<PAGE> 1
DIDAX INC.
190,000 COMMON STOCK UNDERWRITER WARRANTS
250,000 WARRANT UNDERWRITER WARRANTS
250,000 UNDERWRITER UNDERLYING WARRANTS
3,315,000 SHARES OF COMMON STOCK UNDERLYING
2,875,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
PROSPECTUS 190,000 COMMON STOCK UNDERWRITER WARRANTS AND
250,000 UNDERWRITER UNDERLYING WARRANTS
This Prospectus relates to the offering by DIDAX INC. (the "Company") of
190,000 Common Stock Underwriter Warrants (the "Common Stock Underwriter
Warrants"), 250,000 Warrant Underwriter Warrants (the "Warrant Underwriter
Warrants"), 250,000 Underwriter Underlying Warrants ("the Underwriter Underlying
Warrants"), and an aggregate of 3,315,000 shares (the "Offered Shares") of
Common Stock, $.01 par value per share (the "Common Stock"), issuable upon the
exercise of 2,875,000 Redeemable Common Stock Purchase Warrants (the "Purchase
Warrants"), the Common Stock Underwriter Warrants and the Underwriter Underlying
Warrants. The Purchase Warrants, the Common Stock Underwriter Warrants, the
Warrant Underwriter Warrants, and the Underwriter Underlying Warrants are
sometimes hereinafter collectively referred to as the "Warrants." Each Purchase
Warrant entitles the registered holder thereof to purchase, through September
24, 2002 one share of the Company's Common Stock at a price of $5.75 per share,
subject to adjustment under certain circumstances. The Common Stock Underwriter
Warrants allow certain persons to purchase through September 24, 2002, up to
190,000 shares of Common Stock of the Company at a purchase price of $8.25 per
share. The Warrant Underwriter Warrants, allow certain persons to purchase
through September 24, 2002, up to 250,000 of Underwriter Underlying Warrants at
purchase price of $.309375 per warrant, each of which Underwriter Underlying
Warrant entitles the holder to purchase one share of Common Stock of the Company
at a purchase price of $8.25 per share. The securities offered hereby are not
exercisable unless, at the time of exercise, the Company has a current
Prospectus covering the shares of Common Stock issuable upon their exercise and
such shares have been registered, qualified or deemed to be exempt under the
securities laws of the states of residence of the exercising holders of the
Warrants. The Purchase Warrants are subject to redemption by the Company, at
the option of the Company, at $0.25 per Purchase Warrant, upon 30 days' prior
written notice, if the closing bid price, as reported on The Nasdaq SmallCap
Market ("Nasdaq"), of the shares of the Common Stock for 30 consecutive trading
days ending within ten days of the notice of redemption of the Purchase Warrants
averages in excess of $10.00 per share, subject to adjustment. The Company is
required to maintain an effective registration statement with respect to the
Common Stock underlying the Purchase Warrants prior to their redemption. Prior
to September 24, 1998, the Purchase Warrants are not redeemable by the Company
without the written consent of Barron Chase Securities, Inc., the underwriter
(the "Underwriter") of the Company's initial public offering (the "IPO"). SEE
"DESCRIPTION OF SECURITIES."
The Company's Common Stock and the Purchase Warrants are quoted on the
Nasdaq under the symbols "AMEN" and "AMENW," respectively. On July 22, 1998,
the closing prices of the Common Stock and Warrants as quoted on Nasdaq were
$4.3125 and $1.25 respectively. The holders of the Warrants do not have any of
the rights, privileges or liabilities of the Company stockholders prior to
warrant exercise.
THE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. IN ADDITION, PURCHASERS OF THE SECURITIES WILL SUFFER IMMEDIATE
SUBSTANTIAL DILUTION IN THAT THE BOOK VALUE PER SHARE OF THE COMMON STOCK AFTER
THIS OFFERING WILL BE SUBSTANTIALLY LESS THAN THE PUBLIC OFFERING PRICE OF THE
COMMON STOCK. SEE "RISK FACTORS" AND "DILUTION" AT PAGES 7 AND 18.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Underwriting Discount Proceeds to Company (1)
Offering Price -----------------------
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Underlying Underwriter Warrant $0.309375 $0.0 $0.309375
- ------------------------------------------------------------------------------------------------------------------
Per Share underlying Purchase Warrants $5.75 $0.0 $5.75
- ------------------------------------------------------------------------------------------------------------------
Per Share underlying Common Stock
Underwriter Warrants and Underlying
Underwriter Warrants $8.25 $0.0 $8.25
- ------------------------------------------------------------------------------------------------------------------
Total $20,238,604 $0.00 $20,238,604
- ------------------------------------------------------------------------------------------------------------------
==================================================================================================================
See footnotes on the following page
</TABLE>
THE DATE OF THIS PROSPECTUS IS JULY 29, 1998
<PAGE> 2
(1) Before deducting expenses payable by the Company estimated at $55,000
(collectively, the "Offering Costs").
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements made herein that are not historical are forward-looking
within the meaning of the Private Securities Litigation Reform Act of 1995. The
words "estimate," "project," "intend," "expect," "believe," and similar
expressions are intended to identify forward-looking statements. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below under "Risk Factors."
For additional information regarding these and other risks and uncertainties
associated with the Company's business, see "Risk Factors" below, as well as the
Company's reports filed from time to time with the Commission.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Post-Effective Amendment to a Registration Statement on Form
SB-2 (as so amended, the "Registration Statement"), pursuant to the Act, with
respect to the offer, issuance and sale of the Warrants and Offered Shares. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. The statements contained in this Prospectus
as to the contents of any contract or other document identified as exhibits in
this Prospectus are not necessarily complete, and in each instance, reference is
made to a copy of such contract or document filed as an exhibit to the
Registration Statement, each statement being qualified in any and all respects
by such reference. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
exhibits thereof which may be inspected without charge at the principal office
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549.
On September 24, 1997, the Company became subject to the informational
requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act")
and, in accordance therewith, is required to file reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). The Common Stock and Purchase Warrants are listed on Nasdaq.
Accordingly, such reports, proxy statements and other information can be
inspected and copied at the Commission's principal office, Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549; the Northeast Regional
Office of the Commission at 7 World Trade Center, Suite 1300, New York, New York
10048; and the Midwest Regional Office of the Commission, Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, where copies may be
obtained upon payment of the fees prescribed by the Commission, as well as at
the offices of Nasdaq, 1735 K Street, N.W., Washington, D.C. Such documents may
also be obtained through the website maintained by the Commission at
http://www.sec.gov.
INVESTORS SHOULD CAREFULLY REVIEW THE FINANCIAL STATEMENTS WHICH ARE AN
INTEGRAL PART OF THIS PROSPECTUS.
The Company's financial information for the fiscal years ended December
31, 1997 and 1996 and the three month periods ended March 31, 1998 and 1997
included in this Prospectus include the operations of gofishnet.com, inc., an
internet retailer acquired by the Company in February 1998.
ATTENTION CALIFORNIA RESIDENTS: Offers and sales of the Securities of the
Company made to California residents pursuant to this Prospectus are restricted
to individuals who meet suitability standards of not less than $250,000 liquid
net worth (net worth exclusive of home, home furnishings and automobiles) plus
$100,000 annual gross income, or $500,000 liquid new worth (net worth exclusive
of home, home furnishings and automobiles).
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any
information that is incorporated by reference in the Prospectus (not including
exhibits in the information that is incorporated by reference unless the
exhibits themselves are specifically incorporated by reference.) Such requests
may be directed to the Secretary, DIDAX INC., 4501 Daly Dr. Suite 103,
Chantilly, VA 20151. Telephone 703-968-4808 Ext. 23.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Prospectus Summary........................................ 4
Risk Factors.............................................. 7
Use of Proceeds........................................... 16
Capitalization............................................ 17
Dilution.................................................. 18
Management's Discussion and
Analysis or Plan of Operation........................... 19
Business.................................................. 26
Management................................................ 35
Principal Shareholders.................................... 41
Description of Securities................................. 44
Plan of Distribution...................................... 47
Legal Proceedings......................................... 47
Legal Matters............................................. 47
Experts................................................... 48
Financial Statements F-1
</TABLE>
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<PAGE> 4
PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
THE COMPANY
DIDAX INC. ("the Company") owns and operates the Christian Community
Network(TM) (CCN) (WWW.CHRISTCOM.NET), an interactive website which provides
information and resources that the Company believes generally appeals to the
Christian community. The information, resources and products provided on CCN are
developed and made available both by the Company and by Christian and secular
retailers, publishers, charities and ministries. To date, the Company has
derived most of its revenue from providing Internet development and hosting
services and limited technology consulting services, including website
development services, (the "Consulting Services") for a fee to Christian
organizations, such as Promise Keepers, a nonprofit Christian ministry (PK Net,
www.promisekeepers.org); Christianity Today, Inc., a publisher of Christian
periodicals (www.christianity.net); and World Vision, an international Christian
relief agency (www.worldvision.org). The Company's website services and
development clients also include Mercy Medical Airlift, Christian Management
Association, Worship Media Resources, the Salvation Army, Evangelical Council
for Financial Accountability (ECFA), Young Life and Presbyterian Church in
America.
The Company obtained net proceeds of approximately $6.0 million in
connection with the closing of the IPO, after the retirement of certain debt.
The Company believes it is positioned to generate increasing revenues from the
sale of advertising space on and sponsorships of CCN, the retail sale via CCN of
Christian interest and other products manufactured or developed by others
(primarily books, CDs, and other articles generally appealing to the Christian
marketplace); and the sale of affinity memberships. In addition, to an
increasingly lesser extent, the Company continues to generate revenue through
providing Consulting Services. To enhance its retail capabilities the Company
completed the acquisition of gofishnet.com, inc. ("gofishnet"), an Internet
retailer of Christian music and videos in February 1998.
The Company targets the marketing of its sales, products and services and
the content on CCN to persons of all ages, economic levels, genders, ethnic
backgrounds and nationalities that identify themselves as Christian, principally
Protestant (regardless of denomination, if any) and Catholic, with particular
emphasis upon evangelical Christians. According to a poll conducted by the
Gallup Organization in 1994, approximately 25% of Americans identify themselves
as Catholic and approximately 20% identify themselves as Protestant. The Pew
Center for Civic Journalism in a survey published in April 1997, reported that
approximately 35% of the United States population identify themselves as
evangelical Christians.
The Company has an extremely limited operating history upon which an
evaluation of the Company and its business can be based. For the fiscal years
ended December 31, 1996 and 1997 and the three-month periods ended March 31,
1997 and 1998, the Company generated net losses of $(2,630,578), and
$(4,271,249), and ($496,467) (unaudited) and $(751,720) (unaudited),
respectively, from operations. See "FINANCIAL STATEMENTS." The Company has
achieved only limited revenues to date, has incurred net losses since inception
and expects to continue to operate at a loss for the foreseeable future. Its
expense levels are based in part on its expectations as to future revenues, if
any. Any shortfall in revenues, whether caused by the cancellation or deferral
of, or the failure to obtain, advertising, retail or website development
customers, or otherwise, would have an immediate material adverse impact on the
Company's business, results of operations and financial condition. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
The Company was founded in 1993 and began revenue generating operations in
1996. In April 1997 (the "Merger Date"), DIDAX, Inc. a Virginia corporation,
DIDAX ON-LINE, L.C., a Virginia limited liability company
4
<PAGE> 5
(collectively, "Predecessor Didax") and DIDAX INC., a Delaware corporation
organized on January 7, 1997 ("Didax Delaware") consummated a reorganization
resulting in Didax Delaware being the surviving corporation (the reorganization
being referenced herein as the "Merger"). For comparison purposes, the
discussion below relates to the consolidated financial statements of Predecessor
Didax. Predecessor Didax and Didax Delaware are referenced in this Prospectus
collectively as the "Company."
The Company's corporate headquarters are located at 4501 Daly Drive, Suite
103, Chantilly, Virginia 20151 and its telephone number is (703)968-4808, its
fax number is (703) 968-4819 and its Internet address is
http://www.christcom.net.
THE OFFERING
Securities offered........................190,000 Common Stock Underwriter
Warrants, which grant certain
persons through September 24, 2002,
the right to purchase up to 190,000
shares of Common Stock of the
Company at a purchase price of $8.25
per share, 250,000 Warrant
Underwriter Underlying Warrants
which grant certain persons through
September 24, 2002, the right to
purchase, up to 250,000 Underwriter
Underlying Warrants at an exercise
price of $.309375 per warrant,
each of which Underwriter Warrant
entitles the holder to purchase
through September 24, 2002, one
share of Common Stock of the
Company at a price of $8.25 per
share, an aggregate of 3,315,000
shares of the Company's Common
Stock, underlying 190,000 Common
Stock Underwriter Underlying
Warrants, 250,000 Underwriter
Underlying Warrants, and 2,875,000
Purchase Warrants. Each Purchase
Warrant entitles the registered
holder thereof to purchase, through
September 24, 2002, one share of
Common Stock at a price of $5.75
per share, subject to adjustment
under certain circumstances. The
Securities offered hereby are not
exercisable unless, at the time of
exercise, the Company has a current
Prospectus covering the shares of
Common Stock issuable upon exercise
of the Warrants and such shares
have been registered, qualified or
deemed to be exempt under the
securities laws of the states of
residence of the exercising holders
of the Warrants. The Purchase
Warrants are subject to redemption
by the Company, at the option of
the Company, at $0.25 per Purchase
Warrant, upon 30 days prior written
notice, if the closing bid price,
as reported on Nasdaq, or the
closing sale price, as reported on
a national or regional securities
exchange, as applicable, of the
shares of the Common Stock for 30
consecutive trading days ending
within ten days of the notice of
redemption of the Purchase Warrants
averages in excess of $10.00 per
share, subject to adjustment. The
Company is required to maintain an
effective registration statement
with respect to the Common Stock
underlying the Purchase Warrants
prior to redemption of the Purchase
Warrants. Prior to September 24,
1998, the Purchase Warrants will
not be redeemable by the Company
without the written consent of
Barron Chase Securities, Inc., the
underwriter of the Company's
initial public offering of
securities (the "Underwriter.") See
"DESCRIPTION OF SECURITIES."
5
<PAGE> 6
Shares of Common Stock Outstanding
Prior to this Offering.................. 3,672,880 shares
Warrants Outstanding
Prior to this Offering.................. 3,315,000 warrants
Warrants Exercised as of June 30, 1998 0 warrants
Shares of Common Stock Outstanding if all
Warrants are exercised(1)............... 6,987,880 shares
Estimated Net Proceeds if all Warrants are
exercised ................................. $20,238,604
Use of Proceeds............................ Administrative expenses, operating
costs and working capital, including
product support and development,
capital equipment, marketing and
sales. See "Use of Proceeds."
Purchase
Common Stock Warrants
------------ --------
Nasdaq Symbols AMEN AMENW
Risk Factors and Dilution.................. The securities offered hereby (the
"Securities"), involve a high
degree of risk including risks
related to the failure of the
Company to anticipate and adapt
to a developing market, the
rejection of the Company's
services and products by Internet
users, development of equal or
superior services or products by
competitors and the failure of
the market to adopt the Internet
as a transaction medium. The
Securities should not be
purchased by investors who cannot
afford the loss of their entire
investment. Purchasers of the
Securities will incur immediate
substantial dilution of their
investment. See "RISK
FACTORS,""DILUTION,"and
"FINANCIAL STATEMENTS."
- ----------
(1) Assumes the purchase of 3,315,000 shares of Common Stock pursuant to (i) the
exercise of the 2,875,000 Purchase Warrants at an exercise price of $5.75 per
share; (ii) the purchase of 190,000 Common Stock Underwriter Warrants at a
purchase price of $8.25 per share; and (iii) acquisition (for an aggregate fee
of $77,344), and exercise of the 250,000 Warrant Underwriter Warrants at a
purchase price of $8.25 per share. Does not include the exercise of any
outstanding options granted pursuant to the Company's 1997 Stock Option Plan
(options to acquire an additional 1,955,916 shares (the "Outstanding Stock
Options"). See "MANAGEMENT -1997 and 1998 Stock Option Plans."
6
<PAGE> 7
RISK FACTORS
The Securities are speculative, and involve immediate substantial dilution
and a high degree of risk, including, but not necessarily limited to, the
several factors described below. Each prospective investor should consider
carefully the following risk factors inherent in and affecting the business of
the Company and this Offering before making an investment decision.
As described under "Forward-Looking and Cautionary Statements," certain
statements made herein that are not historical are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below.
EXTREMELY LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATION OF
CONTINUED LOSSES
The Company is a development stage company which was founded in May 1993
and commenced offering internal systems development in February 1995.
Accordingly, the Company has an extremely limited operating history upon which
an evaluation of the Company and its business can be based. The Company's
business must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as the Internet.
Specifically, such risks include the failure of the Company to anticipate and
adapt to a developing market, the rejection of the Company's services and
products by Internet users, development of equal or superior services or
products by competitors, the failure of the market to adopt the Internet as a
transaction medium.
There can be no assurance that the Company will be successful in
addressing such risks. Since its inception, the Company has incurred costs to
develop and enhance its technology, to create, introduce, and enhance its
service and content offerings, to establish marketing and distribution
relationships, to recruit and train an engineering and marketing group, and to
build an administrative organization. The Company intends to continue these
efforts in order to develop customer participation from the content provided in
order to generate revenue. As of March 31, 1998, the Company had an accumulated
deficit of approximately $8,689,000. There can be no assurance that the Company
can generate revenue growth, or that any revenue growth that is achieved can be
sustained. Revenue growth that the Company may achieve may not be indicative of
future operating results. With revenue growth, the Company may increase further
its operating expenses in order to increase its sales and marketing efforts,
fund greater levels of product development, increase its sales and marketing
staff, and increase its general and administrative costs to support the enlarged
organization. To the extent that increases in such operating expenses precede or
are not subsequently followed by increased revenues, the Company's business,
results of operations and financial condition will be materially adversely
affected. Given the level of planned expenditures, the Company anticipates that
it will continue to incur losses for the foreseeable future and there can be no
assurance that the Company will ever achieve or sustain profitability. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's extremely limited operating history and the
rapid technological change experienced in the Internet industry generally, the
Company has no meaningful historical financial data upon which to base future
operating expenses. Accordingly, the Company's expense levels are based in part
on its expectations as to future revenues, of which there can be no assurance.
There can be no assurance that the Company will be able to accurately predict
the levels of future revenues, if any, and the failure to do so would have a
materially adverse effect on the Company's business, results of operations and
financial condition.
The Company continued to generate a substantial portion of its revenue
during the first quarters of 1998 and 1997 from Consulting Services. Prior to
the consummation of the IPO, the Company lacked the financial resources to
develop and market CCN. Since the closing of the IPO, the Company has been
offering Consulting
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<PAGE> 8
Services to a lesser extent, and concentrating on what the Company believes are
the high leverage opportunities that escalating growth in consumer interest in
CCN are expected to provide. This transition is expected to cause significant
fluctuations in near term future quarterly operating results.
