING WITH SECTION 162(M). If a Participating
Company is a "publicly held corporation" within the meaning of Section 162(m),
the Board may establish a Committee of "outside directors" within the meaning of
Section 162(m) to approve the grant of any Option which might reasonably be
anticipated to result in the payment of employee remuneration that would
otherwise exceed the limit on employee remuneration deductible for income tax
purposes pursuant to Section 162(m).
3.5 ADMINISTRATION WITH RESPECT TO INSIDERS. With respect to
participation by Insiders in the Plan, at any time that any class of equity
security of the Company is registered pursuant to Section 12 of the Exchange
Act, the Plan shall be administered in compliance with the requirements, if any,
of Rule 16b-3.
3.6 INDEMNIFICATION. In addition to such other rights of
indemnification as they may have as members of the Board or officers or
employees of the Participating Company Group, members of the Board and any
officers or employees of the Participating Company Group to whom authority to
act for the Board or the Company is delegated shall be indemnified by the
Company against all reasonable expenses, including attorneys' fees, actually and
necessarily incurred in connection with the defense of any action, suit or
proceeding, or in connection with any appeal therein, to which they or any of
them may be a party by reason of any action taken or failure to act under or in
connection with the Plan, or any right granted hereunder, and against all
amounts paid by them in settlement thereof (provided such settlement is approved
by independent legal counsel selected by the Company) or paid by them in
satisfaction of a judgment in any such action, suit or proceeding, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding that such person is liable for gross negligence, bad faith or
intentional misconduct in duties; provided, however, that within sixty (60) days
after the institution of such action, suit or proceeding, such person shall
offer to the Company, in writing, the opportunity at its own expense to handle
and defend the same.
4. SHARES SUBJECT TO PLAN.
----------------------
4.1 MAXIMUM NUMBER OF SHARES ISSUABLE. Subject to adjustment as
provided in Section 4.2, the maximum aggregate number of shares of Stock that
may be issued under the Plan shall be Twenty Eight Million Three Hundred Fifty
Thousand (28,350,000) and shall consist of authorized but unissued or reacquired
shares of Stock or any combination thereof. If an outstanding Option for any
reason expires or is terminated or canceled or if shares of Stock are acquired
upon the exercise of an Option subject to a Company repurchase option and are
repurchased by the Company at the Optionee's exercise price, the shares of Stock
allocable to the unexercised portion of such Option or such repurchased shares
of Stock shall again be available for issuance under the Plan. However, except
as adjusted pursuant to Section 4.2, in no event shall more than Twenty Eight
Million Three Hundred Fifty Thousand (28,350,000) shares of Stock be available
for issuance pursuant to the exercise of Incentive Stock Options (the "ISO SHARE
K-6
ISSUANCE LIMIT"). Notwithstanding the foregoing, at any such time as the offer
and sale of securities pursuant to the Plan is subject to compliance with
Section 260.140.45 of Title 10 of the California Code of Regulations ("SECTION
260.140.45"), the total number of shares of Stock issuable upon the exercise of
all outstanding Options (together with options outstanding under any other stock
option plan of the Company) and the total number of shares provided for under
any stock bonus or similar plan of the Company shall not exceed thirty percent
(30%) (or such other higher percentage limitation as may be approved by the
stockholders of the Company pursuant to Section 260.140.45) of the then
outstanding shares of the Company as calculated in accordance with the
conditions and exclusions of Section 260.140.45.