The Company expects to experience significant fluctuations in future
quarterly operating results that may be caused by other factors as well. Causes
of such significant fluctuations may include, among other factors, demand for
the Company's services, the number, timing and significance of new service
announcements by the Company and its competitors, the ability of the Company to
develop, market and introduce new and enhanced versions of its services on a
timely basis, the level of product and price competition, changes in operating
expenses, changes in service mix, changes in the Company's sales incentive
strategy, and general economic factors.
The Company's operating expense levels are based, in significant part, on
the Company's expectations of future revenue on a quarterly basis. If actual
revenue levels on a quarterly basis are below management's expectations, both
gross margins and results of operations are likely to be adversely affected
because a relatively small amount of the Company's costs and expenses varies
with its revenue in the short term. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds, in order to address changed circumstances
and opportunities. As a result of the foregoing, the success of the Company will
continue to be substantially dependent upon the discretion and judgment of the
management of the Company with respect to the application and allocation of the
net proceeds of the Company's initial public offering and of the Offering
contemplated hereby. Pending use of such proceeds, the net proceeds of this
Offering will be invested by the Company in temporary, short-term
interest-bearing obligations. See "USE OF PROCEEDS."
EXERCISE OF WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Warrants will provide, during their term, an opportunity for the
holder to profit, upon exercise, from a rise in any market price of the Common
Stock, with resulting dilution in the ownership interest in the Company held by
the then present stockholders. Holders of Warrants most likely would exercise
those Warrants and purchase the underlying Common Stock at a time when the
Company may be able to obtain capital by a new offering of securities on terms
more favorable than those provided by the Securities, in which event the terms
on which the Company may be able to obtain additional capital would be
adversely affected.
DEVELOPING MARKET; VALIDATION OF THE INTERNET AS AN EFFECTIVE COMMERCE MEDIUM
The market for the Company's services and products has recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed services and products for use
on the Internet. As a result, the Company's mix of services and products may
undergo substantial changes as the Company reacts to competitive and other
developments in the overall Internet market. The Company's market is highly
dependent upon the increased use of the Internet for information, interaction,
distribution and commerce. In particular, the Company believes that the Internet
is still an unproven medium for paid services such as the Company's.
Accordingly, the Company's future operating results will depend substantially
upon the increased use of the Internet by individuals and companies for
information, interaction, distribution and commerce, and the emergence of the
Internet as an effective commerce medium. Moreover, critical issues concerning
the commercial use of the Internet (including security, reliability, cost, ease
of use, access, quality of service and acceptance of advertising), remain a
barrier to entry for many individuals and businesses and therefore may impact
the rate of growth of Internet use. If widespread commercial use of the Internet
does not develop, or if the Internet does not develop as an effective commerce
medium, the Company's business, results of operations and financial condition
will be materially adversely affected.
8
<PAGE> 9
TECHNOLOGICAL CHANGE; DEPENDENCE ON RECENTLY INTRODUCED AND NEW PRODUCTS AND
RISK OF PRODUCT DELAYS
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. These market characteristics are exacerbated by the emerging nature of
the Internet and the apparent need of companies from a multitude of industries
to offer Internet-based products and services. Accordingly, the Company's future
success will depend in significant part on its ability to adapt to rapidly
changing technologies, the ability to adapt its services and products to
evolving industry standards, and to continually improve the performance,
features and reliability of its services and products in response to both
evolving demands of the marketplace and competitive service and product
offerings. The failure of the Company to adapt to such changes and evolution
would have a materially adverse effect on the Company's business, results of
operations and financial condition.
Since advertising and retail sales are based entirely upon the use of the
Company's marketed services and products by Internet consumers, broad acceptance
of the Company's services and products offerings by Internet consumers is
critical to the Company's future success. Failure of the Company to successfully
design, develop, test and introduce new services and products to achieve market
acceptance could prevent the Company from developing its desired family of
services and products. Furthermore, there can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of these services and products, or that
its new or recently introduced services and products and enhancements thereon
will adequately meet the requirements of the marketplace and achieve any degree
of significant market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new services, products or enhancements
of services and products in a timely manner in accordance with its business
model or in response to changing market conditions or customer requirements, or
if the services provided do not achieve a significant degree of market
acceptance, the Company's business, results of operations and financial
condition would be materially adversely affected.
UNCERTAINTY OF PRICING OF ADVERTISING
The intense competition faced by the Company in the sale of Internet
advertising from online service providers and search engine companies, including
competition from other firms focused on Christian content, has resulted and will
continue to result in a wide range of rates quoted by different vendors for a
variety of advertising services. This, combined with a limitation on the type
and content of advertising acceptable to the Company for use on CCN, makes it
very difficult to project future levels of the Company's Internet advertising
costs.
LIMITED SALES FORCE; EVOLVING DISTRIBUTION CHANNELS
The Company has a limited number of sales and marketing employees and has
immature distribution channels for its services and products. In order to
generate advertising and retail sales, the Company must achieve broad promotion
of its services and products to Internet users, thereby, developing a
recognition of its services, products and technology. There can be no assurance
that the Company will be able to establish additional content relationships,
retain existing relationships or broadly promote its services and products and
generate demand for its services and products, and the inability to do so would
have a material adverse effect on the Company's business, results of operations
and financial condition. See "BUSINESS."
DEPENDENCE ON THE INTERNET
Because global commerce and online exchange of information on the Internet
and other similar open wide area networks are new and evolving, it is difficult
to predict with any assurance whether the Internet will prove to be a viable
commercial marketplace. The Internet has experienced, and is expected to
continue to experience growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
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<PAGE> 10
activity, or due to increased governmental regulation. There can be no assurance
that the infrastructure or complementary services necessary to make the Internet
a viable commercial marketplace will be developed, or, if developed, that the
Internet will become a viable commercial marketplace for services and products
such as those offered by the Company. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet does
not become a viable marketplace, the Company's business, results of operations
and financial condition will be materially adversely affected. See "BUSINESS."
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of
traffic to its website, the Christian Community Network(TM) ("CCN").
Accordingly, the performance of the Company's services and products is critical
to the Company's reputation, its ability to attract customers to CCN and market
acceptance of these services and products. Any system failure that causes
interruptions in the availability or increases response time of the Company's
services would reduce traffic to the Company's website and, if sustained or
repeated, would reduce the attractiveness of the Company's services to
advertisers and other future potential customers or Internet users. An increase
in the volume of traffic conducted through the Company's services and products
could strain the capacity of the software or hardware deployed by the Company,
which could lead to slower response time or system failures. In addition, as the
number of websites and Internet users increases, there can be no assurance that
the Company's services and products will be able to compete with firms who may
have greater financial resources than the Company. The Company is also dependent
upon web browsers and Internet and online service providers for access to its
services and consumers may experience difficulties due to system failures
unrelated to the Company's systems, services and products. To the extent that
the capacity restraints described above are not effectively addressed by the
Company, such constraints would have a material adverse effect on the Company's
business, results of operations and financial condition.
DEPENDENCE ON COMPUTER INFRASTRUCTURE
Certain of the Company's communications hardware and certain of its
computer hardware operations are located at the Company's headquarters located
in Chantilly, Virginia. There can be no assurance that a system failure at these
locations would not adversely affect the performance of the Company's services.
These locations are vulnerable to damage from fire, floods, earthquakes, power
loss, telecommunications failures, break-ins and similar events. Although the
Company carries property insurance, its coverage may not be adequate to
compensate the Company for all losses that may occur. Despite the implementation
of network security measures by the Company, its servers are also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptive
problems. Computer viruses, break-ins or other problems caused by third parties
could lead to interruptions, delays or cessations in service to users of the
Company's services and products. The occurrence of any of these risks could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "BUSINESS-Facilities."
GOVERNMENT REGULATION AND REGULATORY UNCERTAINTIES
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing, characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who
distributes obscene, indecent or patently offensive communications on the
Internet (although certain provisions of that law have been stayed, in part, by
a United States District Court.) The adoption of any additional laws or
regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's services and products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, libel and personal privacy is
uncertain. Any such new legislation or regulation could have a material adverse
effect on the Company's business, results of operations and financial condition.
10
<PAGE> 11
PROPRIETARY TECHNOLOGY; LICENSES AND INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and attempts to protect
it with copyrights, trademarks, trade secret laws, restrictions on disclosure
and transferring title and other methods. The Company also generally enters into
confidentiality or license agreements with its consultants and business
partners, and generally controls access to and distribution of its documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology
independently. Policing unauthorized use of the Company's technology is
difficult. There can be no assurance that the steps taken by the Company will
prevent misappropriation or infringement of its technology. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company currently owns and licenses from third parties several
technologies, as it continues to introduce new services and products and to
incorporate new technologies. There can be no assurance that these third party
technology licenses will be available to the Company on commercially reasonable
terms, if at all. The inability of the Company to obtain any of these technology
licenses could result in delays or reductions in the introduction of new
services or product shipments or could materially and adversely affect the
performance of its services until equivalent technology could be identified,
licensed and integrated. Any such delays or reductions in the introduction of
services or product shipments or adverse impact on service quality could
materially adversely affect the Company's business, results of operations and
financial condition.
FUTURE CAPITAL NEEDS, UNCERTAINTY OF ADDITIONAL FINANCING
It is anticipated that the Company has available funds sufficient to meet
its anticipated needs for working capital, capital expenditures and business
expansion for approximately fifteen months. Thereafter, the Company may need to
raise additional funds. Utilization of the working capital will be based on
budgets approved by the Board of Directors. The Company may need to raise
additional funds sooner in order to fund more rapid expansion, to develop new or
enhanced services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. If additional funds are
raised through the issuance of equity or convertible debt securities, the
percentage ownership of the shareholders of the Company will be reduced and such
securities may have rights, preferences or privileges senior to those of the
existing shareholders of the Company. There can be no assurance that additional
financing will be available on terms favorable to the Company, or at all. If
adequate funds are not available or are not available on acceptable terms, the
Company may not be able to fund growth, take advantage of acquisition
opportunities, develop or enhance services or products or respond to competitive
pressures. Such inability could have a material adverse effect on the Company's
business, results of operations and financial condition. See "USE OF PROCEEDS"
and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS AND INVESTMENTS
The Company's current strategy is to broaden the number, scope and content
of its Internet sites through the acquisition of existing sites and businesses
specializing in Internet-related technologies and content, as well as through
internally developed Internet sites and services. Any such investments would
involve many of the same risks posed by acquisitions, particularly risks related
to the diversion of resources, the inability to generate revenues, the
impairment of relationships with third parties and potential additional
expenses. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions or new investments. See "BUSINESS."
11
<PAGE> 12
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The Company has entered into certain material agreements with numerous
businesses which provide the Company services and products. The following table
provides information pertinent to these relationships:
<TABLE>
<CAPTION>
Name Service Provided Term Consideration
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GTE Interworking Hosting Two year contract Company pays monthly fixed rate
to January 2000
netradio Software, hardware and Exclusive for Company paid one time license fee,
bandwidth infrastructure Christian format shares advertising revenue in 20% to
for Internet radio, audio, through June 1999 50% range based on size of advertising
archiving and simulcast in comparison to netradio cost for
providing spot, other services paid for
on a quotation basis
ichat Chat Technology Annual Renewal Company pays annual license fee
Cybercash Internet secure Month to month Company pays fee per transaction
transaction capability
Intermind Internet Publishing Cancelable with Company receives commission for
Software Ninety day notice bringing Intermind other users
</TABLE>
If the Company's arrangements and activities with such companies were lessened,
curtailed, or otherwise modified, the Company may not be able to replace or
supplement such services alone or with other companies. If these companies were
to cease to jointly provide their services, the Company's business, results of
operations, and financial condition would be materially and adversely affected.
See "Business."
INABILITY TO MANAGE GROWTH
The rapid execution necessary for the Company to establish itself as a
leader in the developmental market for Internet-based sales of Christian related
products and advertising requires an effective planning and management process.
The Company's development has placed, and is expected to continue to place, a
significant strain on the Company's managerial, technical, sales and marketing
and administrative personnel as well as the Company's financial resources. To
manage its growth, the Company must implement operational and financial systems
and train and manage its employee base. There can be no assurances that the
Company will be able to successfully implement such systems on a timely basis,
if at all. Further, the Company will be required to manage multiple
relationships with consumers, strategic partners and other third parties. There
can be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's future operations. The Company's future
operating results will also depend on its ability to expand its sales and
marketing organizations, implement and manage new services to penetrate broader
markets and further develop and expand its organization. If the Company is
unable to manage growth effectively, the Company's business, results of
operations and financial condition will be materially adversely affected. There
can be no assurance that the Company will be able to effectively manage such
change.
COMPETITION
There are several other companies, including nonprofit organizations, some
of which have longer operating histories, greater name recognition and
significantly greater financial and other resources than the Company, attempting
or which may attempt to aggregate Christian content on the Internet. There can
be no assurances that the Company will ever be positioned to compete
successfully with its current or future competitors nor can there be any
assurance that competitive pressures faced by the Company will not result in
increased marketing costs, decreased
12
<PAGE> 13
Internet traffic or loss of market share or otherwise will not materially
adversely affect the Company's business, results of operations and financial
condition. See "BUSINESS-Competition."
CLASSIFICATION AS A "RELIGIOUS CORPORATION"
Article XIII of the Company's Bylaws provides that the Company is a
"religious corporation." To this end, the Company's policy is generally, to
include among its officers and directors unconditionally, and employees, where a
bona-fide occupational qualification exists, only persons who, upon request,
subscribe to the Company's Christian statement of faith. The Company deems this
as necessary in order to best identify with and service its selected Christian
market niche and to generate its Internet product which is heavily content
laden. Based on advice of counsel, the Company believes that its use of
religious criteria in employment practices does not violate federal law relating
to equal employment opportunities ("Federal Employment Law") because the Company
qualifies as an exempt religious corporation for purposes of the Federal
Employment Law. The Federal Employment Law has been subject to limited judicial
and regulatory interpretation on the question of what type of religious
corporation would be exempt from the reach of the Federal Employment Law. The
Federal Employment Law is enforced, in part, by a federal regulatory agency that
is vested with broad discretion in interpreting its meaning. The Company's
policies and procedures with respect to hiring have not been examined by federal
or state authorities. For these reasons, there can be no assurances that a
review of the Company's hiring practices or the operation of the Company's
business will not result in determinations that materially adversely affect the
Company's business, results of operations and financial condition or the
Company's ability to attain its objectives. SEE "BUSINESS.-Christian Statement
of Faith; the Company's Policy."
POSSIBLE SECURITIES LAW VIOLATION
In 1996, the Company became aware that certain prior private placements
may be deemed not to have been properly exempted from registration under federal
and/or state law. This may give rise to the opportunity for certain stockholders
and members to exercise recission rights, if any, related to their investment in
the Company. The Company believes there may be valid legal defenses to any
and/or all such recission actions, if initiated. The potential of inadvertent
exemption violations was communicated to the investors concerned in August of
1996 and in writing in December 1996. As of March 20, 1998, all but 21,250
shares of common stock subject to recission were beyond the statute of
limitations under Section 13 of the Securities Act of 1933 and Section 10b-5 of
the Securities Exchange Act of 1934 along with the securities laws of state
jurisdictions, which the Company uses as a reasonable basis for establishing the
potential exposure. In December 1998, these remaining 21,250 shares of common
stock subject to recission will be beyond the statute of limitations, and, if
the recission rights to such shares are not exercised, the common stock at par
and paid in capital will increase at that time by $213 and $84,787,
respectively.
SHARES ELIGIBLE FOR FUTURE SALE
Of the 5,628,796 shares of Common Stock issued and outstanding before
giving effect to this Offering (which amount, for this purpose, includes
1,955,916 shares issuable upon the exercise of the Outstanding Stock Options),
3,591,796 shares are "restricted securities," as that term is defined under Rule
144 ("Rule 144"), promulgated under the Securities Act, and may only be sold
pursuant to a registration statement under the Securities Act or in compliance
with Rule 144. Furthermore, the holders of all of the restricted securities
(other than the holders of 394,395 shares of Common Stock) have agreed not to
sell, transfer or otherwise dispose of any shares of Common Stock until
September 24, 1998 (51,550 shares), March 24, 1999 (2,675,559 shares), June 30,
1999 (130,292 shares) and September 24, 1999 (340,000 shares), or any longer
period required by the laws of any state. The Company is unable to predict the
effect that any subsequent sales of the Company's securities by its existing
shareholders, under Rule 144 or otherwise, may have on the then-prevailing
market price of the Common Stock, although such sales could have depressive
effect on such market price. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices of the Common stock and could impair the Company's
ability to raise capital through the sale of its equity securities. See
"DESCRIPTION OF SECURITIES-Shares Eligible for Future Sale."
13
<PAGE> 14
LIMITATION ON MONETARY LIABILITY OF OFFICERS AND DIRECTORS TO STOCKHOLDERS
Section 145 of the General Corporation Law of the State of Delaware
contains provisions entitling directors and officers of the Company to
indemnification from judgments, fines, amounts paid in settlement and reasonable
expenses, including attorney's fees, as a result of an action or proceeding in
which they may be involved by reason of being or having been a director or
officer of the Company provided said officers or directors acted in good faith.
Articles 10 and 11 of the Company's Certificate of Incorporation contain
provisions indemnifying officers and directors of the Company to the fullest
extent provided by Delaware law. As a result, the rights of the Company's
shareholders to recover monetary damages from directors of the Company for
breaches of directors' fiduciary duties may be significantly limited.
NON-REGISTRATION IN CERTAIN JURISDICTION OF SHARES UNDERLYING THE PURCHASE
WARRANTS
The Purchase Warrants are not exercisable unless, at the time of the
exercise, the Company has a current Prospectus covering the shares of Common
Stock issuable upon exercise of the Purchase Warrants, and such shares are
registered, qualified or deemed to be exempt under the securities laws of the
states of residence of the exercising holders of the Purchase Warrants. Although
the Company will use its best efforts to have all of the shares of Common stock
issuable upon exercise of the Purchase Warrants registered or qualified on or
before the exercise date and to maintain a current Prospectus relating thereto
until the expiration of the Purchase Warrants, there is no assurance that it
will be able to do so.
Although the Purchase Warrants will not knowingly be sold to purchasers in
jurisdictions in which the Securities are not registered or otherwise qualified
for sale, purchasers may buy Purchase Warrants in the after-market or may move
to jurisdictions in which the shares underlying the Purchase Warrants are no so
registered or qualified during the period that the Purchase Warrants are
exercisable. In this event, the Company would be unable to issue shares of
commons Stock to those persons desiring to exercise their Purchase Warrants
(whether in response to a redemption notice or otherwise), unless and until the
shares could be qualified for sale in the jurisdictions in which such purchasers
reside, or exemptions exist in such jurisdictions from such qualification.