4.2 ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE. In the event of
any stock dividend, stock split, reverse stock split, recapitalization,
combination, reclassification or similar change in the capital structure of the
Company, appropriate adjustments shall be made in the number and class of shares
subject to the Plan and to any outstanding Options, in the ISO Share Issuance
Limit set forth in Section 4.1, in the Section 162(m) Grant Limit set forth in
Section 5.4 and in the exercise price per share of any outstanding Options. If
a majority of the shares which are of the same class as the shares that are
subject to outstanding Options are exchanged for, converted into, or otherwise
become (whether or not pursuant to an Ownership Change Event, as defined in
Section 8.1) shares of another corporation (the "NEW SHARES"), the Board may
unilaterally amend the outstanding Options to provide that such Options are
exercisable for New Shares. In the event of any such amendment, the number of
shares subject to, and the exercise price per share of, the outstanding Options
shall be adjusted in a fair and equitable manner as determined by the Board, in
its discretion. Notwithstanding the foregoing, any fractional share resulting
from an adjustment pursuant to this Section 4.2 shall be rounded down to the
nearest whole number, and in no event may the exercise price of any Option be
decreased to an amount less than the par value, if any, of the stock subject to
the Option. The adjustments determined by the Board pursuant to this Section
4.2 shall be final, binding and conclusive.
5. ELIGIBILITY AND OPTION LIMITATIONS.
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5.1 PERSONS ELIGIBLE FOR OPTIONS. Options may be granted only to
Employees, Consultants, and Directors. Eligible persons may be granted more
than one (1) Option. However, eligibility in accordance with this Section shall
not entitle any person to be granted an Option, or, having been granted an
Option, to be granted an additional Option.
5.2 OPTION GRANT RESTRICTIONS. Any person who is not an Employee
on the effective date of the grant of an Option to such person may be granted
only a Nonstatutory Stock Option.
5.3 FAIR MARKET VALUE LIMITATION. To the extent that options
designated as Incentive Stock Options (granted under all stock option plans of
the Participating Company Group, including the Plan) become exercisable by an
Optionee for the first time during any calendar year for stock having a Fair
Market Value greater than One Hundred Thousand Dollars ($100,000), the portions
of such options which exceed such amount shall be treated as Nonstatutory Stock
K-7
Options. For purposes of this Section 5.3, options designated as Incentive
Stock Options shall be taken into account in the order in which they were
granted, and the Fair Market Value of stock shall be determined as of the time
the option with respect to such stock is granted. If the Code is amended to
provide for a different limitation from that set forth in this Section 5.3, such
different limitation shall be deemed incorporated herein effective as of the
date and with respect to such Options as required or permitted by such amendment
to the Code. If an Option is treated as an Incentive Stock Option in part and
as a Nonstatutory Stock Option in part by reason of the limitation set forth in
this Section 5.3, the Optionee may designate which portion of such Option the
Optionee is exercising. In the absence of such designation, the Optionee shall
be deemed to have exercised the Incentive Stock Option portion of the Option
first. Separate certificates representing each such portion shall be issued
upon the exercise of the Option.
5.4 SECTION 162(M) GRANT LIMIT. Subject to adjustment as provided
in Section 4.2, no Employee shall be granted one or more Options within any
fiscal year of the Company which in the aggregate are for the purchase of more
than eleven million three hundred forty thousand (11,340,000) shares (the
"SECTION 162(M) GRANT LIMIT"). An Option which is canceled in the same fiscal
year in which it was granted shall continue to be counted against the Section
162(m) Grant Limit for such period.
6. TERMS AND CONDITIONS OF OPTIONS.
-------------------------------
Options shall be evidenced by Option Agreements specifying the number
of shares of Stock covered thereby, in such form as the Board shall from time to
time establish. No Option or purported Option shall be a valid and binding
obligation of the Company unless evidenced by a fully executed Option Agreement.
Option Agreements may incorporate all or any of the terms of the Plan by
reference and shall comply with and be subject to the following terms and
conditions:
6.1 EXERCISE PRICE. The exercise price for each Option shall be
established in the discretion of the Board; provided, however, that (a) the
exercise price per share for an Incentive Stock Option shall be not less than
the Fair Market Value of a share of Stock on the effective date of grant of the
Option, (b) the exercise price per share for a Nonstatutory Stock Option shall
be not less than eighty-five percent (85%) of the Fair Market Value of a share
of Stock on the effective date of grant of the Option, and (c) no Option granted
to a Ten Percent Owner Optionee shall have an exercise price per share less than
one hundred ten percent (110%) of the Fair Market Value of a share of Stock on
the effective date of grant of the Option. Notwithstanding the foregoing, an
Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be
granted with an exercise price lower than the minimum exercise price set forth
above if such Option is granted pursuant to an assumption or substitution for
another option in a manner qualifying under the provisions of Section 424(a) of
the Code.