Purchase Warrant holders would have no choice but to attempt to sell the
Purchase Warrants or allow them to expire unexercised. See "DESCRIPTION OF
SECURITIES."
DIVIDEND POLICY
The Company has not paid any dividends on its capital stock to date and
does not currently intend to pay dividends in the foreseeable future. The
payment of dividends, if any, will be contingent upon the Company's revenues and
earnings, if any, capital requirements and general financial condition
subsequent to the Closing of this Offering. The payment of any dividends
subsequent to the Closing of this Offering will be within the discretion of the
Company's Board of Directors. It is the current intention of the Board of
Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board does not anticipate paying any cash
dividends in the foreseeable future. See "DESCRIPTION OF SECURITIES-Dividends."
NASDAQ ELIGIBILITY AND MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
Under the current rules relating to the continued listing of securities on
Nasdaq SmallCap, a company must maintain (a) at least $2,000,000 in net tangible
assets, or $500,000 in net income in two of the last three years, or a market
capitalization of at least $35,000,000, (b) public float of at least 500,000
shares, (c) market value of public float of at least $1,000,000, and (d) a
minimum bid price of $1.00 per share.
If at any time the Common Stock and Purchase Warrants (the "Listed
Securities") are not listed on Nasdaq SmallCap, and no other exclusion from the
definition of a "penny stock" under the Exchange Act were available,
transactions in the Listed Securities would become subject to the penny stock
regulations which impose additional sales practice requirements on
broker-dealers who sell such securities.
14
<PAGE> 15
If the Company should experience losses from operations, it may be unable
to maintain the standards for continued listing and the Listed Securities could
be subject to delisting from Nasdaq SmallCap. Trading, if any, in the Listed
Securities would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the Nasdaq
SmallCap listing requirements or in what are commonly referred to as the "pink
sheets." As a result, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the price of, the Listed Securities.
RISK OF LOW-PRICED STOCKS
If the Listed Securities were delisted from Nasdaq, and no other exclusion
from the definition of a "penny stock" under applicable Commission regulations
were available, the Listed Securities may become subject to the penny stock
rules that impose additional sales practice requirements on broker-dealers who
sell such securities to persons other than established customers and accredited
investors (generally defined as investors with net worth in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with spouse). For
transactions covered by these rules, the broker-dealer must make a special
suitability determination for the purchase and must have received the
purchaser's written consent to the transaction prior to sale. Consequently,
delisting from Nasdaq, if it were to occur, could materially adversely affect
the ability of broker-dealers to sell the securities and the ability of
purchasers in this Offering to sell their securities in the secondary market.
See "DESCRIPTION OF SECURITIES."
NON-EXERCISE OF PURCHASE WARRANTS CALLED FOR REDEMPTION
The Purchase Warrants are subject to redemption by the Company, at the
option of the Company, at $0.25 per Purchase Warrant, upon 30 days prior written
notice, if the closing bid price, as reported on Nasdaq, or the closing sale
price, as reported on a national or regional securities exchange, as applicable,
of the shares of the Common Stock for 30 consecutive trading days ending within
ten days of the notice of redemption of the Purchase Warrants averages in excess
of $10.00 per share, subject to adjustment. Prior to September 24, 1998, the
Purchase Warrants will not be redeemable by the Company without the written
consent of the Underwriter. The Company is required to maintain an effective
registration statement with respect to the Common Stock underlying the Purchase
Warrants prior to redemption of the Purchase Warrants. In the event the Company
elects to redeem the Purchase Warrants, such Purchase Warrants will be
exercisable until the close of business on the date for redemption fixed in such
notice. If any Purchase Warrant called for redemption is not exercised by such
time, it will cease to be exercisable and the holder will be entitled only to
the redemption price. Redemption of the Purchase Warrants could force Purchase
Warrant holders either to (i) exercise the Purchase Warrants and pay the
exercise price thereof at a time when it may be less advantageous economically
to do so, or (ii) accept the redemption price in consideration for cancellation
of the Purchase Warrants, which could be substantially less than the market
value thereof at the time of redemption. See "DESCRIPTION OF
SECURITIES--Purchase Warrants."
15
<PAGE> 16
USE OF PROCEEDS
The Company intends to use the net proceeds of approximately $20,240,000
(the "Net Proceeds") from the exercise of the Warrants to fund the sales and
marketing of CCN; for development of new CCN products and services; and for
other working capital and general corporate purposes. The Company may also use a
portion of the Net Proceeds for the acquisition of businesses, products and
technologies that are complementary to those of the Company. As of the date of
this Prospectus, the Company has no agreements, understandings or arrangements
with respect to any such acquisitions, and no portion of the Net Proceeds has
been allocated for any specific acquisition.
The Company currently anticipates that the Net Proceeds, together with
available funds will be sufficient to meet its anticipated needs for working
capital, capital expenditures and business expansion for at least fifteen
months. Thereafter, the Company may need to raise additional funds. The Company
may need to raise additional funds sooner in order to fund more rapid expansion,
to develop new or enhanced services or products, to respond to competitive
pressures or to acquire complementary products, businesses or technologies. If
additional funds are raised through the issuance of equity or debt securities,
the percentage ownership of the shareholders of the Company will be reduced,
shareholders may experience additional dilution and such securities may have
rights, preferences or privileges senior to those of the shareholders of the
Company. There can be no assurance that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be able
to fund its expansion, take advantage of acquisition opportunities, develop or
enhance services or products or respond to competitive pressures. Such inability
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "RISK FACTORS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
The Company reserves the right to allocate the Net Proceeds as management
may perceive its needs from time to time in response to these and related
contingencies. Pending such uses, the Net Proceeds will be invested in
short-term, interest bearing investment grade securities and money market
instruments; provided, however, that the Company will attempt not to invest the
Net Proceeds in a manner which may result in the Company being deemed to be an
investment company under the Investment Company Act of 1940.
16
<PAGE> 17
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 and as adjusted to give effect of the exercise of the Warrants. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION", and "FINANCIAL
STATEMENTS"
<TABLE>
<CAPTION>
Historical at
March 31, 1998 As Adjusted
-------------- -----------
<S> <C> <C>
Notes Payable .......................................................... $ 82,230 82,230
Common Stock Subject to Possible Recission, $.01 par
value, 21,250 shares issued and outstanding............................. 85,000 85,000
Stockholders Equity
(Net Capital Deficiency):
Common Stock, $.01 par value, 20,000,000 shares authorized,
3,651,630 shares issued and outstanding, 6,966,630 shares
issued and outstanding as adjusted (1).................................. 36,516 69,666
Additional paid-in capital.............................................. 12,608,527 33,353,044
Common Stock Warrants (2)............................................... 666,722 127,659
Accumulated Deficit..................................................... (8,688,872) (8,688,872)
----------- -----------
Total shareholders' equity $ 4,622,893 $24,861,497
=========== ===========
</TABLE>
- -----------------
(1) Excludes (i) 1,955,916 shares of Common Stock issuable upon exercise of
Outstanding Stock Options, of which options to purchase 889,414 shares are
currently exercisable. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION," and "DESCRIPTION OF SECURITIES."
(2) $127,659 balance in Common Stock Warrants relates to an aggregate of 172,639
warrants outstanding to purchase Common Stock of the Company at $4.00, issued to
Bruce Edgington and Robert C. Varney, directors of the Company. These warrants
were issued in lieu of interest per the terms of $623,000 in notes payable which
were repaid from the proceeds of the IPO.
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<PAGE> 18
DILUTION
The difference between the price per share of Common Stock issued pursuant
to exercise of the Warrants and the pro forma net tangible book value per share
of Common Stock of the Company after this Offering constitutes the dilution to
investors in this Offering. Net tangible book value per share is determined by
dividing the net tangible book value of the Company (total tangible assets less
total liabilities) by the number of outstanding shares of Common Stock.
At March 31, 1998, the net tangible book value of the Company was
$4,622,893 or approximately $1.30 per share of Common Stock of the Company
(based upon 3,651,630 shares then outstanding). After giving effect to the
exercise of the Warrants and the issuance of the Offered Shares pursuant
thereto, the pro forma net tangible book value of the Company at March 31, 1998
would have been $ 24,861,497 or approximately $3.57 per share, representing an
immediate increase in net tangible book value of $20,238,604 or $2.31 per share
to existing shareholders and an immediate dilution of $2.55 per share to new
investors (which represents 41.7% of the weighted average of the Offered
Shares). As of the date hereof, there are currently no plans, proposals,
arrangements, understandings or obligations with respect to the sale of
additional securities to any persons as of the Prospectus date, other than the
Company's issuance of shares of Common Stock upon the exercise of the
Outstanding Stock Options. See "PROSPECTUS SUMMARY--The Offering," "PRINCIPAL
SHAREHOLDERS," "MANAGEMENT - 1997 and 1998 Stock Option Plans," and "FINANCIAL
STATEMENTS."
The following table illustrates the foregoing information with respect to
dilution to new investors on a per Share basis after this Offering (1):
<TABLE>
<S> <C> <C>
Weighted average offering price of Offered Shares......................... $6.12
Net tangible book value per
share of Common Stock, before this Offering............................... $1.26
Increase per share of Common Stock attributable to
payment by new investors.................................................. 2.31
-----
Pro forma adjusted net tangible book value
per share of Common Stock after this Offering............................. 3.57
----
Net tangible book value dilution to new investors
per Share of Common Stock................................................. $2.55
-----
</TABLE>
(1) If the Common Stock subject to recission was included in the dilution
calculation, the net tangible book value of the Company would be $4,707,893 or
approximately $1.28 per share and pro forma net tangible book value would be
$25,946,493 or approximately $3.57 per share, representing an immediate increase
in net tangible book value of $20,238,604 or $2.29 per share to existing
stockholders and an immediate dilution of $2.55 per share to new investors
(which represents 41.7% of the public offering price of the Shares.)
The following table sets forth as of the date of this Prospectus, with respect
to existing shareholders and new investors, on a pro forma basis, a comparison
of the number of shares of Common Stock acquired from the Company, their
percentage ownership of such shares, the total consideration paid, and the
percentage of total consideration paid No assurance can be given as to the
timing of the exercise of the Warrants or whether any or all of the Warrants
will be exercised:
<TABLE>
<CAPTION>
Securities Purchased(1) Total Consideration
----------------------- -------------------
Amount Percentage Amount(3) Percentage
------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Existing Shareholders (2) 3,672,880 100.0% $12,502,909 37.4%
Existing Purchase Warrant Holders (2) 2,875,000 100.0% $539,062 1.6%
Investors in this Offering 3,315,000 100.0% $20,238,604 61.0%
----------- -----
$33,280,575 100.0%
=========== =====
</TABLE>
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<PAGE> 19
- --------------
(1) The above table assumes no exercise of the Outstanding Stock Options. If
the Outstanding Stock Options currently exercisable had been exercised at
March 31, 1998, the net tangible book value would be increased to
$27,751,490 and the percentage of outstanding Common Stock owned by
investors in this offering would decrease to 42.3%. See "PROSPECTUS
SUMMARY--The Offering," "PRINCIPAL SHAREHOLDERS," and "MANAGEMENT - 1997
and 1998 Stock Option Plans."
(2) Of the shares, 823,735 shares were purchased by officers, directors,
promoters and affiliated persons of the Company for an aggregate
consideration of $1,414,986. Of the Purchase Warrants, 35,000 were
purchased by officers, directors, promoters and affiliated persons of the
Company for an aggregate consideration of $6,875.
(3) Before deduction of estimated expenses of the Offering.
MARKET PRICES OF COMMON STOCK
The Company's Common Stock and Purchase Warrants have been quoted in the
Nasdaq Smallcap Market under the symbols AMEN and AMENW, respectively, since
September 24, 1997. The following table sets forth the high and low closing
sales price for the Common Stock and Purchase Warrants as reported by the Nasdaq
Smallcap Market for the periods indicated.
<TABLE>
<CAPTION>
Common Stock Purchase Warrants
------------ -----------------
Period High Low High Low
------ ---- --- ---- ---
<S> <C> <C> <C> <C>
September 24 - December 31, 1997 $ 5.5000 $ 2.00000 $ .7500 $ .15625
January 1 - March 31, 1998 $ 3.5000 $ 1.96875 $ .5000 $ .15625
April 1, 1998 - June 30, 1998 $ 6.5000 $ 3.25000 $1.6250 $ .46875
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
GENERAL
DIDAX INC. ("the Company") owns and operates the Christian Community Network(TM)
(CCN) (WWW.CHRISTCOM.NET), an interactive website which provides information and
resources that the Company believes generally appeals to the Christian
community. The information and resources are developed and made available both
by the Company and by Christian and secular retailers, publishers, charities and
ministries. To date, the Company has derived most of its revenues from providing
Internet development and hosting services and limited technology consulting
services, including web development services, for a fee to Christian
organizations, such as Promise Keepers, a nonprofit Christian ministry (PK Net,
www.promisekeepers.org); Christianity Today, Inc., a publisher of Christian
periodicals (www.christianity.net); and World Vision, an international Christian
relief agency (www.worldvision.org). The Company's website services and
development clients also include Mercy Medical Airlift, Christian Management
Association, Worship Media Resources, the Salvation Army, Evangelical Council
for Financial Accountability (ECFA), Young Life and Presbyterian Church in
America.
The Company obtained net proceeds of approximately $6.0 million in connection
with the closing of the IPO, after the retirement of certain debt. The Company
believes, with the application of the IPO net proceeds, that it is positioned to
generate increasing revenues from the sale of advertising and sponsorships of
CCN, retail sale via CCN of Christian interest and other product manufactured or
developed by others (primarily books, CDs, and other articles generally
appealing to the Christian marketplace); and the sale of affinity memberships.
In addition, to an increasingly lesser extent, the Company continues to generate
revenue through
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providing Consulting Services. The Company believes that Internet commerce will
increasingly flow towards communities that are able to aggregate large numbers
of individual consumers with similar interests and characteristics. The Company
believes the Christian market is a prime example of this type of community, and
demographic studies of online Christians indicate their desirability to the
advertisers and online retail businesses that currently generate the majority of
Internet revenues. The Company believes that there is a relationship between the
size of a given online community and its ability to generate advertising and
retail revenues and is focused on substantially increasing the size of its
current membership base and visitor traffic.
The Company's progress in developing CCN is evidenced both by a substantial
increase in revenue derived from the sale of advertising space, the retail sale
of products on CCN, as well as by the Company's being awarded commendations by
various external industry-wide sources For the three months ended March 31, 1998
and the March 31, 1997, respectively, approximately 51% and 72% of total revenue
was generated from Consulting Services, respectively. The decline in revenue
derived from Consulting Services was largely offset by the Company's new revenue
streams (advertising, affinity memberships, and retail sales). Additionally, the
Company's progress in developing the CCN community is evidenced by the growth in
membership, site visits, and advertising impressions as well as substantive
recognition from external sources such as USA Today and several Website rating
services, including The Mining Company (www.theminingco.com) and Best of the
Christian Web (www.botcw.org). Membership on CCN is free and requires an online
registration form with one's name, e-mail address, and limited demographic data.
A visit is the number of times a sequence of pages has been viewed in succession
by a single user without leaving the CCN site. An advertising (ad) impression is
the display of one of several types of ads on a given page seen during the
course of a visit. At March 31, 1998, the company had 26,469 members as compared
to 3,829 members at March 31, 1997, an annual growth rate of 591%. Visits
increased 340% from a monthly average of 32,000 visits per month in the quarter
ended March 31,1997 to an average of 141,000 visits per month in the quarter
ended March 31, 1998. During the same period, ad impressions grew 1,076% from a
monthly average of 128,000 to a monthly average of 1,506,000. To the extent
visits continue to increase on the CCN site and the Company continues to place
advertisements on CCN for which it receives a fee, advertising revenues from CCN
should increase. The opportunity for the Company to begin generating significant
advertising and retail revenues is predicated upon increasing the membership and
site visits to CCN. Until critical mass is achieved in pursuing this consumer
oriented business model, work effort shifted from client services activities may
have an adverse effect on overall revenue.
During the first quarter of 1998, the Company completed the purchase of
gofishnet.com, inc., an Internet retailer of Christian music and videos,
("gofishnet"), released several new products, and enhanced several of its
existing products. The combination of these community building activities has
been instrumental in realizing this increased traffic pattern. Through the
expansion of its services, the marketing of those services, and its presence on
CCN, gofishnet experienced a retail sales (music and videos) revenue growth of
1,025% from $1,881 for the first quarter of 1997 to $21,153 for the first
quarter of 1998. Additional new offerings to CCN members and visitors included
direct access to Net.Market (an Internet based discount buying club),
Auto-by-Tel (an automobile buying service), and The Flower Club (an online
flower retailer). The Company receives purchase royalties and/or referral fees
from these businesses that complement similar arrangements already in place with
Amazon.com (an online book and music retailer) and Promise Keepers (a nonprofit
ministry selling a range of books, music and clothing items). The Company also
began offering free Web-based e-mail to CCN members through a revenue sharing
agreement with WhoWhere? The agreement provides CCN with a percentage of the
advertising revenue sold by WhoWhere? on the e-mail service and also allows CCN
to remarket the service - called CCNmail - to third party organizations whose
membership can benefit from the service and whose usage generates additional
revenue sharing opportunities for CCN and the third party organization. The
Company invested significant resources to improve site content via the
Brotherhood(TM) Channel (provides information and interaction opportunities for
Christian men), CCN Forums (an interactive medium for the continuing discussion
of topics of interest to CCN members), and the launch of CCN Events, the most
comprehensive local Christian events database on the Internet. To support the
growing interest in these services, the Company invested in technology
infrastructure - primarily server speed and capacity - to enable more visitors
to get involved. Indications of favorable market acceptance include: the "1997
Christian Web Site of the Year" award given to CCN by Best of the Christian Web,
an Internet watchdog and advisory service for the online Christian community; a
"Hot Site" award by USA Today; the "#1 Christian Music Website" award given to
CCN Events by The Mining Company in recognition of its expansive local concert
and events information; and the
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"#2 Christian Music Website" award given to gofishnet.com by The Mining Company
in recognition of its broad content, unique features, and product selection. The
Company intends to continue enhancing CCN with the goal of becoming the
preferred online resource for Christians in search of information, interaction
and involvement opportunities that help them apply a Christian world view across
the breadth of their life and interests. In order to efficiently achieve this
end, the Company is in the process of restructuring operations under the
direction of William M. Parker, who joined the Company as CEO and President in
April, 1998. This organizational move entails significant changes in staffing,
utilization of outsourced services to generate economies of scale and focus on
reducing product-to-market lead times. It is intended to address specific skill
set weaknesses, enhance productivity, and build a strong foundation to generate
traffic, membership and revenues in line with the wealth of opportunities that
the Company has opportunity to pursue. It is desired that these changes will
provide a platform for the unique content, services and promotional ventures
aimed at making CCN dominant in the Christian niche market on the Internet These
processes, while time consuming and costly, are necessary to complete the
Company's transition from being a client-based web consulting service provider
to a consumer-based Internet community builder, concentrating on high leverage
retail and advertising revenue opportunities from servicing the Christian
community through CCN.
The Company has an extremely limited operating history upon which an evaluation
of the Company and its business can be based. The Company's business must be
considered in light of the risks, expenses and problems frequently encountered
by companies in their early stage of development, particularly companies in new
and rapidly evolving markets, such as the Internet. The market for the Company's
services and products has only very recently begun to develop, is rapidly
evolving and is characterized by an increasing number of market entrants who
have introduced or developed services and products for use on the Internet. As a
result, the Company's mix of services and products may undergo substantial
changes as the Company reacts to competitive and other developments in the
overall Internet market. The Company has achieved only limited revenues to date,
has incurred net losses since inception and expects to continue to operate at a
loss until sufficient revenues are generated to cover expenses. As of March 31,
1998, the Company had an accumulated deficit of approximately $8,689,000.
As a result of the Company's extremely limited operating history, the Company
has no meaningful historical financial data upon which to base future operating
expenses. Accordingly, the Company's expense levels are based in part on
possible future revenues, of which there can be no assurance. A shortfall in
revenues would have an immediate adverse impact on the Company's business,
results of operations and financial condition. The Company has just recently
begun to generate revenue from the commercial sale of advertising space on CCN
and very limited sales of products via CCN. The Company plans to significantly
increase its sales and marketing efforts, and fund greater levels of product
development. The Company expects to experience significant fluctuations in
future quarterly operating results and believes that period-to-period
comparisons of its results of operations are not necessarily meaningful and
should not be relied upon as any indication of future performance.
The Company's financial information for the fiscal years ended December 31, 1997
and 1996 and the three month periods ended March 31, 1998 and 1997 included in
this Prospectus include the operations of gofishnet.com, inc.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
NET LOSS
For the quarter ended March 31, 1998, the Company incurred a net loss of
$751,720 as compared to a net loss of $496,467 for the same period ended March
31, 1997. This increased loss of $255,253 (51%) results from a $346,939 increase
in the Loss from Operations for the quarter ended March 31, 1998 ($808,100) as
compared to the quarter ended March 31, 1997 ($461,161), offset by a $91,686
increase in other income, consisting of a $48,843 increase in interest income
and a $42,956 decrease in interest expense.
REVENUES
The Company generates revenue from: (i) providing Consulting Services (the
"Consulting Services Revenue"); (ii) providing Internet access to others (the
"Internet Access Revenue"); (iii) the retail sale of Christian interest and
other products via CCN
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(the "Retail Product Revenue"); and (iv) the sale of advertising space on CCN
(the "Advertising Revenue"). During the quarters ended March 31, 1998 and 1997,
the Company generated $89,803 and $94,617 of revenue, respectively. Of the
revenue generated during the quarter ended March 31, 1998, $45,881 was
Consulting Services Revenue, $2,072 was Internet Access Revenue, $26,120 was
Retail Product Revenue, and $15,730 was Advertising Revenue. This compares to
$67,837 of Consulting Services Revenue, $23,438 of Internet Access Revenue,
$3,342 of Retail Product Revenue and $0 of Advertising Revenue for the
comparable period in 1997. Internet Access Revenue decreased by $21,366 (91%)
because DIDAX recorded a one-time adjustment in the first quarter of 1997. This
adjustment was to reflect a change in DIDAX's agreement with IBM as to the
method of measuring Internet Access Revenue. Additionally, the Company
discontinued actively marketing Internet access in December 1996. The $21,956
(32%) decrease in Consulting Services Revenue is due to DIDAX's transition from
being a web consulting services provider to focusing more on the Retail Product
Revenue and Advertising Revenue streams, which is indicative of the 682%
increase in Retail Product Revenue and the posting of Advertising Revenue
unrealized in the first quarter of 1997. With growth in site traffic, service
enhancements, and marketing resources dedicated to retail and advertising
revenue opportunities, the Company hopes to achieve continued progress in these
revenue streams.
COST OF REVENUES
Cost of goods and services, consisting primarily (62%) of costs related to
development, maintenance and support of customer websites, was $39,401 and
$37,900 for the quarters ended March 31, 1998 and 1997, respectively. The result
of this was a gross margin reduction from 60% to 56% for the quarters ended
March 31, 1998 and 1997, respectively. However, taking the one time favorable
revenue adjustment in the first quarter of 1997 into account, operationally this
increase is really from 51% instead of 60% gross margin. This trend establishes
the reason the Company intends to transition to higher leverage retail and
Advertising Revenue streams. To the extent that the Company is able to continue
to increase these high margin revenues, cost of sales should continue to
decrease as a percentage of revenue. However, there can be no guarantee that
this will occur due to the volatile nature of the Internet industry.
PRODUCT DEVELOPMENT AND CCN OPERATIONS
Product development expenses decreased by $37,615 (32%) primarily because of a
decrease in salary expenses. There was one less employee in the product
development department in the first quarter of 1998 as compared to the same
period in 1997. CCN operations expenses, consisting primarily of costs related
to the Company's maintenance and enhancements for CCN, increased to $157,622 for
the quarter ended March 31, 1998, as compared to $116,743 for the same period in
1997. The cost of CCN operations increased by 35% because a smaller portion of
salary expense was charged to cost of sales due to the decrease in Consulting
Services Revenues. In addition, there was an across the board wage increase in
September 1997.
SALES AND MARKETING
The Company invested $157,098 (170%) more in the first quarter of 1998 as
compared to the same period in 1997. This amounts to a total expense of $249,626
and $92,528 for the quarters ended March 31, 1998 and 1997, respectively. This
increased investment consisted of increases in staffing, wages, and promotional
expense. DIDAX's promotional efforts include magazine and Internet
advertisements and the use of promotional giveaway materials to expand market
awareness. The Company believes that it will continue to incur substantial
technical and marketing expenses as it seeks to expand the market for CCN.
GENERAL AND ADMINISTRATIVE
The Company increased its general & administrative (G&A) expenses by 93% or
$180,262 in the first quarter of 1998 versus the same quarter in 1997,
principally due to the increased costs of being a public company. In addition,
the acquisition of gofishnet resulted in $32,739 of cost. In order to address
the Company's requirement to improve the operational processes necessary to
support the growth of CCN, the Company invested over $40,000
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in management consulting services. Lastly, salary expenses increased in the
first quarter of 1998 to $76,336 as compared to $36,110, as salary abatements
due to funding constraints were discontinued at the end of 1997.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased 526% to $58,132 from $9,289 for the quarters ended
March 31, 1998 and 1997, respectively. This $48,843 increase was due to the
investment of the proceeds from the Company's IPO.
Interest expense was $1,752 and $44,708 for the quarters ended March 31, 1998
and 1997, respectively. The decrease in interest expense was due to the
repayment in October 1997 of $623,000 of interest bearing notes issued in 1996.
YEAR ENDED DECEMBER 31, 1997 VS. DECEMBER 31, 1996
NET LOSS
The Company incurred a net loss of $4,271,249 for the year ended December 31,
1997, as compared to a loss of $2,630,578 for the same period ended December 31,
1996. This increased loss of $1,640,671 (62%) was due to several events
including the recognition of a $1,700,000 noncash charge to interest expense
related to a private placement of short term debt which was liquidated from the
proceeds of the IPO, a $200,000 marketing expense recognized pursuant to the
donation of 40,000 shares of the Company's common stock to Promise Keepers, and
the recognition of $142,462 of private placement amortization expense in 1997 as
compared to $3,351 in 1996. These events were partially offset by a $241,371
(133%) increase in revenues, and the fact that during the years ended December
31, 1997 and 1996, the Company donated to three separate Christian ministry
customers unaffiliated with the Company otherwise, salable computer consulting
services valued at approximately $35,000 and $241,000, respectively. Loss from
Operations was reduced by approximately 3% to $2,484,503 in 1998 versus
$2,568,015 in 1997. This reduction would have been approximately 11% without the
recognition of the donation of stock.
REVENUES
In the year ended December 31, 1997 and 1996, the Company generated $422,368 and
$180,997 of revenue, respectively. Of the revenue generated during the year
ended December 31, 1997, $305,140 was Consulting Services Revenue, $33,942 was
Internet Access Revenue, $66,410 was Retail Product Revenue, and $16,876 was
Advertising Revenue. This compares to $90,571 of Consulting Services Revenue,
$81,371 of Internet Access Revenue, and $9,055 of Retail Product Revenue for the
comparable period in 1996. The $214,569 increase in Consulting Services Revenue
is primarily due to an 85% decrease, or $205,652, in services previously
provided at no charge. The Company ceased to actively market Internet access in
the fourth quarter of 1996, and there was no prior year Advertising Revenue.
Interest income was $90,145 for the year ended December 31, 1997 compared to
$11,412 for the year ended December 31, 1996. This $78,733 (690%) increase is
due to the investment of the proceeds from the October 3, 1997 IPO.
COST OF REVENUES
Cost of goods and services, consisting primarily of costs related to
development, maintenance and support of customer websites was $232,363 for the
year ended December 31, 1997 as compared to $234,742 for the year ended December
31, 1996. Although revenues increased by 133%, the corresponding costs were
basically flat due mostly to the Company not actively marketing Internet access
in 1997. The costs associated with this business were substantial as compared to
the revenues, which is why the Company has minimized its efforts in this area in
a manner which is now profitable. Additionally, the Company's cost of labor
decreased due to a $60,000 salary cap which was in place for nine months during
1997 as compared to three months in 1996.
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PRODUCT DEVELOPMENT AND CCN OPERATIONS
Product development expenses decreased by $111,407 (20%) primarily because of
the 85% decrease in services provided at no charge as noted above. As a result,
a greater portion of billable work was charged to cost of goods and services in
1997. In addition, DIDAX had a wider customer base and a larger amount of
billable work in 1997. Lastly, in 1997, technical staff were dedicated to CCN
operations for the full year as compared to six months in 1996. CCN operations
expenses, consisting primarily of costs related to the Company's maintenance and
enhancements for CCN, increased to $506,979 for the year ended December 31,
1997, as compared to $250,726 for the same period in 1996. The cost of CCN
operations increased by 102% because 1997 includes a full year of activity as
compared to six months in 1996. In addition, 1997 CCN operations includes three
additional employees and the cost of a consultant.
SALES AND MARKETING
Sales and marketing costs decreased to $837,171 during the year ended December
31, 1997 from $905,509 in the comparable period ended December 31, 1996. This
marginal ($68,338 or 7%) decrease is due to the fact that the Company is no
longer marketing Internet access which precipitated a reduction in the number of
the Company's employees. In addition, an overall decrease in salary expense (due
to the salary cap noted above) also contributed to the reduction, which was all
partially offset by the $200,000 donation of common stock previously mentioned.
The Company believes that it will continue to incur substantial technical and
marketing expenses as it seeks to expand the market for CCN.
GENERAL AND ADMINISTRATIVE
General and administrative (G&A) expenses, which consist of payroll and related
expenses and office overhead costs (including rent), were $877,718 and $793,988
for the year ended December 31, 1997 and 1996. G&A expenses increased by $83,730
(11%) primarily because 1997 includes the $142,462 of private offering costs
referred to above, as compared to $3,351 in 1996. In addition, 1997 includes
$66,253 of director and officer insurance incurred for the first time in the
Company's history.
INTEREST EXPENSE
Interest expense was $1,877,541 and $77,815 for the years ended December 31,
1997 and 1996, respectively. Recognition of a non cash charge to interest
expense of $1,700,000 (remitted via 340,000 shares of Common Stock at $5 or
market value) on the repayment of $1,700,000 of short term debt accounts for the
majority of the increase. In addition, borrowings of $476,000 and $359,000
during the third and fourth quarters of 1996, respectively and $250,000 during
the third quarter of 1997, for a total of $1,085,000, account for another
$28,596 of the increase in interest expense. Additionally, included in the
interest expense for the year ended 1997, is $86,270 of amortization of the
discount on warrants issued to an executive officer and a director of the
Company as compared to $41,390 for the same period in 1996. In December of 1997,
the Company recognized a $33,750 charge for the issuance of the equivalent of
8,237 shares of Common Stock paid in lieu of interest on a promissory note
issued by gofishnet.com, inc. to a former principal of gofishnet.com,inc. See
"Liquidity and Capital Resources" below and Notes D and E to the Financial
Statements.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $79,098 in the year ended December
31, 1996, to $223,067 in the year ended December 31, 1997. The 1997 increase is
the result of increased amortization of the discount on warrants referred to
above.
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LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997 and 1996, net cash used in operating
activities was $2,344,834 and $2,049,186, respectively. Net cash used in
investment activities was $42,108 and $193,616 in the year ended December 31,
1997 and 1996, respectively. Net cash provided by financing activities was
$7,779,597 and $2,046,611 for the years ended December 31, 1997 and 1996,
respectively. In 1997, the Company raised $10,539,063 gross proceeds from the
Company's IPO. During the quarters ended March 31, 1998 and 1997, net cash used
in operating activities was $529,565 and $616,434, respectively. Net cash (used)
provided by financing activities was $(3,330) and $1,384,794 for the quarters
ended March 31, 1998 and 1997, respectively.
The Company currently anticipates that its $4,423,790 working capital balance at
March 31, 1998, consisting primarily of remaining proceeds from the Company's
IPO, will be sufficient to meet the Company's anticipated working capital, lease
commitments, and capital expenditure requirements for the next eighteen months.
However, the Company anticipates that it may seek to raise additional funds in
order to pursue acquisitions, or in the event that the Company's estimates of
operating losses and capital requirements change or prove inaccurate or in order
that the Company may respond to increased demand or to take advantage of other
unanticipated opportunities. There can be no assurance that additional financing
will be available to the Company or that such financing will be available on
acceptable terms.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's extremely limited operating history and the rapid
technological change experienced in the Internet industry generally, the Company
has no meaningful historical financial data upon which to base future operating
expenses. Accordingly, the Company's expense levels are based in part on its
expectations as to future revenues, of which there can be no assurance. There
can be no assurance that the Company will be able to accurately predict the
levels of future revenues, if any, and the failure to do so would have a
materially adverse effect on the Company's business, results of operations and
financial condition.
The Company generated most of its revenue in the first quarters of 1998 and 1997
from Consulting Services Revenue. Prior to the closing of the IPO, the Company
was resource limited in its ability to expand its core business of developing
Advertising Revenue and Retail Product Revenues. The Company believes it is now
positioned to focus on the development of CCN and the Company is offering
Consulting Services to a lesser extent, concentrating on the generation of
Advertising Revenue and Retail Product Revenue. This transition is expected to
cause significant fluctuations in near term future quarterly operating results.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by other factors as well. Causes of such
significant fluctuations may include, among other factors, demand for the
Company's services, the number, timing and significance of new service
announcements by the Company and its competitors, the ability of the Company to
develop, market and introduce new and enhanced versions of its services on a
timely basis, the level of product and price competition, changes in operating
expenses, changes in service mix, changes in the Company's sales incentive
strategy, and general economic factors.
The Company's operating expense levels are based, in significant part, on the
Company's expectations of future revenue on a quarterly basis. If actual revenue
levels on a quarterly basis are below management's expectations, both gross
margins and results of operations are likely to be adversely affected because a
relatively small amount of the Company's costs and expenses varies with its
revenue in the short term.
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BUSINESS
OVERVIEW
Founded in 1993, DIDAX INC. (the "Company" or "DIDAX") owns and operates
CCN: The Christian Community Network(TM) (http://www.christcom.net). CCN is an
interactive website focused on content material and products which the Company
generally believes appeals to the family friendly community and persons who
consider themselves Christians. The content material and site resources are
developed and offered both by DIDAX, and by ministries, secular retailers,
and publishers. Prior to the closing of the Company's IPO in September 1997, the
operations of the Company were limited to (a) research and development and
marketing activities related to CCN (WWW.CHRISTCOM.NET), and (b) providing for
a fee, to Christian organizations, limited technology consulting services,
including website development services (the "Consulting Services"), Internet
access through the IBM Global Network, hosting through various hosting services
(including in-house hosting) and other related Internet services. The Company's
website, an Internet- based alternative to traditional means of communication
by Christian ministries and Christian content publishers and retailers (such as
fliers, periodicals, books, radio and television) is intended to provide its
target constituent base, the Christian consumer, with resources and information
provided by Christian and secular retailers, publishers, charities and
ministries. The Company's website is also intended to reduce its clients' costs
of contacting their target constituents and markets while expanding the
potential reach and duration of that contact. Access to CCN is currently
provided free of charge to persons who have Internet access. To date, the
Company has derived all of its revenues from (i) providing Consulting Services
to Christian organizations, such as Promise Keepers, a nonprofit Christian
ministry (PK Net, www.promisekeepers.org), Christianity Today, Inc., a
publisher of Christian periodicals (www.christianity.net), and World Vision, an
international Christian relief agency. (ii) providing Internet Access Services;
and (iii) to a very limited extent, retail sales of Christian interest and
other products via CCN and advertising space on CCN. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - General."
The Company obtained net proceeds of approximately $6.0 million in
connection with the closing of the IPO, after the retirement of certain debt.
The Company believes, with the application of the IPO net proceeds, that it is
positioned to generate increasing revenues from the sale of advertising and
sponsorships of CCN, retail sale via CCN of Christian interest and other
products manufactured or developed by others on CCN and royalties/fees from
the sale of Christian interest products manufactured or developed by others
(primarily books, CDs, and other articles generally appealing to the Christian
marketplace), and the sale of affinity memberships. In addition, to an
increasingly lesser extent, the Company continues to generate revenue through
providing Consulting Services. To enhance its retail capabilities the Company
completed the acquisition of gofishnet.com, inc. ("gofishnet"), an Internet
retailer of Christian music and videos in February 1998.
The Company has an extremely limited operating history upon which an
evaluation of the Company and its business can be based. For the fiscal years
ended December 31, 1996 and 1997, and for the three month period ended March 31,
1998, the Company generated net losses of $(2,630,578), $(4,271,249), and
$(751,720), respectively. See "FINANCIAL STATEMENTS." The Company has achieved
only limited revenues to date, has incurred net losses since inception and
expects to continue to operate at a loss for the foreseeable future. Its expense
levels are based in part on its expectations as to future revenues, if any. Any
shortfall in revenues, whether caused by the cancellation or deferral of, or the
failure to obtain, advertising, retail or website development customers, or
otherwise, would have an immediate material adverse impact on the Company's
business, results of operations and financial condition.