6.2 EXERCISABILITY AND TERM OF OPTIONS. Options shall be
exercisable at such time or times, or upon such event or events, and subject to
such terms, conditions, performance criteria and restrictions as shall be
determined by the Board and set forth in the Option Agreement evidencing such
Option; provided, however, that (a) no Option shall be exercisable after the
K-8
expiration of ten (10) years after the effective date of grant of such Option,
(b) no Incentive Stock Option granted to a Ten Percent Owner Optionee shall be
exercisable after the expiration of five (5) years after the effective date of
grant of such Option, and (c) with the exception of an Option granted to an
Officer, a Director or a Consultant, no Option shall become exercisable at a
rate less than twenty percent (20%) per year over a period of five (5) years
from the effective date of grant of such Option, subject to the Optionee's
continued Service. Subject to the foregoing, unless otherwise specified by the
Board in the grant of an Option, any Option granted hereunder shall terminate
ten (10) years after the effective date of grant of the Option, unless earlier
terminated in accordance with its provisions.
6.3 PAYMENT OF EXERCISE PRICE.
(a) FORMS OF CONSIDERATION AUTHORIZED. Except as otherwise
provided below, payment of the exercise price for the number of shares of Stock
being purchased pursuant to any Option shall be made (i) in cash, by check or
cash equivalent, (ii) by tender to the Company, or attestation to the ownership,
of shares of Stock owned by the Optionee having a Fair Market Value not less
than the exercise price, (iii) by the assignment of the proceeds of a sale or
loan with respect to some or all of the shares being acquired upon the exercise
of the Option (including, without limitation, through an exercise complying with
the provisions of Regulation T as promulgated from time to time by the Board of
Governors of the Federal Reserve System) (a "CASHLESS EXERCISE"), (iv) by such
other consideration as may be approved by the Board from time to time to the
extent permitted by applicable law, or (v) by any combination thereof. The
Board may at any time or from time to time, by approval of or by amendment to
the standard forms of Option Agreement described in Section 7, or by other
means, grant Options which do not permit all of the foregoing forms of
consideration to be used in payment of the exercise price or which otherwise
restrict one or more forms of consideration.
(b) LIMITATIONS ON FORMS OF CONSIDERATION.
(i) TENDER OF STOCK. Notwithstanding the foregoing, an
Option may not be exercised by tender to the Company, or attestation to the
ownership, of shares of Stock to the extent such tender or attestation would
constitute a violation of the provisions of any law, regulation or agreement
restricting the redemption of the Company's stock. Unless otherwise provided by
the Board, an Option may not be exercised by tender to the Company, or
attestation to the ownership, of shares of Stock unless such shares either have
been owned by the Optionee for more than six (6) months (and not used for
another Option exercise by attestation during such period) or were not acquired,
directly or indirectly, from the Company.
(ii) CASHLESS EXERCISE. The Company reserves, at any
and all times, the right, in the Company's sole and absolute discretion, to
establish, decline to approve or terminate any program or procedures for the
exercise of Options by means of a Cashless Exercise.