The Company targets CCN to persons of all ages, economic levels, genders,
ethnic backgrounds and nationalities who identify themselves as Christian,
principally Protestant (regardless of denomination, if any) and Catholic, with
particular emphasis upon evangelical Christians. According to USA Today (source:
Barna Research Group) on December 5, 1997 "43% of all adults now consider
themselves born-again Christians" where born-again
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is "defined as people who believe they'll go to heaven because they have
'confessed their sins and accepted Jesus Christ as their savior.'" According to
a poll conducted by the Gallup Organization in 1994, approximately 25% of
Americans identify themselves as Catholic and approximately 20% identify
themselves as Protestant. The Pew Center for Civic Journalism in a survey
published in April 1997, reported that approximately 35% of the United States
population identify themselves as evangelical Christians. Based on these reports
DIDAX traditionally uses 40% as the number of Christians in its target audience.
According to SOMA Communications, Inc., a Christian broadcast market
research firm utilizing data supplied by Simmons, over 70% of Christians on the
Internet have annual incomes in excess of $40,000 and over 30% of Christians on
the Internet have annual incomes over $75,000. According to Christianity Today,
Inc., a publisher of Christian periodicals, when compared to the general U.S.
population, Christians are approximately 25% more likely to own a computer and
approximately 15% more likely to own a modem. Additionally, according to the
Simmons data, Christians on the Internet are 19% more likely than the general
population to place an order by phone from a catalog. DIDAX concludes that
Christians are active on the Internet, can afford to purchase goods and
services, have a propensity to buy on the Internet (which is similar to catalog
buying) and thus represent a good demographic segment for advertisers and
retailers.
INFORMATION AND COMMERCE ON THE INTERNET GENERALLY
The Internet is a network of computers which enables users to access and
share information and conduct business transactions. Much of the recent growth
in the use of the Internet by businesses and individuals has been driven by the
emergence of the World Wide Web (the "Web"), which enables non-technical users
to exploit the resources of the Internet. International Data Corporation ("IDC")
estimates that the number of Web users increased from 16.1 million at the end of
1995 to 34.6 million at the end of 1996 and that this number will increase to
163 million by the end of the year 2000. Furthermore, IDC has reported that the
number of individuals on the Web was approximately 69 million in March 1998, and
that this number will grow to 97.25 million people by the end of 1998 and 319.79
million by the end of 2002. In May 1998, RelevantKnowledge, an Internet research
website, reported that there are approximately 57 million people using the Web
in The US. Given 40% as the size of DIDAX's U.S. target audience and 20% as the
size of DIDAX's target audience worldwide, the number of Christians already
surfing the World Wide Web is approximately 20 million.
The emergence of the Internet as a significant communications medium is
driving the development and adoption of website content and commerce
applications that offer convenience and value to consumers, as well as unique
marketing opportunities and reduced operating costs to businesses. By publishing
information about products and services on a website, a company or organization
can enable potential customers or constituents in any geographical area to
gather relevant, in-depth information about products, services or organization
activities and messages at their convenience and according to their preferences.
A growing number of consumers have begun to transact business electronically,
such as paying bills, booking airline tickets, trading securities and purchasing
consumer goods, including personal computers, consumer electronics, compact
disks, books and vehicles. Moreover, online transactions can be faster, less
expensive and more convenient than transactions conducted through a human
intermediary. In addition, website commerce applications enable businesses and
organizations, including ministries, to rapidly target and economically manage a
broad customer and constituent base and establish and maintain ongoing direct
customer and constituent relationships. IDC estimates that the dollar value of
goods and services purchased over the Internet will increase from approximately
$318 million in 1995 to $95 billion in the year 2000. IDC's report also shows
there were 27.65 million Web buyers as of March 1998.
COMPLEMENTARY MISSIONS
The Company generates revenues through the sale of advertising space on
CCN, memberships in affinity marketing programs (affording participants price
discounts and other benefits of group purchasing power), the sale of Christian
and family-friendly products manufactured or developed by others (books, music,
and so on), and to a lesser extent, the continuing provision of technology
consulting services to Christian organizations (including Promise Keepers,
Christianity Today, World Vision, Family Research Council, Young Life and the
Presbyterian Church in America).
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The Company believes that the virtual community built by DIDAX, CCN is
positioned to be the preeminent community for Christians on the Internet. CCN is
planned as a gathering place for Christians offering INFORMATION, INTERACTION
and INVOLVEMENT: general INFORMATION (not just Christian information) together
with a Christian world view; INTERACTION based around the information found
throughout CCN; and INVOLVEMENT with other Christians, churches, communities,
and the many Christian organizations represented within CCN. As a for-profit
religious organization, the Company maintains the VISION to carry out its
calling to help build up the Church, which is the Body of Christ. The MISSION of
the Company is to honor Christ by building a community on the Internet which
proclaims Christ and a Christ-centered worldview. The community should:
* Strengthen the spiritual life of individuals and families
* Equip Christians for life and service
* Engage people in lively, challenging and relevant interaction
* Compel Christians to get involved in the work of Christ.
CCN acts as an advocate for its consumers. DIDAX seeks opportunities (1) to
partner with Christian ministries to assist them in reaching mutual
constituents, for the growth and edification of the Body of Christ; (2) to
partner with advertisers to assist them in reaching the Christian Internet
consumer with messages that our community will value; and (3) to partner with
retailers to provide goods and services that satisfies the needs of our
Christian community.
The Company believes that its employees are driven not only by the
business opportunities, but by a deep spiritual commitment to help enhance the
lives of Christians around the world.
REVENUE SOURCES AND WEBSITE TRAFFIC
Fee-Based Advertising and Retail Sales
Access to CCN is free of charge to those persons who have Internet access.
The Company attempts to collect demographic (e.g. age, gender, location) and
psychographic (e.g. purchasing habits, brand loyalty, price sensitivity)
characteristics of its consumers by building individual profiles over a period
of time through guestbook registration, online surveys and instant polling
techniques. User profiles allow the Company to provide valuable, targeted
information to the consumer (called personalization), resulting in the Company's
ability to receive a greater share of that consumer's expenditures. At the same
time, personalization will position the Company to charge higher premiums for
third-party advertising on CCN.
The Company's progress in developing the CCN community is evidenced by the
growth in membership, site visits, and advertising impressions as well as
substantive recognition from external sources such as USA Today and several
Website rating services, including The Mining Company (www.theminingco.com) and
Best of the Christian Web (www.botcw.org). Membership on CCN is free and simply
requires filling out an online registration form with one's name, e-mail
address, and limited demographic data. A visit is the number of times a sequence
of pages has been viewed in succession by a single user without leaving the CCN
site. An advertising (ad) impression is the display of one of several types of
ads on a given page seen during the course of a visit. At March 31, 1998, the
company had 26,469 members as compared to 3,829 members at March 31, 1997, an
annual growth rate of 591%. Visits increased 340% from a monthly average of
32,000 visits per month in the quarter ended March 31,1997 to an average of
141,000 visits per month in the quarter ended March 31, 1998. During the same
period, ad impressions grew 1,076% from a monthly average of 128,000 to a
monthly average of 1,506,000. To the extent visits continue to increase on the
CCN site and the Company continues to place advertisements on CCN for which it
receives a fee, advertising revenues from CCN should increase. The opportunity
for the Company to begin generating significant advertising and retail revenues
is predicated upon increasing the membership and site visits to CCN. Advertising
revenues commenced for the Company, in the fourth quarter of 1997. Those
revenues were over $10,000 for the fourth quarter of 1997, and over $15,000 for
the first quarter of 1998. Until critical mass is achieved in pursuing this
consumer oriented business model, work effort shifted from client services
activities may have an adverse effect on overall revenue.
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In the first quarter of 1998, the Company completed the purchase of
gofishnet.com, inc. ("gofishnet"), released several new products, and enhanced
several of its existing products. The combination of these community building
activities has been instrumental in realizing this increased traffic pattern.
Gofishnet, an Internet retailer of Christian music and videos, was acquired on
February 18, 1998. The acquisition was accounted for as a pooling of interests
and gofishnet operates as a wholly owned subsidiary of DIDAX INC. Through the
expansion of its services, the marketing of those services, and its presence on
CCN, gofishnet experienced a retail sales (music and videos) revenue growth of
1,025% from $1,881 for the first quarter of 1997 to $21,153 for the first
quarter of 1998.
Affinity Program
In order to offer CCN consumers and other members of the Christian
community additional services and encourage them to regularly revisit CCN, the
Company has added new offerings to CCN members and visitors including direct
access to Net.Market (an Internet based discount buying club), Auto-by-Tel (an
automobile buying service), and The Flower Club (an online flower retailer). The
Company receives purchase royalties and/or referral fees from these businesses
that complement similar arrangements already in place with Amazon.com (an online
book and music retailer) and Promise Keepers (a nonprofit ministry selling a
range of books, music and clothing items). The Company also began offering free
Web-based e-mail to CCN members through a revenue sharing agreement with
WhoWhere? The agreement provides CCN with a percentage of the advertising
revenue sold by WhoWhere? on the e-mail service and also allows CCN to remarket
the service - called CCNmail - to third party organizations whose membership can
benefit from the service and whose usage generates additional revenue sharing
opportunities for CCN and the third party organization.
Website Development and Technology Consulting Services
The Company has been engaged in providing Consulting Services for others
since late 1995. Substantially all of the Consulting Services were donated to
the Company's clients in 1995 and 1996. In 1997, 80% of the Company's revenues
were generated from providing Consulting Services. As the Company focuses more
on the Christian consumer served through CCN, the Company anticipates that
Consulting Services Revenue will be reduced to not more than 20% over the next
few years. The Company has received more than 20 awards for its website
development activities. The Company's website service and development clients
include Promise Keepers and Christianity Today, Inc., World Vision, Maranatha!
Music, the Salvation Army, Ministry Business Services, Family Research Council,
Evangelical Council for Financial Accountability (ECFA), Christian Liberty
Academy, Young Life and Billy Graham Institute of Evangelism.
CCN CONTENT AND AWARDS
The Company invested significant resources to improve site content via the
Brotherhood(TM) Channel (provides information and interaction opportunities for
Christian men), CCN Forums (an interactive medium for the continuing discussion
of topics of interest to CCN members), and the launch of CCN Events, the most
comprehensive local Christian events database on the Internet. To support the
growing interest in these services, the Company invested in technology
infrastructure - primarily server speed and capacity - to enable more visitors
to get involved. Indications of favorable market acceptance include: the "1997
Christian Web Site of the Year" award given to CCN by Best of the Christian Web,
an Internet watchdog and advisory service for the online Christian community; a
"Hot Site" award by USA Today; the "#1 Christian Music Website" award given to
CCN Events by The Mining Company in recognition of its expansive local concert
and events information; and the "#2 Christian Music Website" award given to
gofishnet.com by The Mining Company in recognition of its broad content, unique
features, and product selection. The Company plans to continue enhancing CCN for
years to come in order to become the preferred online resource for Christians in
search of information, interaction and involvement opportunities that help them
apply a Christian world view across the breadth of their life and interests.
MARKETING
The Company's efforts to achieve traffic, membership and revenue
objectives begin with the development and provision of unique, value-added,
market-driven content and services for the CCN online community. Only by
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understanding our consumers' needs -- and their rationale for using the Internet
to help meet those needs -- can the Company tap into the large and vibrant
Christian and family-friendly communities.
Simultaneously, the Company is leveraging a broad array of opportunities
to drive awareness, trial and repeat usage of CCN's content and services. Most
importantly, the Company works closely with ministries and non-profit
organizations to provide free or value-added services to their constituents in
ways that both strengthen the organization's constituent relationships and
provide the CCN community with traffic, membership and third-party revenue
streams (some of which are shared with the organizations in exchange for
endorsements and strategic access to sizeable constituencies). These
relationships, which allow CCN to serve the Christian and family-friendly
communities while tapping into the commercial interests who desire access to
these targeted communities, represent very high-leverage marketing channels that
provide unique benefits for all parties.
The Company is also moving within the traditional channels of advertising,
public relations and promotions to generate awareness, and thus membership in
CCN. As membership continues to grow, the Company believes that its ability to
close on revenue opportunities -- ranging from site sponsorships to advertising
to member/donor acquisition fees to retail sales and transaction fees -- will
increase.
COMPETITION
To the extent the Company engages in sales of advertising space on CCN,
the Company will compete with print and direct mail, radio and television
advertising, as well as several hundreds of thousands of other websites.
The Company's retail sales services compete against a variety of Internet
and traditional buying services and stores, some of which offer the same
products and services as the Company does on CCN. In the Internet-based market,
the Company competes for attention with other entities which maintain similar
commercial websites. The Company also competes indirectly against affinity
programs offered by several companies.
The market for Internet-based commercial services is new and competition
among commercial websites is expected to increase significantly in the future.
Potential competitors could include, but are not limited to, information service
providers and manufacturers, producers and distributors of products and
services. In order to compete successfully as an Internet commerce entity, the
Company must significantly increase awareness of the Company and its brand name,
effectively market its services and successfully differentiate its website.
In addition, as the Company introduces new services, it will compete
directly with a greater number of companies. Such companies may already maintain
or may introduce websites which compete with those of the Company. There can be
no assurance that the Company can continue to compete successfully against
current or future competitors, nor can there be any assurance that competitive
pressures faced by the Company will not result in increased marketing costs,
decreased Internet traffic or loss of market share or otherwise will not
materially adversely affect its business, results of operations and financial
condition.
The Company believes that the principal competitive factors affecting the
market for Internet-based marketing services are the speed and quality of
service execution, the size and effectiveness and quality of products and
services of the participating manufacturers, producers and distributors,
competitive pricing, successful marketing and establishment of national brand
name recognition, positioning itself as a leading Internet-based marketing
service, the volume and quality of traffic to and purchase requests from a
website and the ability to introduce new services in a timely and cost-effective
manner. Although the Company believes that it currently competes favorably with
respect to such factors, there can be no assurance that the Company will be able
to compete successfully against current or future competitors with respect to
any of these factors.
The Company's known competitors include CHRISTIANITY ONLINE (COL), an
aggregated website operated by Christianity Today, Inc. The Company has
developed Christianity.Net, another website operated by Christianity Today, Inc.
which is available through CCN pursuant to an agreement between the Company and
Christianity Today, Inc. Other known competitors include GOSPEL COMMUNICATIONS
NETWORK (GCN), a website operated by a division of
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Gospel Films, predominantly supported through donations; GOSHEN, a website
operated by Media Management, which provides limited news services and
advertising space; ICRN (INVOLVED CHRISTIAN RADIO NETWORK BY DOMAIN), a website
operated by The Domain Group, a for-profit international marketing and fund
raising organization currently operating an Internet radio service geared to the
Christian community; LIGHTSOURCE ONLINE (BY KMA), a website operated by Killian,
McCabe and Associates (KMA), a for-profit marketing and fund raising
organization currently operating an Internet radio service geared to the
Christian community; and GLOBAL CHRISTIAN NETWORK, a website operated by Dynamic
Systems International, a for-profit Internet/Intranet client/server software
development Company.
OPERATIONS AND TECHNOLOGY
The Company believes that its future success is dependent on its ability
to improve continuously the speed and reliability of CCN, enhance communications
functionality with its consumers and maintain the highest level of information
privacy and transaction security. Continuous system enhancements are primarily
intended to accommodate increased traffic across the Company's website, improve
the speed with which purchase requests are processed and heighten website
security, which will be increasingly important as the Company offers new
services. System enhancements entail the implementation of sophisticated new
technology and system processes and there can be no assurance that such
continuous enhancements may not result in unanticipated system disruptions, such
as power loss and telecommunications failures. The Company's primary servers are
located offsite and maintained by various unaffiliated third parties. In
addition the Company maintains certain servers at its corporate headquarters in
Chantilly, Virginia. The Company's servers are vulnerable to interruption by
damage from fire, hurricane, power loss, telecommunications failure and other
events beyond the Company's control. The Company maintains business interruption
insurance for the actual loss of business income sustained due to the suspension
of its operations over a twelve month period as a result of direct physical loss
of or damage to property at the Company's offices. However, in the event of a
prolonged interruption, it is probable that this business interruption insurance
will not be sufficient to fully compensate the Company. In the event that the
Company experiences significant system disruptions, the Company's business,
results of operations or financial condition could be materially adversely
affected.
The Company's services also may be vulnerable to break-ins and similar
disruptive problems caused by Internet users. Further, weaknesses in the
Internet may compromise the security of confidential electronic information
exchanged across the Internet. This includes, but is not limited to, the
security of the physical network and security of the physical machines used for
the information transfer. Any such flaws in the Internet or the end-user
environment, or weaknesses or vulnerabilities in the Company's services or the
licensed technology incorporated in such service, would jeopardize the
confidential nature of information transmitted over the Internet and could
require the Company to expend significant financial and human resources to
protect against future breaches, if any, in order to alleviate or mitigate
problems caused by such security breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company, or third party
contractors, involve the storage and transmission of proprietary information
(such as personal financial information or credit card numbers), security
breaches could expose the Company to a risk of financial loss or litigation or
other liabilities. Any such occurrence could reduce consumer satisfaction in the
Company's services and could have a material adverse effect on the Company's
business, results of operations or financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon its
proprietary systems and technology. While the Company relies on trademark, trade
secret and copyright laws to protect its proprietary rights, the Company
believes that the technical and creative skills of its personnel, continued
development of its proprietary systems and technology, brand name recognition
and reliable website maintenance are more essential in establishing and
maintaining a leadership position. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's services or to obtain and use information that the Company regards as
proprietary. Policing unauthorized use of the Company's proprietary rights is
difficult. In addition, litigation may be necessary in the future to enforce or
protect the Company's intellectual property rights or to defend
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against claims of infringement or invalidity. Misappropriation of the Company's
intellectual property or potential litigation could have a material adverse
effect on the Company's business, results of operations or financial condition.
The Company has filed applications to register a number of its trademarks
and service marks, including the name "Christian Community Network" and the
related "Rope Cross" logo, but no federal registrations have been granted for
any names or marks used by the Company. The Company also asserts common law
protection on certain names and marks that it has used in connection with its
business activities. There can be no assurance that the Company will be able to
secure registration for any of its marks. The Company has also invested
resources in purchasing Internet domain names for existing and potential
Internet sites from the registered owners of such names. There is a substantial
degree of uncertainty concerning the application of federal trademark law to the
protection of Internet domain names, and there can be no assurance that the
Company will be entitled to use such domain names.