6.4 TAX WITHHOLDING. The Company shall have the right, but
not the obligation, to deduct from the shares of Stock issuable upon the
exercise of an Option, or to accept from the Optionee the tender of, a number of
whole shares of Stock having a Fair Market Value, as determined by the Company,
K-9
equal to all or any part of the federal, state, local and foreign taxes, if any,
required by law to be withheld by the Participating Company Group with respect
to such Option or the shares acquired upon the exercise thereof. Alternatively
or in addition, in its discretion, the Company shall have the right to require
the Optionee, through payroll withholding, cash payment or otherwise, to make
adequate provision for any such tax withholding obligations of the Participating
Company Group arising in connection with the Option or the shares acquired upon
the exercise thereof. The Fair Market Value of any shares of Stock withheld or
tendered to satisfy any such tax withholding obligations shall not exceed the
amount determined by the applicable minimum statutory withholding rates. The
Company shall have no obligation to deliver shares of Stock or to release shares
of Stock from an escrow established pursuant to the Option Agreement until the
Participating Company Group's tax withholding obligations have been satisfied by
the Optionee.
6.5 EFFECT OF TERMINATION OF SERVICE.
(a) OPTION EXERCISABILITY. Subject to earlier termination of
the Option as otherwise provided herein and unless otherwise provided by the
Board in the grant of an Option and set forth in the Option Agreement, an Option
shall be exercisable after an Optionee's termination of Service only during the
applicable time period determined in accordance with this Section 6.5 and
thereafter shall terminate:
(i) DISABILITY. If the Optionee's Service terminates
because of the Disability of the Optionee, the Option, to the extent unexercised
and exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee (or the Optionee's guardian or legal representative)
at any time prior to the expiration of twelve (12) months (or such longer period
of time as determined by the Board, in its discretion) after the date on which
the Optionee's Service terminated, but in any event no later than the date of
expiration of the Option's term as set forth in the Option Agreement evidencing
such Option (the "OPTION EXPIRATION DATE").
(ii) DEATH. If the Optionee's Service terminates
because of the death of the Optionee, the Option, to the extent unexercised and
exercisable on the date on which the Optionee's Service terminated, may be
exercised by the Optionee's legal representative or other person who acquired
the right to exercise the Option by reason of the Optionee's death at any time
prior to the expiration of twelve (12) months (or such longer period of time as
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date. The Optionee's Service shall be deemed to have terminated on
account of death if the Optionee dies within ninety (90) days (or such longer
period of time as determined by the Board, in its discretion) after the
Optionee's termination of Service.
(iii) OTHER TERMINATION OF SERVICE. If the Optionee's
Service terminates for any reason, except Disability or death, the Option, to
the extent unexercised and exercisable by the Optionee on the date on which the
Optionee's Service terminated, may be exercised by the Optionee at any time
prior to the expiration of ninety (90) days (or such longer period of time as
K-10
determined by the Board, in its discretion) after the date on which the
Optionee's Service terminated, but in any event no later than the Option
Expiration Date.
(b) EXTENSION IF EXERCISE PREVENTED BY LAW. Notwithstanding
the foregoing, if the exercise of an Option within the applicable time periods
set forth in Section 6.5(a) is prevented by the provisions of Section 10 below,
the Option shall remain exercisable until three (3) months (or such longer
period of time as determined by the Board, in its discretion) after the date the
Optionee is notified by the Company that the Option is exercisable, but in any
event no later than the Option Expiration Date.
(c) EXTENSION IF OPTIONEE SUBJECT TO SECTION 16(B).
Notwithstanding the foregoing, if a sale within the applicable time periods set
forth in Section 6.5(a) of shares acquired upon the exercise of the Option would
subject the Optionee to suit under Section 16(b) of the Exchange Act, the Option
shall remain exercisable until the earliest to occur of (i) the tenth (10th) day
following the date on which a sale of such shares by the Optionee would no
longer be subject to such suit, (ii) the one hundred and ninetieth (190th) day
after the Optionee's termination of Service, or (iii) the Option Expiration
Date.
6.6 TRANSFERABILITY OF OPTIONS. During the lifetime of the
Optionee, an Option shall be exercisable only by the Optionee or the Optionee's
guardian or legal representative. No Option shall be assignable or transferable
by the Optionee, except by will or by the laws of descent and distribution.