CHRISTIAN STATEMENT OF FAITH; THE COMPANY'S POLICY
Article XIII of the Company's Bylaws provides that the Company is a
"religious corporation." To this end, and in order to best identify with and
service its selected Christian market niche and to generate its Internet product
which is heavily content laden, the Company's policy is generally to include
among its officers and directors unconditionally, and employees, where a bona-
fide occupation qualification exists, only persons who, upon request, subscribe
to the Company's Christian Statement of Faith as follows:
"1. We believe that there is one God, eternally existing in three persons: the
Father, the Son, and the Holy Spirit.
2. We believe that the Bible is God's written revelation to man and that it
is verbally inspired, authoritative, and without error in the original
manuscripts.
3. We believe in the deity of Jesus Christ, His virgin birth, sinless life,
miracles, death on the cross to provide for our redemption, bodily
resurrection and ascension into heaven, present ministry of intercession
for us, and His return to earth in power and glory.
4. We believe in the personality and deity of the Holy Spirit, that He
performs the miracle of the new birth in an unbeliever and indwells
believers, enabling them to live a godly life.
5. We believe that man was created in the image of God, but because of sin,
was alienated from God. That alienation can be removed only by accepting
through faith, God's gift of salvation which was made possible by Christ's
death."
In order to implement the Christian Statement of Faith, the Company
intends generally to act in accordance with the following policy, as stated in
its Bylaws:
"The Corporation shall:
1. Actively seek to market the services of the [C]orporation to those
persons, entities, and agencies which are actively involved in propagating
a pattern of beliefs and actions consistent with the tenets of the
Statement of Faith. Nothing herein shall be construed to prohibit
marketing such services to other persons, entities, or agencies except as
specifically set forth in the prohibitions or corporate action set forth
below.
2. To the extent permitted by law, expend from the revenues of the
[C]orporation such sums as are deemed prudent by the Board of Directors to
support, encourage, or sustain persons or entities which in the judgment
of the Board of Directors are expected to make significant efforts to
propagate the Gospel of Jesus Christ in any manner not in conflict with
the Statement of Faith. Such expenditures may be made without regard to
the tax status or nonprofit status of the recipient. It is expected that
the expenditures paid out under the provisions of this paragraph shall
approximate ten percent (10%) of the amount that would otherwise be the
net profits of the [C]orporation for the accounting period.
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The Corporation shall not:
1. Take any position publicly or privately that denies or conflicts with the
tenets of the Statement of Faith.
2. Elect, qualify or permit to serve in office as a [d]irector or officer to
the [C]orporation any person who has not without reservation subscribed to
the Statement of Faith as being true, accurate and correct or who having
so subscribed has either publicly or privately recanted from a particular
of the Statement of Faith or who has publicly made statements or taken
actions without repentance which the Board of Directors finds to be in
clear conflict with the Statement of Faith.
3. Hire or continue to employ any employee in any position in which, in the
sole discretion of the Corporation, subscription to the Statement of Faith
is a bona-fide occupational qualification reasonably necessary to the
normal operations of the Corporation's activities, where such employee
refuses, upon request, to subscribe to the Statement of Faith or having so
subscribed has either publicly or privately recanted from any particular
of the Statement of Faith or has publicly made statements or taken actions
without repentance which the Board of Directors finds to be in clear
conflict with the Statement of Faith. Because the Scriptures teach that
bad company corrupts good morals and that a little leaven affects the
whole lump, it is important to the Corporation's purposes that it be
protected from the influence of persons not in agreement with the
Statement of Faith at every level of employment.
4. Permit any party to utilize the name, goodwill, trade marks, or trade
names of the [C]orporation in any course of action or dealings which the
[C]orporation itself is herein prohibited from taking."
"In addition to any other appropriate legend, prior to its issuance each
and every share certificate to be issued by this Corporation shall be inscribed
with a legend that states:
'This Corporation is a religious corporation. All shares of this
[C]orporation are subject to the terms as set forth in the BYLAWS of
the corporation which restricts the amendment or deletion of that
section of the BYLAWS which prescribes a corporate Statement of
Faith in the LORD JESUS CHRIST and directs or prohibits certain
corporate actions on the basis of the Statement of Faith.' "
The Bylaws also state:
"No amendment to this Article XIII and no other superseding or conflicting
provision of these BYLAWS, the ARTICLES OF INCORPORATION, or any
shareholder agreement shall be adopted unless the result of the count of
votes approving the amendment is 90% affirmative without dissension and a
minimum of two-thirds of the shares outstanding are represented and voted.
Such vote must be made at an actual special meeting of the shareholders
called by written notice delivered to each shareholder not less than 10
nor more than 60 days prior to the date of the meeting. Time is of the
essence as to this notice provision and no extension of the time of the
meeting or adjournment of the meeting to a date outside the notice period
shall be permitted except upon the affirmative vote of not less than 70
percent of the shares then issued and outstanding."
GOVERNMENT REGULATION
As the Company introduces new services, the Company may need to comply
with additional licensing regulations and regulatory requirements. Becoming
licensed may be an expensive and time-consuming process which could divert the
efforts of management. In the event that the Company does not successfully
become licensed under applicable state laws or otherwise comply with regulations
necessitated by changes in current regulations or the introduction of new
services, the Company's business, results of operations or financial condition
be materially adversely affected.
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There are currently few laws or regulations directly applicable to access
to or commerce on the Internet. However, because of the increasingly popularity
and use of the Internet, it is likely that a number of laws and regulations may
be adopted at the local, state, national or international levels with respect to
commerce over the Internet, potentially covering issues such as pricing of
services and products, advertising, user privacy and expression, intellectual
property, information security, anti-competitive practices or the convergence of
traditional distribution channels with Internet commerce. In addition, tax
authorities in a number of states are currently reviewing the appropriate tax
treatment of companies engaged in Internet commerce. New state tax regulations
may subject the Company to additional state sales and income taxes. The adoption
of any such laws or regulations may decrease the growth of Internet usage or the
acceptance of Internet commerce which could, in turn, decrease the demand for
the Company's services and increase the Company's costs or otherwise have a
material adverse effect on the Company's business, results of operations or
financial condition.
EMPLOYEES
The Company currently has 30 employees, including its recently appointed
Chief Executive Officer and President William M. Parker. Executive officers are
Dane B. West, Vice President Business Development and Sales, William H. Bowers,
Chief Technical Officer, and Gary A. Struzik, Chief Financial Officer and
Secretary. The Company also has eight engineering employees, five marketing and
sales employees, eleven employees engaged in product management, and two in
administration. No employees are represented by a union and no work stoppages
have occurred.
PROPERTY AND FACILITIES
The Company currently maintains its executive offices in approximately
5,000 square feet of space at 4501 Daly Drive, Chantilly, Virginia pursuant to a
three year lease agreement terminating in September, 1998 with an unaffiliated
third party at an annual rental of approximately of $68,700. At present, the
Company considers this space to be sufficient for its corporate headquarters.
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MANAGEMENT
The following table sets forth certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
James G. Buick 65 Chairman of the Board of Directors
William M. Parker(1) 44 Chief Executive Officer and President and director
Dane B. West 43 Vice President Business Development and Sales and director
William H. Bowers 38 Chief Technical Officer and director
Gary A. Struzik 42 Chief Financial Officer and Secretary
Robert C. Varney, Ph.D. 53 Vice Chairman of the Board of Directors
Bruce E. Edgington(1) 40 director
John J. Meindl, Jr.(1) 41 director
Clay T. Whitehead(2) 59 director
Earl E. Gjelde(2) 53 director
W.R. 'Max' Carey(2) 50 director
</TABLE>
- -----------
(1) Members of Compensation Committee
(2) Members of Audit Committee
JAMES G. BUICK has been Chairman of the Board of Directors since January
15, 1998, and a director of the Company since April 1997. Since 1993 he has been
self employed as a management consultant in the area of business strategic long
range financial planning. From 1984 to 1993, he was President and Chief
Executive Officer of the Zondervan Corporation, a firm engaged in the
distribution of Bibles, books, computer software, and religious gifts. He
currently is on the Board of Directors of Spartan Stores, a firm engaged in food
wholesale and operations, and is Chairman of the Board of the Dove Foundation, a
not-for-profit foundation engaged in the creation, promotion, production and
distribution of wholesome family entertainment.
WILLIAM M. PARKER, has been Chief Executive Officer and President and a
director of the Company since April 1998. From 1996 through March 1998, Mr.
Parker was Executive Vice President and Manager of the Information Systems
Division of CACI International Inc., an international information technology
product and services company. From 1992 to 1996, he was Executive Vice President
and Director of Business Development for CACI International Inc. Mr. Parker
received a B.S. degree from the U.S. Naval Academy.
ROBERT C. VARNEY, PH.D. has been Vice Chairman of the Board of Directors
since April 1998 and a director of the Company and its predecessor entities
since July 1995. From July 1995 to January of 1998, Dr. Varney also served as
Chairman of the Board of Directors of the Company. From July 1995 to April of
1998, Dr. Varney also served as Chief Executive Officer of the Company. From
1993 to 1995, he managed his personal real estate holdings. Dr. Varney was
Chairman and Chief Executive Officer of International Telesystems Corporation
("ITC"), a firm engaged in outbound call center automation, from 1985 through
1993. Dr. Varney received a B.S. degree from the University of Rochester in
June, 1966 and an M.S. and a Ph.D. degree in Computer Science from Pennsylvania
State University in 1969 and 1971, respectively.
DANE B. WEST has been Vice President of Business Development and Sales
since May of 1998 and a Senior Executive and a director of the Company and its
predecessor entities since the Company's inception in 1993. From January 1992
through April, 1993, Mr. West was a student at the University of Virginia. Mr.
West is an ordained minister with 15 years of ministry leadership experience. As
a pastor, he recruited, trained and managed a volunteer staff of more than 300
persons. He has completed doctoral studies in educational administration at the
University of Virginia. He received a B.A. in Biblical Studies from The
Washington Bible College in 1978, and an M.A. in Christian Education from Talbot
Theological Seminary in 1981.
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WILLIAM H. BOWERS has been the Chief Operating Officer and a director of
the Company and its predecessor entities since the Company's inception. Mr.
Bowers was a Branch Chief of the Central Intelligence Agency from April, 1990
until May, 1993, where his responsibilities included providing engineering and
technical support services. Mr. Bowers received a B.S. degree in Engineering
from Virginia Polytechnic Institute in 1983.
GARY A. STRUZIK has been the Chief Financial Officer and Secretary of the
Company since April 1997 and was Vice President Finance and Administration of
the Company's predecessor entities from February 1996 until April 1997. Mr.
Struzik was Director of Accounting for Loral Defense Systems (formally Unisys
Defense Systems) from February 1995 through February 1996 and Director of
Accounting for Unisys Defense Systems from October 1987 through February 1995,
where his responsibilities included financial statement preparation, external
audit liaison, policy and procedures. Mr. Struzik received a B.A. degree in
Economics from the State University of New York at Oswego in May 1977 and an
M.B.A. from Chapman College in October 1984.
BRUCE E. EDGINGTON has been director of the Company and its predecessors
since November 1995. From 1979 through 1988, Mr. Edgington was a registered
representative with Johnston Lemon & Co., a securities broker-dealer, where his
responsibilities included the management of retail securities accounts and
administration. In 1988 he founded and continues to be an officer, director and
shareholder of DiBiasio & Edgington, a firm engaged in providing software to
investment firms and money managers.
JOHN J. MEINDL, JR. has been director of the Company since April 1997, has
been self employed as a management consultant to medium and large firms in the
area of electronic records management, Internet strategies and business
reengineering since 1996. From 1993 through 1996 Mr. Meindl was Chief Operating
Officer of OTG Software, Inc., a firm engaged in the development of electronic
imaging and optical disk storage management software. Since 1988, he has been
Chief Executive Officer of GeneSys Data Technologies, Inc., a firm engaged in
providing software and services in the area of electronic records management.
GeneSys Data Technologies, Inc. has been dormant and inactive since 1992 but was
not liquidated because of its pursuit of a claim which was successfully awarded
in 1996. In connection with winding up the affairs of GeneSys Data Technologies,
Inc. GeneSys Data Technologies, Inc. filed for bankruptcy protection in June
1996 (Case No. 96-5-50118-SD, U.S. Bankruptcy Court Baltimore, Maryland
District) and as of the date hereof has not been discharged.
CLAY T. WHITEHEAD, has been a director of the Company since April 1997
and, since 1987, has been the President of Clay Whitehead Associates, a
consulting firm in the areas of strategic planning and business development
concentrating on the telecommunications and media industries. Mr. Whitehead
holds a B.S. and M.S. in Electrical Engineering and a Ph.D. in Management, all
from the Massachusetts Institute of Technology and from 1969 through 1974 held
various federal government positions, including Director of the U.S. Office of
Telecommunications Policy.
EARL E. GJELDE has been a director of the Company since April 1997. From
1989 through 1993, he was Vice President, Chemical Waste Management, Inc. and
from 1991 to 1993 was Vice President, Waste Management Inc. (currently WMX
Technologies, Inc.). Since 1991, Mr. Gjelde has been Managing Director, Summit
Group International, Ltd., an energy and natural resource consulting firm with
Internet based security controlled document systems and Managing Director,
Summit Energy Group, Ltd., an energy development company and since 1996, a
partner in Pipeline Power Partners, LP, a natural gas services company. From
1980 through 1989, Mr. Gjelde held various federal government positions
including Under Secretary and Chief Operating Officer of the U.S. Department of
Interior from 1985 through 1989 and Special Assistant to the Secretary, Chief
Operating Officer, U.S. Department of Energy from 1982 through 1985. He is a
member of the Board of Directors of The United States Energy Association, The
World Energy Congress, the National Wilderness Institute, Allied Technologies
Group, Inc., and publicly held Electrosource, Inc.
W.R. 'MAX' CAREY has been a director of the Company since June 1997. Since
1981, he has been Chairman and Chief Executive Officer of Corporate Resource
Development, Inc., a sales and marketing consulting and training firm based in
Atlanta. He currently is also a member of the Board of Directors of Outback
Steakhouse,
36
<PAGE> 37
Inc., a restaurant franchiser and ROMAC International, a leading specialty
staffing services firm, both public companies.
The Board of Directors at DIDAX INC. is currently in the process of
considering an additional Board member for appointment in the third or fourth
quarter of 1998. Such appointment, if any, will be rendered in a manner
consistent with the Company's By-Laws and will be announced at the time of
appointment.
Each director serves until the next annual meeting of shareholders and the
election and qualification of their successors. In February 1997, the Company
agreed that an advisor to the Company's Board of Directors appointed by Barron
Chase Securities, Inc., would be invited to attend all meetings of the Board of
Directors. Executive officers are elected by the Board of Directors annually and
serve at the discretion of the Board.
EMPLOYMENT AGREEMENTS
Pursuant to the resignation of Robert C. Varney, Ph.D., as the Company's
Chief Executive Officer, the Company entered into a Conclusion of Employment
Agreement with Dr. Varney, dated February 27, 1998, Under the terms of this
Conclusion of Employment Agreement, Dr. Varney maintains the right to acquire
194,986 shares of the Company's Common Stock granted to him during the course of
his employment with the Company, at exercise prices ranging from $2.00 to $5.00
per share. Dr. Varney also has full rights to continue, at the Company's
expense, health care benefits comparable to group coverage provided by DIDAX
from time to time to its employees. This benefit coverage will cease upon the
date Dr. Varney is eligible for coverage by a succeeding employer, or under
other health care coverage such as medicare. Upon the conclusion of his
employment with the Company of $6,250 per month, Dr. Varney shall continue to
receive as severance payment his salary for an additional eighteen (18) months.
In addition, both Dr. Varney and the Company waived and released each other of
and from any and all claims and causes of action for damages or other relief
that either Dr. Varney or the Company may have against the other (or their
personal representatives, agents, assigns, attorneys, and their officers,
directors, employees, agents or representatives) based on Dr. Varney's
employment or other association with the Company, the conclusion of employment,
or any event or transaction that occurred before February 27, 1998.
In March, 1998, the Company entered into employment agreements with
William M. Parker, Dane B. West, William H. Bowers and Gary A. Struzik. These
employment agreements, which may be terminated by the employee or the Company
upon thirty days prior written notice, provide for annual base salaries of
$115,000 to Mr. Parker and $90,000 each for Messrs. West, Bowers and Struzik,
with incremental increases based on meeting revenue objectives as determined by
the Board of Directors, resulting in a maximum of salary of $130,000, $120,000,
$120,000, and $110,000 for Messrs. Parker, West, Bowers, and Struzik
respectively, when quarterly revenues exceed $400,000. The agreement with each
of Messrs. Parker, Bowers, West and Struzik provides that, if his employment is
terminated by the Company, then the employee is entitled to an additional six
(6) months of severance pay, health and group life coverage. Further, pursuant
to the employment agreements, each of Messrs. Parker, West, Bowers and Struzik
have agreed during the term of his respective employment with the Company and
for six months thereafter not to compete with the Company. For Messrs. West,
Bowers and Struzik, these employment agreements supersede a previous June 1997
set of employment agreements.
In addition to their employment agreements, executive officers of the
Company may participate in the 1997 and 1998 Stock Option Plans. The Company
does not currently have any compensation plans or similar arrangements under
which an executive officer is entitled to benefits, except group life, a Company
401K plan, and a medical and dental insurance plan.
EXECUTIVE OFFICER COMPENSATION
No person employed by the Company received salary and bonus exceeding in
the aggregate $100,000 during the fiscal years 1995, 1996 and 1997. The
following Summary Compensation Table sets forth all compensation awarded to,
earned by or paid for services rendered to the Company in all capacities during
1996 and 1997 by the Company's Chief Executive Officer.
37
<PAGE> 38
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- ------
<S> <C> <C> <C> <C> <C> <C>
Name and Principal Position Year Salary($) Bonus($) Other Annual Securities All Other
Compensation Underlying Compensation
($)(1) Options/ ($) (3)
SARs (2)
Robert C. Varney, Ph.D., 1996 38,203 0 4,271 162,836 140
Chief Executive Officer(4) 1997 17,349 0 5,845 21,807 390
</TABLE>
- --------------------------------------------------------------------------------
(1) Other Annual Compensation represents medical insurance premiums paid by
the Company for Dr. Varney.
(2) See "OPTION GRANTS IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(3) All Other Compensation represents life insurance premiums paid by the
Company for Dr. Varney.
(4) Dr. Varney resigned as CEO of the Company effective April 1998, at which
time William Parker became Chief Executive Officer and President of the
Company.
The following table sets forth information concerning stock option grants made
during 1997 to the executive officer of the Company named in the Summary
Compensation Table, and the fiscal year-end value of unexercised options. No
options were exercised during 1997 by Dr. Varney or any other director or
officer of the Company.
OPTION GRANTS TABLE
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Percent of
Underlying Total Options
Options Granted Exercise
------- to Employees or Base Price
Name Granted (1) in 1997 Per Share ($) Expiration Date
---- ----------- ------- ------------- ---------------
<S> <C> <C> <C> <C>
Robert C. Varney, Ph.D. (2) 5,657 2.6% $4.00 September 25, 2005
8,075 3.8% $5.00 March 31, 2007
8,075 3.8% $5.00 June 30, 2007
</TABLE>
- --------------------------------------------------------------------------------
(1) All options are non-qualified options.
(2) Dr. Varney resigned as CEO of the Company effective April 1998, at which
time William Parker became Chief Executive Officer and President of the
Company
1998 STOCK OPTION PLAN
Effective as of April 6, 1998, the Board of Directors adopted, and on
April 29, 1998, the stockholders approved, the DIDAX INC. 1998 Stock Option Plan
(the "1998 Stock Option Plan"). The purpose of the 1998 Stock Option Plan is to
advance the interests of the Company by providing an opportunity to its
directors, selected key employees and consultants to purchase shares of the
Common Stock of the Company. By encouraging stock ownership, the Company seeks
to attract, retain and motivate directors, key employees, and consultants
including ministry partners. The 1998 Stock Option Plan will be administered by
the Compensation Committee of the Board of Directors or by the Board of
Directors as a whole.
The shares that may be purchased (through the exercise of options) under
the 1998 Stock Option Plan shall not exceed in the aggregate 400,000 shares. If
any stock options granted under the 1998 Stock Option Plan shall terminate,
expire or be canceled as to any Shares, new stock options may thereafter be
granted covering such shares.
38
<PAGE> 39
In addition, any shares purchased under this 1998 Stock Option Plan subsequently
repurchased by the Company pursuant to the terms hereof may again be granted
under the 1998 Stock Option Plan. The shares issued upon exercise of stock
options under this 1998 Stock Option Plan may, in whole or in part, be either
authorized but unissued shares or issued shares reacquired by the Company.
The Board of Directors or the Compensation Committee will administer the
1998 Stock Option Plan as delegated by the Board. The Board of Directors will
have sole authority to select the participants that will be granted stock
options, based on its own determination and the recommendations of the
Compensation Committee and Company management with respect to the contributions
of each participant to the success of the Company. No single participant may
receive options to purchase more than the total number of shares authorized for
issuance under the 1998 Stock Option Plan. The Compensation Committee will make
recommendations to the Board for approval of actions including, but not limited
to determining the nature, extent, timing, exercise price, vesting and duration
of stock options to the termination of the 1998 Stock Option Plan or
acceleration of stock option vesting. The Board of Directors independently, or
at the advice of the Compensation Committee, also has discretion to prescribe
all other terms and conditions consistent with the 1998 Stock Option Plan, to
interpret the 1998 Stock Option Plan, to establish any rules or regulations
relating to the 1998 Plan that it determines to be appropriate, and to make any
other; determination that it believes necessary or advisable for the proper
administration of the 1998 Stock Option Plan.
The Compensation Committee, upon approval of the Board of Directors, may
grant nonqualified stock options or incentive stock options to purchase shares
of Common Stock. The grant of stock options will be evidenced by Board
resolutions documenting their approval, and option agreements containing such
terms and provisions as are determined and approved by the Board of Directors,
including, but not limited to, the term of the stock option, vesting of the
stock option, and the exercise price of the stock option. The stock option
exercise price may be paid in cash, or, at the Company's option, in shares of
Common Stock.
Subject to the expiration and termination provisions of individual option
agreements, qualified incentive stock options expire ten years after the date of
grant. The expiration and termination periods of nonqualified stock options will
be determined by the Board of Directors based on recommendation of the
Compensation Committee and set forth in the individual stock option agreements.
Subject to the expiration and termination provisions of individual option
agreements, if a participant dies or becomes disabled, all vested stock options
may be exercised at any time within one year (or the remaining term of the stock
option, if less). If a participant ceases to be a Company employee for any other
reason, other than for cause, he or she must exercise any vested stock options
within thirty days (or the remaining term of the stock option, if less). The
Compensation Committee may recommend to extend nonqualified option exercise
dates on a cases by case basis, subject to Board approval.
The Board of Directors may amend or discontinue the 1998 Stock Option Plan
at any time, subject to certain restrictions set forth in the 1998 Stock Option
Plan, including the ability to revise the number of shares reserved for issuance
thereunder. Except in limited circumstances, no amendment or discontinuance may
adversely affect any previously granted stock option award without the consent
of the recipient thereof.
1997 STOCK OPTION PLAN
In April 1997, the Board of Directors adopted, and the stockholders
approved the Company's 1997 Stock Option Plan (the "1997 Stock Option Plan"),
The 1997 Stock Option Plan provides for the issuance of up to 2,057,937 shares
of the Company's Common Stock. As of the date herein, options to purchase
1,955,916 shares of the Company's Common Stock were granted and will be
outstanding under the 1997 Stock Option Plan of which options to purchase
889,414 shares are exercisable. If any options granted under the 1997 Stock
Option Plan shall terminate, expire or be canceled as to any shares, new options
may thereafter be granted covering such shares. In addition, any shares
purchased under this 1997 Stock Option Plan subsequently repurchased by the
Company pursuant to the terms hereof may again be granted under the 1997 Stock
Option Plan. The shares issued upon exercise of options under the 1997 Stock
Option Plan may, in whole or in part, may be either authorized but unissued
shares or issued shares reacquired by the Company. The purpose of the 1997 Stock
Option Plan is to advance the
39
<PAGE> 40
interests of the Company by providing an opportunity to its directors, employees
and consultants, including ministry partners, to purchase shares of the
Company's Common Stock. By encouraging stock ownership, the Company seeks to
attract, retain and motivate directors, employees and consultants. The 1997
Stock Option Plan provides for the grant of (i) incentive stock options
("Incentive Options") as described in Section 422A of the Internal Revenue Code
of 1986, as amended (the "Code"); (ii) nonqualified stock options ("Nonqualified
Options," and, together with the Incentive Options, the "Options"); and (iii)
rights to purchase shares of Common Stock ("Restricted Stock") of the Company
pursuant to restricted stock agreements and subscription agreements. The Option
Plan is administered by the Board of Directors, or at its discretion, by a
committee which is appointed by the Board to perform such function. Under the
terms of the 1997 Stock Option Plan, the exercise price for Incentive Options
may not be less than the fair market value of the underlying stock at the time
the Incentive Option is granted.
The 1997 Stock Option Plan has a provision which limits the number of
shares of the Company's Common Stock for which options may be granted to any
individual during any year. With this provision, options granted under the 1997
Stock Option Plan qualify as performance-based compensation for purposes of
Section 162(m) of the Code and the regulation thereunder, and the Company will
be entitled to deduct the compensation paid to certain executives pursuant to
the 1997 Stock Option Plan, notwithstanding the deduction limit contained in
Section 162(m).
Under the 1997 Stock Option Plan, the price payable upon exercise of
options may be paid in cash or check acceptable to the Company, or by any other
consideration that the Board deems acceptable. The exercise price may also be
paid in shares of the Company's Common Stock, duly owned by the optionee having
a fair market value equal to the option price on the date of exercise.
In April 1998, the Board of Directors resolved to amend the 1997 Stock
Option Plan. The substance of this change was to amend the actual administration
of the plan by making all options subject to the approval of the Board of
Directors, and in the case of a merger or a similar reorganization that the
Company does not survive, to cause only non vested stock options to be subject
to termination should the surviving entity not assume the obligation of all
granted options.
DIRECTOR COMPENSATION
In April 1997, the Company's (i) non-employee directors, other than Bruce
E. Edgington and (ii) an advisor to the Company's Board appointed by Barron
Chase Securities, Inc. (the "Advisor") each were granted under the Company's
1997 Stock Option Plan options to acquire an aggregate of 37,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share, exercisable for
the following number of shares for a period of five years subsequent to the
satisfaction of the following conditions precedent (collectively the
"Non-Employee Director Options):
<TABLE>
<CAPTION>
NUMBER OF SHARES CONDITIONS PRECEDENT TO EXERCISE
---------------- --------------------------------
<S> <C>
1,000 shares per Board of Director Attendance at Board meeting
meeting for the first three years as a
member of the Board up to a maximum
of 4,000 shares per year.
5,000 shares Closing of the Company's IPO.
5,000 shares CCN's use exceeding one million hits per day.
5,000 shares The Company's quarterly earnings per share equaling or exceeding $.05.
5,000 shares The Company's quarterly earnings per share equaling or exceeding $.10.
5,000 shares The Company's quarterly earnings per share equaling or exceeding $.15.
</TABLE>
As of the date hereof, non-employee directors excluding Bruce Edgington
and including the Advisor have the right to acquire an aggregate of 222,000
shares of the Company's common Stock pursuant to the Non-Employee Director
Options. In addition, non-employee directors receive reimbursement of reasonable
expenses incurred in attending Board meetings.
40
<PAGE> 41
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of the date hereof and as
adjusted to reflect the exercise of the Warrants and issuance of the Offered
Shares, by (i) each person who is known by the Company to own beneficially more
than five percent of the Company's Common Stock; (ii) each of the Company's
officers and directors; and (iii) all officers and directors as a group. No
assurance can be given as to the timing of exercise of the Warrants or whether
all or any of the Warrants will be exercised.
<TABLE>
<CAPTION>
BEFORE EXERCISE AND ISSUANCE AFTER EXERCISE AND ISSUANCE
---------------------------- ---------------------------
Amount and Approximate Approximate
Nature of Percentage of Percentage of
Name and Address Beneficial Outstanding Outstanding
of Beneficial Owner Ownership(1) Shares(2) Shares
- ------------------- ------------ --------- ------
<S> <C> <C> <C>
Bruce E. Edgington 444,782(3) 11.7% 6.3%
7857 Heritage Drive
Annandale, VA 22003
Robert C. Varney, Ph.D. 275,281(4) 7.1% 3.8%
4501 Daly Drive
Chantilly, VA 20151
Dane B. West 130,032(5) 3.5% 1.9%
4501 Daly Drive
Chantilly, VA 20151
William H. Bowers 124,417(6) 3.4% 1.8%
4501 Daly Drive
Chantilly, VA 20151
William M. Parker 120,000(7) 3.1% 1.7%
PO Box 307
Philomont, Virginia 20131
John J. Meindl, Jr. 91,000(8) 2.5% 1.3%
5 Old Tyler Court
Greenville, SC 29615
James G. Buick 16,000(9) .4% .2%
10081 East Rivershore Dr.
Alto, MI 49302
Clay T. Whitehead 15,000(10) .4% .2%
1320 Old Chain Bridge Rd.
McLean, VA 22101
Earl J. Gjelde 14,500(11) .4% .2%
42 Bristlecone Crt.
Keystone, CO 80435
William R. 'Max' Carey 10,000(12) .3% .1%
665 River Knoll Drive
Marietta. GA 30067
All officers and directors
as a group (11 persons) 1,269,037 30.0% 16.8%
</TABLE>
41
<PAGE> 42
(1) Unless otherwise noted, all persons named in the table have sole voting and
sole investment power with respect to all shares of Common Stock beneficially
owned by them, and no persons named in the table are acting as nominees for any
persons or are otherwise under the control of any person or group of persons. As
used herein, the term "beneficial ownership" with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as
consisting of sole or shared voting power (including the power to vote or direct
the vote) or sole or shared investment power (including the power to dispose or
direct the disposition) with respect to the security through any contract,
arrangement, understanding, relationship or otherwise, including a right to
acquire any such power during the next 60 days.
(2) Based upon 3,672,880 shares of Common Stock outstanding as of the date
hereof.
(3) Includes 117,282 shares of Common Stock issuable to Mr. Edgington upon
exercise of currently exercisable stock options.
(4) Includes 210,031 shares of Common Stock issuable to Dr. Varney upon
exercise of currently exercisable stock options, and 15,000 shares of
Common Stock issuable to Dr. Varney upon exercise of Purchase Warrants.
(5) Includes 40,031 shares of Common Stock issuable to Mr. West upon exercise
of currently exercisable stock options. Does not include 24,000 shares of
Common Stock owned by Mr. West's parents and Mr. West's spouse's parents,
over which Mr. West disclaims beneficial ownership.
(6) Includes 19,225 shares of Common Stock issuable to Mr. Bowers upon
exercise of currently exercisable stock options.
(7) Includes 114,000 shares of Common Stock issuable to Mr. Parker upon
exercise of currently exercisable stock options.
(8) Includes 11,000 shares of Common Stock issuable to Mr. Meindl upon
exercise of currently exercisable stock options, and 20,000 shares of
Common Stock issuable to Mr. Meindl upon exercise of Purchase Warrants.
(9) Includes 12,000 shares of Common Stock issuable to Mr. Buick upon exercise
of currently exercisable stock options.
(10) Includes 12,000 shares of Common Stock issuable to Mr. Whitehead upon
exercise of currently exercisable stock options.
(11) Includes 12,000 shares of Common Stock issuable to Mr. Gjelde upon
exercise of currently exercisable stock options.
(12) Represents 10,000 shares of Common Stock issuable to Mr. Carey upon
exercise of currently exercisable stock options. Does not include 17,145
shares of Common Stock issuable to Corporate Resource Development Inc.
upon exercise of currently exercisable Stock Options granted as part of
compensation to Mr. Carey's employer, for providing management consulting
services to the Company.
CERTAIN TRANSACTIONS
During 1996, Mr. Edgington and Dr. Varney, both directors of the Company,
advanced $212,000 to the Company to cover operating costs for certain periods,
which advances bear interest in the amount of 9.75% and were repaid from the
proceeds of the Company's private placement closed in February 1997.
Four separate promissory notes ("Officer Notes") aggregating $623,000
principal amount of debt owed by the Company to Dr. Varney ($201,000) and Mr.
Edgington ($422,000), the Chairman of the Company's Board of Directors and Chief
Executive Officer, and a director of the Company, respectively. The Officer
Notes bear interest at 9.75% per annum. The Officer Notes were issued on July
10, 1996, July 30, 1996, September 26, 1996 and October 30, 1996, and the
proceeds received by the Company from the issuance of the Officer Notes were
used for working capital. The Company satisfied the Officer Notes at the Closing
of the Company's IPO. In connection with
42
<PAGE> 43
the satisfaction of the Officer Notes, the Company issued to Dr. Varney and Mr.
Edgington, options to purchase up to 60,357 shares and 112,282 shares of the
Company's Common Stock, respectively, at a purchase price of $4.00 per share,
exercisable at any time and from time to time for a period commencing with the
satisfaction of the Officer Notes and for a period of eight years thereafter.
In January 1997, John G. Meindl Jr., a director of the Company purchased
from the Company Junior Notes in the aggregate principal amount of $300,000. The
Company satisfied the Junior Notes at the Closing of the Company's IPO. In
connection with the satisfaction of the Junior Notes, the Company issued 60,000
shares of Common Stock to Mr. Meindl.
In the first quarter of 1997, gofishnet borrowed $37,230 at an interest
rate of 7% from a former majority shareholder of gofishnet. Gofishnet borrowed
an additional $45,000 at an interest rate of 10% from the same source during the
third and fourth quarters of 1997. Gofishnet recognized $37,060, $1,752 and $382
interest expense for the year ended December 31, 1997 and the three months ended
March 31, 1998 and 1997, respectively in connection with these notes. The
$37,060 of interest expense includes $33,750 for the equivalent of 8,237 shares
of the Company's stock issued to the note holder in lieu of interest. Both notes
were due and repaid in full on April 1, 1998.
In August and September of 1997, the Company issued Promissory Notes for
the purpose of working capital, to Dr. Varney and Mr. Edgington in the aggregate
of $130,000 and $90,000 respectively, bearing 11.5% interest per annum. These
Promissory Notes were satisfied from the proceeds of the Company's IPO in
October 1997.
In October 1997, the Board of Directors approved the issuance of notes
receivable in the amount of $75,000 and $18,000 to Dane B. West and William H.
Bowers respectively. The Company is collecting interest on these notes
receivable through payroll deductions at the minimum federal statutory rate at
the time of issuance of 5.7%. The notes are due to be repaid to the Company on
October 31, 1999.
In February 1998, the Company entered into a thirty day cancelable
agreement with Corporate Resource Development Inc. ("Corporate Resource"), a
firm in which W. Max Carey, a director of the Company, is Chairman and Chief
Executive Officer, whereby Corporate Resource provided to the Company management
consulting services in consideration for an initial cash payment of $25,000 and
a monthly payment of $25,000, payable $12,500 in cash and options to purchase
5,715 shares of the Company's Common Stock at $2.185 per share. This agreement
was terminated as of May 31, 1998. The Company believes that the services
provided by Corporate Resource were provided at fair market value.
For the fiscal years ended December 31, 1997 and December 31,1996 and for
the three month period ended March 31, 1998, there were no other material
transactions between the Company and any of its officers and/or directors which
involved $60,000 or more.
Although the Company has no present intention to do so, it may in the
future enter into other transactions and agreements incident to its business
with its directors, officers, principal stockholders and other affiliates. The
Company intends for all such transactions and agreements to be on terms no less
favorable to the Company than those obtainable from unaffiliated third parties
on an arm's-length basis. In addition, the approval of a majority of the
company's directors will be required for any such transactions or agreements.
43
<PAGE> 44
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock, $.01
par value per share. As of the date of this Prospectus, 3,672,880 shares of
Common Stock are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of Common Stock, as
such, have no conversion, preemptive or other subscription rights, and, except
as noted herein, there are no redemption provisions applicable to the Common
Stock. All of the outstanding shares of Common Stock are, and the Shares, when
issued and paid for as set forth in this Prospectus, will be, fully paid and
nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
Offering, persons acquiring Common Stock in this Offering would have no right to
purchase additional shares, and, as a result, their percentage equity interest
in the Company would be reduced.
Pursuant to the Company's Bylaws, except for any matters which, pursuant
to Delaware corporate law (the "Corporate Law"), require a greater percentage
vote for approval, (including, for example certain mergers and consolidations
and the amendment of certain provisions of the Company's Bylaws), the holders
of majority of the issued and outstanding Common Stock entitled to vote, if
present in person or by proxy, are necessary and sufficient to constitute a
quorum for the transaction of business at meetings of the Company's
shareholders. Further, except as to any matter which, pursuant to Corporate
Law, requires a greater percentage vote for approval (including, for example,
certain mergers, consolidations, sales of substantially all of the assets, and
amendments of certain provisions of the charter and Bylaws, of the Company),
the affirmative vote of the holders of a majority of the Common Stock voted on
the matter (provided a quorum as aforesaid is present) is necessary and
sufficient to authorize, affirm or ratify any act or action except the election
of directors, which is by a plurality of the votes cast. See "BUSINESS -
Christian Statement of Faith: the Company's Policy."