Notwithstanding the foregoing, to the extent permitted by the Board, in its
discretion, and set forth in the Option Agreement evidencing such Option, a
Nonstatutory Stock Option shall be assignable or transferable subject to the
applicable limitations, if any, described in Section 260.140.41 of Title 10 of
the California Code of Regulations and the General Instructions to Form S-8
Registration Statement under the Securities Act.
7. STANDARD FORMS OF OPTION AGREEMENT.
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7.1 OPTION AGREEMENT. Unless otherwise provided by the Board at
the time the Option is granted, an Option shall comply with and be subject to
the terms and conditions set forth in the appropriate form of Option Agreement
approved by the Board concurrently with its adoption of the Plan and as amended
from time to time.
7.2 AUTHORITY TO VARY TERMS. The Board shall have the authority
from time to time to vary the terms of any standard form of Option Agreement
described in this Section 7 either in connection with the grant or amendment of
an individual Option or in connection with the authorization of a new standard
form or forms; provided, however, that the terms and conditions of any such new,
revised or amended standard form or forms of Option Agreement are not
inconsistent with the terms of the Plan.
8. CHANGE IN CONTROL.
-----------------
8.1 DEFINITIONS.
K-11
(a) An "OWNERSHIP CHANGE EVENT" shall be deemed to have
occurred if any of the following occurs with respect to the Company: (i) the
direct or indirect sale or exchange in a single or series of related
transactions by the stockholders of the Company of more than fifty percent (50%)
of the voting stock of the Company; (ii) a merger or consolidation in which the
Company is a party; (iii) the sale, exchange, or transfer of all or
substantially all of the assets of the Company; or (iv) a liquidation or
dissolution of the Company.
(b) A "CHANGE IN CONTROL" shall mean an Ownership Change
Event or a series of related Ownership Change Events (collectively, a
"TRANSACTION") wherein the stockholders of the Company immediately before the
Transaction do not retain immediately after the Transaction, in substantially
the same proportions as their ownership of shares of the Company's voting stock
immediately before the Transaction, direct or indirect beneficial ownership of
more than fifty percent (50%) of the total combined voting power of the
outstanding voting securities of the Company or, in the case of a Transaction
described in Section 8.1(a)(iii), the corporation or other business entity to
which the assets of the Company were transferred (the "TRANSFEREE"), as the case
may be. For purposes of the preceding sentence, indirect beneficial ownership
shall include, without limitation, an interest resulting from ownership of the
voting securities of one or more corporations or other business entities which
own the Company or the Transferee, as the case may be, either directly or
through one or more subsidiary corporations or other business entities. The
Board shall have the right to determine whether multiple sales or exchanges of
the voting securities of the Company or multiple Ownership Change Events are
related, and its determination shall be final, binding and conclusive.
8.2 EFFECT OF CHANGE IN CONTROL ON OPTIONS.
(a) ACCELERATED VESTING. Notwithstanding any other provision
of the Plan to the contrary, the Board, in its sole discretion, may provide in
any Option Agreement or, in the event of a Change in Control, may take such
actions as it deems appropriate to provide for the acceleration of the
exercisability and vesting in connection with such Change in Control of any or
all outstanding Options and shares acquired upon the exercise of such Options.
(b) ASSUMPTION OR SUBSTITUTION OF OPTIONS. In the event of a
Change in Control, the surviving, continuing, successor, or purchasing
corporation or other business entity or parent thereof, as the case may be (the
"ACQUIRING CORPORATION"), may, without the consent of any Optionee, either
assume the Company's rights and obligations under outstanding Options or
substitute for outstanding Options substantially equivalent options for the
Acquiring Corporation's stock. Any Options which are not assumed by the
Acquiring Corporation in connection with the Change in Control shall, to the
extent not exercised as of the date of the Change in Control, terminate and
cease to be outstanding effective as of the date of the Change in Control.
Notwithstanding the foregoing, shares acquired upon exercise of an Option prior
to the Change in Control and any consideration received pursuant to the Change
in Control with respect to such shares shall continue to be subject to all
applicable provisions of the Option Agreement evidencing such Option except as
otherwise provided in such Option Agreement. Furthermore, notwithstanding the
foregoing, if the corporation the stock of which is subject to the outstanding
K-12
Options immediately prior to an Ownership Change Event described in Section
8.1(a)(i) constituting a Change in Control is the surviving or continuing
corporation and immediately after such Ownership Change Event less than fifty
percent (50%) of the total combined voting power of its voting stock is held by
another corporation or by other corporations that are members of an affiliated
group within the meaning of Section 1504(a) of the Code without regard to the
provisions of Section 1504(b) of the Code, the outstanding Options shall not
terminate unless the Board otherwise provides in its discretion. For purposes
of this Section 8.2(b), an Option shall be considered assumed if, for every
share of Stock subject thereto immediately prior to the Change in Control, the
Optionee has the right, following the Change in Control, to acquire in
accordance with the terms and conditions of the assumed Option the consideration
(whether stock, cash or other securities or property) received in the Change in
Control transaction by holders of shares of Stock for each share held
immediately prior to such transaction (and if holders were offered a choice of
consideration, the type of consideration chosen by the holders of a majority of
the outstanding shares of Stock); provided, however, that if such consideration
received in the Change in Control transaction was not solely common stock of the
Acquiring Corporation, the Board may, with the consent of the Acquiring
Corporation, provide for the consideration to be acquired to be solely common
stock of the Acquiring Corporation equal in Fair Market Value to the per share
consideration received by holders of Stock in the Change in Control transaction.
(c) CASH-OUT OF OPTIONS. The Board may, in its sole
discretion and without the consent of any Optionee, determine that, upon the
occurrence of a Change in Control, each or any Option outstanding immediately
prior to the Change in Control shall be canceled in exchange for a payment with
respect to each vested share of Stock subject to such canceled Option in (i)
cash, (ii) stock of the Company or of a corporation or other business entity a
party to the Change in Control, or (iii) other property which, in any such case,
shall be in an amount having a Fair Market Value equal to the Fair Market Value
of the consideration to be paid per share of Stock in the Change in Control over
the exercise price per share under such Option (the "SPREAD"). In the event
such determination is made by the Board, the Spread (reduced by applicable
withholding taxes, if any) shall be paid to Optionees in respect of their
canceled Options as soon as practicable following the date of the Change in
Control.
9. PROVISION OF INFORMATION.
------------------------
At least annually, copies of the Company's balance sheet and income
statement for the just completed fiscal year shall be made available to each
Optionee and purchaser of shares of Stock upon the exercise of an Option. The
Company shall not be required to provide such information to key employees whose
duties in connection with the Company assure them access to equivalent
information.
10. COMPLIANCE WITH SECURITIES LAW.
------------------------------
The grant of Options and the issuance of shares of Stock upon exercise
of Options shall be subject to compliance with all applicable requirements of
federal, state and foreign law with respect to such securities. Options may not
be exercised if the issuance of shares of Stock upon exercise would constitute a
violation of any applicable federal, state or foreign securities laws or other
K-13
law or regulations or the requirements of any stock exchange or market system
upon which the Stock may then be listed. In addition, no Option may be exercised
unless (a) a registration statement under the Securities Act shall at the time
of exercise of the Option be in effect with respect to the shares issuable upon
exercise of the Option or (b) in the opinion of legal counsel to the Company,
the shares issuable upon exercise of the Option may be issued in accordance with
the terms of an applicable exemption from the registration requirements of the
Securities Act. The inability of the Company to obtain from any regulatory body
having jurisdiction the authority, if any, deemed by the Company's legal counsel
to be necessary to the lawful issuance and sale of any shares hereunder shall
relieve the Company of any liability in respect of the failure to issue or sell
such shares as to which such requisite authority shall not have been obtained.
As a condition to the exercise of any Option, the Company may require the
Optionee to satisfy any qualifications that may be necessary or appropriate, to
evidence compliance with any applicable law or regulation and to make any
representation or warranty with respect thereto as may be requested by the
Company.
11. TERMINATION OR AMENDMENT OF PLAN.
--------------------------------
The Board may terminate or amend the Plan at any time. However,
subject to changes in applicable law, regulations or rules that would permit
otherwise, without the approval of the Company's stockholders, there shall be
(a) no increase in the maximum aggregate number of shares of Stock that may be
issued under the Plan (except by operation of the provisions of Section 4.2),
(b) no change in the class of persons eligible to receive Incentive Stock
Options, and (c) no other amendment of the Plan that would require approval of
the Company's stockholders under any applicable law, regulation or rule. No
termination or amendment of the Plan shall affect any then outstanding Option
unless expressly provided by the Board. In any event, no termination or
amendment of the Plan may adversely affect any then outstanding Option without
the consent of the Optionee, unless such termination or amendment is required to
enable an Option designated as an Incentive Stock Option to qualify as an
Incentive Stock Option or is necessary to comply with any applicable law,
regulation or rule.
12. STOCKHOLDER APPROVAL.
--------------------
The Plan or any increase in the maximum aggregate number of shares of
Stock issuable thereunder as provided in Section 4.1 (the "AUTHORIZED SHARES")
shall be approved by the stockholders of the Company within twelve (12) months
of the date of adoption thereof by the Board. Options granted prior to
stockholder approval of the Plan or in excess of the Authorized Shares
previously approved by the stockholders shall become exercisable no earlier than
the date of stockholder approval of the Plan or such increase in the Authorized
Shares, as the case may be.
K-14
PLAN HISTORY
------------
_____________, 2002 Board adopts Plan, with an initial reserve of __________
shares.
_____________, 2002 Stockholders approve Plan, with an initial reserve of
__________ shares.
SPECIAL MEETING OF STOCKHOLDERS
OF
NETTAXI.COM
____________, 2002
PROXY VOTING INSTRUCTIONS
-------------------------
VOTING BY MAIL
- --------------
Please complete your voting selection, date, sign and mail your proxy card
in the envelope provided as soon as possible. You are encouraged to specify your
choices by marking the appropriate boxes, but you need not mark any box if you
wish to vote in accordance with the Board of Directors' recommendations.
PLEASE DETACH AND MAIL IN THE ENVELOPE PROVIDED
- -------------------------------------------------------------------------------
[X] PLEASE MARK YOUR VOTES AS IN THE EXAMPLE TO THE LEFT USING DARK INK
ONLY.
1. Proposal to approve the Merger Agreement and Plan of Reorganization,
dated as of January 9, 2002, by and among Nettaxi.com, a Nevada corporation, RAE
Inc., a California corporation ("RAE") and RAES Acquisition Corporation, a
California corporation ("RSAC"), as it may be amended from time to time, and the
transactions contemplated thereby (the "Merger Agreement"):
FOR [_] AGAINST [_] ABSTAIN [_]
2. Proposal to approve an amendment to our existing Articles of
Incorporation to effect a reverse stock split of our issued and outstanding
shares of common stock, par value $0.01 per share such that each five and
sixty-seven one hundredths (5.67) shares of our issued and outstanding shares of
common stock are converted into one (1) share of issued and outstanding common
stock
FOR [_] AGAINST [_] ABSTAIN [_]
3. Proposal to approve the reincorporation of Nettaxi.com from Nevada to
Delaware:
FOR [_] AGAINST [_] ABSTAIN [_]
4. Proposal to ratify the 1999 Stock Option Plan:
FOR [_] AGAINST [_] ABSTAIN [_]
5. Proposal to approve the 2002 Stock Option Plan.
FOR [_] AGAINST [_] ABSTAIN [_]
SIGNATURE(S)__________________________________ DATE: ________________
Note: Please sign exactly as name appears hereon. Joint owners should each sign.
When signing as attorney, executor, administrator, trustee or guardian, please
give full title as such. If a corporation, partnership or other entity, please
sign in full entity name by authorized person.