The holders of Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of Common
Stock can elect all of the directors to be elected in any election. In such
event, the holders of the remaining shares of Common Stock would not be able to
elect any directors. The Board of Directors is empowered to fill any vacancies
on the Board of Directors created by the resignation, death or removal of
directors.
In addition to voting at duly called meetings at which a quorum is present
in person or by proxy, Corporate Law, the Charter and the Company's Bylaws
provide that stockholders may take action without the holding of a meeting by
written consent or consents signed by the holders of that number of the
outstanding shares of the capital stock of the Company entitled to vote thereon
which would be required to take the subject action. Prompt notice of the taking
of any action without a meeting by less than unanimous consent of the
shareholders will be given to those stockholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
stockholders and to reduce the corporate expense associated with annual and
special meetings of stockholders. Pursuant to the rules and regulations of the
Commission, if stockholder action is taken by written consent, the Company will
be required to send to each stockholder entitled to vote on the matter acted on,
but whose consent was
44
<PAGE> 45
not solicited, an information statement containing information substantially
similar to that which would have been contained in a proxy statement.
As of the date herein, the Company's executive officers and directors will
beneficially own approximately 30.0% of the outstanding shares of Common Stock,
and may accordingly be in a position to significantly influence the voting
results of certain actions required or permitted to be taken by shareholders of
the Company, including the election of directors. As a result, the officers and
directors of the Company are in a position to control the outcome of
substantially all matters on which shareholders are entitled to vote, including
the election of directors.
PURCHASE WARRANTS
The following is a brief summary of certain provisions of the Purchase
Warrants, but such summary does not purport to be complete and is qualified in
all respects by reference to the actual text of the Purchase Warrant Agreement
between the Company and American Stock Transfer & Trust Company (the "Transfer
and Warrant Agent").
Exercise Price and Terms. Each Purchase Warrant entitles the holder
thereof to purchase, at any time through September 24, 2002, one share of Common
Stock at a price of $5.75 per share if exercised prior to September 24, 2002,
when the Purchase Warrants expire, subject to adjustment in accordance with the
anti-dilution and other provisions referred to below.
The holder of any Purchase Warrant may exercise such Purchase Warrant by
surrendering the certificate representing the Purchase Warrant to the Transfer
and Warrant Agent, with the subscription form on the reverse side of such
certificate properly completed and executed, together with payment of the
exercise price. The Purchase Warrants may be exercised at any time in whole or
in part at the applicable exercise price until close of business September 24,
2002. No fractional shares will be issued upon the exercise of the Purchase
Warrants.
The Purchase Warrants are subject to redemption by the Company, at the
option of the Company, at $0.25 per Purchase Warrant, upon 30 days prior written
notice, if the closing bid price, as reported on Nasdaq, or the closing sale
price, as reported on a national or regional securities exchange, as applicable,
of the shares of the Common Stock for 30 consecutive trading days ending within
ten days of the notice of redemption of the Purchase Warrants averages in excess
of $10.00 per share, subject to adjustment. The Company is required to maintain
an effective registration statement with respect to the Common Stock underlying
the Purchase Warrants prior to redemption of the Purchase Warrants. Prior to
September 24, 1998, the Purchase Warrants will not be redeemable by the Company
without the written consent of the Underwriter. In the event the Company
exercises the right to redeem the Purchase Warrants, such Purchase Warrants will
be exercisable until the close of business on the date for redemption fixed in
such notice. If any Purchase Warrant called for redemption is not exercised by
such time, it will cease to be exercisable and the holder will be entitled only
to the redemption price. Redemption of the Purchase Warrants could force the
Purchase Warrant holders either to (i) exercise the Purchase Warrants and pay
the exercise price thereof at a time when it may be less advantageous
economically to do so, or (ii) accept the redemption price in consideration for
cancellation of the Purchase Warrant, which could be substantially less than the
market value thereof at the time of redemption.
The exercise price of the Purchase Warrants bear no relation to any
objective criteria of value and should in no event be regarded as an indication
of any future market price of the Securities offered hereby.
The Company has authorized and reserved for issuance a sufficient number
of shares of Common Stock to accommodate the exercise of all Purchase Warrants
to be issued in this Offering. All shares of Common Stock issued upon exercise
of the Purchase Warrants, if exercised in accordance with their terms, will be
fully paid and non-assessable.
Adjustments. The exercise price and the number of shares of Common Stock
purchasable upon exercise of the Purchase Warrants are subject to adjustment
upon the occurrence of certain events, including stock dividends,
45
<PAGE> 46
stock splits, combinations or reclassification of the Common Stock, or sale by
the Company of shares of its Common Stock (or other securities convertible into
or exercisable for Common Stock) at a price per share or share equivalent below
the then-applicable exercise price of the Purchase Warrants or the then-current
market price of the Common Stock. Additionally, an adjustment would be made in
the case of a reclassification or exchange of Common Stock, consolidation or
merger of the Company with or into another corporation, or sale of all or
substantially all of the assets of the Company, in order to enable Purchase
Warrant holders to acquire the kind and number of shares of stock or other
securities or property receivable in such event by a holder of that number of
shares of Common Stock that would have been issued upon exercise of the Purchase
Warrant immediately prior to such event. No adjustments will be made until the
cumulative adjustments in the exercise price per share amount to $.05 or more.
No adjustment to the exercise price of the shares subject to the Purchase
Warrants will be made for dividends (other than stock dividends), if any paid on
the Common Stock or upon exercise of the Purchase Warrants, the Warrants or any
other options or warrants outstanding as of the date of this Prospectus.
Transfer, Exchange and Exercise. The Purchase Warrants are in registered
form and may be presented to the Transfer and Warrant Agent for transfer,
exchange or exercise at any time prior to their expiration date at close of
business on September 24, 2002, at which time the Purchase Warrants become
wholly void and of no value. The holder may sell the Purchase Warrants instead
of exercising them. There can be no assurance, however, that a market for the
Purchase Warrants will continue. If the Company is unable to qualify for sale in
particular states the Common Stock underlying the Purchase Warrants, holders of
the Purchase Warrants residing in such states and desiring to exercise the
Purchase Warrants will have no choice but to sell such Purchase Warrants or
allow them to expire. See "-- Transfer and Warrant Agent."
Warrant Holder Not a Stockholder. The Purchase Warrants do not confer upon
holders any voting or any other rights as stockholders of the Company.
There can be no assurance that a public trading market will be maintained
for the Purchase Warrants or Warrants. Although it has no obligation to do so,
he Underwriter may from time to time become a market-maker and otherwise effect
transactions in the Securities. The Underwriter, if it participates in the
market, may be a dominating influence in any market that might develop for any
of the Securities. The price and liquidity of the Securities may be
significantly affected by the degree, if any, of the Underwriter's participation
in the market. See "RISK FACTORS."
SHARES ELIGIBLE FOR FUTURE SALE
As of the date hereof, there are 8,943,796 shares of Common Stock
outstanding including an aggregate of (i) 1,955,916 shares of Common Stock
issuable upon the exercise of the Outstanding Stock Options, and (ii) an
aggregate of 3,315,000 shares issuable upon the exercise of the Purchase
Warrants and the Warrants. See "CAPITALIZATION." Of these, the 2,000,000 Shares
sold in the Company's IPO, the 2,875,000 shares underlying the Purchase
Warrants, and the maximum of 440,000 shares issuable upon full exercise of the
Warrants, will be freely tradable without restriction or further registration
under the Securities Act, except for any such shares purchased by an "affiliate"
of the Company. The 1,672,588 remaining shares currently outstanding as well
as the shares issuable upon exercise of the Outstanding Stock Options
(collectively, the "Current Shares") are "restricted securities" as defined in
Rule 144 and may not be sold without registration under the Securities Act
unless pursuant to an applicable exemption therefrom (collectively, the
"Restricted Shares").
In general, under Rule 144, a person (or persons whose shares are required
to be aggregated) who has satisfied a one-year holding period may, under certain
circumstances, sell within any three- month period a number of Restricted
Shares, and an "affiliate" of the Company may, under certain circumstances, sell
within any three-month period a number of shares, whether or not Restricted
Shares, which does not exceed the greater of 1% of the then-outstanding shares
of Common Stock or the average weekly trading volume during the four calendar
weeks prior to such sale a reported on Nasdaq, all exchanges and the
consolidated transaction reporting system. Rule 144 also permits the sale of
Restricted Shares without any quantity limitations by a person who is not an
"affiliate" of the Company, who has not been an "affiliate" of the Company for
at least three months immediately preceding the sale, and who has owned the
shares for at least two years. The holders of all of the Current Shares (other
than the holders
46
<PAGE> 47
of 431,395 shares) have agreed not to sell, transfer or otherwise dispose of any
shares of Common Stock until September 24, 1998 (51,550 shares), March 24, 1999
(2,675,559 shares), June 30, 1999 (130,292 shares) and September 24, 1999
(340,000 shares), or any longer period required by the laws of any state (the
"Lock-up").
The Company is unable to predict the effect that any subsequent sales of
the Company's securities by its existing shareholders, under Rule 144 or
otherwise, may have on the then-prevailing market price of the Common Stock,
although such sales could have a depressive effect on such market price. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
DIVIDENDS
The Company has not paid any dividends on its capital stock to date and
does not currently intend to pay cash dividends. The payment of dividends, if
any, will be contingent upon the Company's revenues and earnings, if any,
capital requirements and general financial condition at that time. The payment
of any dividends will be within the discretion of the Company's Board of
Directors. It is the current intention of the Board of Directors to retain all
earnings, if any, for use in the Company's business operations and, accordingly,
the Board does not anticipate paying any cash dividends in the foreseeable
future.
TRANSFER AND WARRANT AGENT
The transfer agent for the Common Stock and the warrant agent for the
Purchase Warrants is American Stock Transfer & Trust Company, New York, New
York.
PLAN OF DISTRIBUTION
The Company shall issue the Offered Shares upon the exercise of the
Warrants by the holders thereof. Warrants may be exercised by surrendering the
certificate evidencing such Warrant , with the form of election to purchase on
the reverse side of such certificate properly completed and executed, together
with payment of the exercise price and any transfer tax, to the Warrant Agent,
or in the case of the Common Stock Underwriter Warrants and the Warrant
Underwriter Warrants, to the Company. If less than all of the Warrants evidenced
by a warrant certificate are exercised, a new certificate will be issued for the
remaining number of Warrants. Payment of the exercise price may be made by cash,
bank draft or official bank or certified check equal to the exercise price. The
Company will be prevented, however, from issuing Common Stock upon exercise of
the Warrants in certain circumstances. See "Risk Factors - Continuing
Registration Required to Exercise Warrants."
LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of, any pending litigation
to which it is a party or of which its property is subject.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Berman Wolfe & Rennert, P.A. Miami, Florida. Gammon & Grange, P.C.
McLean, Virginia, has acted as counsel to the Company on matters relating to the
Company's use of religious criteria in employment practices. A member of the law
firm of Gammon & Grange, P.C. is the owner of 12,000 shares of the Company's
Common Stock.
47
<PAGE> 48
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1996, appearing in this Prospectus and Registration Statement have been
audited by Hoffman, Morrison & Fitzgerald, P.C., independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
With respect to the unaudited interim financial information included in
the Company's Quarterly Report on Form 10-QSB for the quarter ended March 31,
1998 included herein, Hoffman, Morrison & Fitzgerald, P.C., has applied limited
procedures in accordance with professional standards for a review of such
information. However, they did not audit and they do not express an opinion on
that interim financial information. Accordingly, the degree of reliance on their
reports on such information should be restricted in light of the limited nature
of the review procedures applied.
48
<PAGE> 49
DIDAX INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED FINANCIAL STATEMENTS
FROM MAY 12, 1993 (DATE OF INCEPTION)
TO MARCH 31, 1998
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
AND FOR THE THREE MONTHS
ENDED MARCH 31, 1997 AND 1998
(Unaudited)
WITH
INDEPENDENT AUDITORS' REPORT
C O N T E N T S
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets at December 31, 1996 and 1997 and F-3
March 31, 1998 (unaudited)
Statements of operations for the years ended December 31,
1996 and 1997, the three months ended March 31, 1997
and 1998 (unaudited) and cumulative from Inception
(May 12, 1993) to March 31, 1998 (unaudited) F-4
Statements of stockholders' equity (deficit)
from Inception (May 12, 1993) to December 31, 1997
and for the three months ended March 31, 1998 (unaudited) F-5
Statements of cash flows for the years ended December 31, 1996
and 1997, the three months ended March 31, 1997 and 1998
(unaudited) and cumulative from Inception (May 12, 1993) to
March 31, 1998 (unaudited) F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-18
</TABLE>
F-1
<PAGE> 50
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
DIDAX INC. AND SUBSIDIARY
Chantilly, Virginia
We have audited the accompanying consolidated balance sheets of DIDAX INC. AND
SUBSIDIARY (the"Company") (development stage companies) as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years then ended and for the period
May 12, 1993 (date of inception) to December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
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 consolidated financial position of DIDAX
INC. AND SUBSIDIARY as of December 31, 1996 and 1997, and the consolidated
results of operations and their consolidated cash flows for the years then
ended and for the period May 12, 1993 (date of inception) to December 31, 1997,
in conformity with generally accepted accounting principles.
As discussed in Note A to the financial statements, DIDAX INC. purchased all of
the outstanding shares of gofishnet.com for 130,292 shares of DIDAX INC.'s
common stock. DIDAX INC. accounted for the merger as a pooling-of-interests
based on the provisions set forth in Accounting Principles Board Opinion No.
16, "Business Combinations." The accompanying financial statements presented
have been restated to reflect the change in reporting entity.
HOFFMAN, MORRISON & FITZGERALD, P.C.
McLean, Virginia
June 19, 1998
F-2
<PAGE> 51
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1996 1997 1998
---------------- ----------------- ----------------
ASSETS (Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 51,126 $ 5,443,781 $ 4,802,845
Accounts receivable including unbilled of $24,978 and
$38,573 at December 31, 1997 and March 31, 1998, respectively 46,450 92,526 71,577
Prepaid expenses 10,800 16,865 10,492
Deferred costs, net 29,367 1,045 2,250
---------------- ----------------- ----------------
Total current assets 137,743 5,554,217 4,887,164
PROPERTY AND EQUIPMENT, net 178,253 139,766 224,524
OTHER ASSETS:
Notes receivable from officers 10,000 93,000 93,000
Deposits 9,803 250 -
Deferred costs, net 7,249 - -
---------------- ----------------- ----------------
Total other assets 27,052 93,250 93,000
---------------- ----------------- ----------------
$ 343,048 $ 5,787,233 $ 5,204,688
================ ================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Short-term debt, officer and director, net of
discount of $69,797 $ 553,203 $ - $ -
Advances due to officer and director 212,000 - -
Notes Payable - 82,230 82,230
Accounts payable 252,541 47,313 184,533
Accrued liabilities 184,514 156,508 190,151
Deferred revenue 4,125 16,018 6,460
---------------- ----------------- ----------------
Total current liabilities 1,206,383 302,069 463,374
OTHER LIABILITIES:
Accounts payable 6,356 25,551 33,421
COMMITMENTS AND CONTINGENCIES - - -
COMMON STOCK SUBJECT TO POSSIBLE RECISSION
$.01 par value, 607,434, 574,434 and 21,250 shares issued
and outstanding at December 31, 1996 and 1997, and March 31, 1,788,399 1,733,399 85,000
1998, respectively
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 20,000,000 shares authorized
674,998, 3,098,447 and 3,651,630 shares issued and
outstanding at December 31, 1996 and 1997, and March 31,
1998, respectively 6,750 30,984 36,516
Common stock warrants 111,187 666,722 666,722
Additional paid-in capital 889,876 10,965,660 12,608,527
Deficit accumulated during development stage (3,665,903) (7,937,152) (8,688,872)
---------------- ----------------- ----------------
Total stockholders' equity (deficit) (2,658,090) 3,726,214 4,622,893
---------------- ----------------- ----------------
$ 343,048 $ 5,787,233 $ 5,204,688
================ ================= ================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements. F-3
<PAGE> 52
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
For the Year For the Three Months from Inception
Ended December 31, Ended March 31, (May 12, 1993)
------------------------------ ---------------------------- to March
1996 1997 1997 1998 31, 1998
-------------- ------------- ----------- -------------- -------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Consulting services $ 90,571 $ 305,140 $ 67,837 $ 45,881 $ 446,994
Internet access 81,371 33,942 23,438 2,072 111,983
Retail sales 9,055 66,410 3,342 26,120 101,584
Advertising sales - 16,876 - 15,730 32,606
-------------- ------------- ----------- -------------- -------------
Total revenues 180,997 422,368 94,617 89,803 693,167
OPERATING EXPENSES:
Cost of goods and services 234,742 232,363 37,900 39,401 506,506
Product development 564,047 452,640 116,515 78,900 1,429,050
CCN operations 250,726 506,979 116,743 157,622 915,327
Sales and marketing 905,509 837,171 92,528 249,626 2,322,605
General and administrative 793,988 877,718 192,092 372,354 2,419,975
-------------- ------------- ----------- -------------- -------------
Total operating expenses 2,749,012 2,906,871 555,778 897,903 7,593,463
-------------- ------------- ----------- -------------- -------------
LOSS FROM OPERATIONS (2,568,015) (2,484,503) (461,161) (808,100) (6,900,296)
OTHER INCOME (EXPENSE):
Interest income 11,412 90,145 9,289 58,132 164,042
Gain on exchange of assets 3,091 - - - 3,091
Miscellaneous income 749 650 113 - 1,399
Interest expense (77,815) (1,877,541) (44,708) (1,752) (1,957,108)
-------------- ------------- ----------- -------------- -------------
Total other income (expenses) (62,563) (1,786,746) (35,306) 56,380 (1,788,576)
-------------- ------------- ----------- -------------- -------------
NET LOSS $ (2,630,578) $ (4,271,249) $ (496,467) $ (751,720) $ (8,688,872)
============== ============= =========== ============== =============
Net loss per common share (basic) $ (3.95) $ (3.31) $ (0.74) $ (0.24)
============== ============== =========== ==============
Weighted average number of common
shares outstanding 666,808 1,289,460 674,997 3,172,204
============== ============== =========== ==============
Net loss per common share (diluted) $ (3.95) $ (3.31) $ (0.74) $ (0.24)
============== ============== =========== ==============
Weighted average number of common shares and
common share equivalents outstanding 666,808 1,289,460 674,997 3,172,204
============== ============== =========== ==============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements. F-4
<PAGE> 53
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Deficit
Common Stock accumulated
------------------------ Additional Common during Total
(rounded to whole share) Paid-in Stock development Equity
Shares Amount Capital Warrants stage (Deficit)
---------- -------- ------------ --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders
on May 12, 1993 180,000 $ 1,800 $ - $ - $ 1,800
Issuance of common stock to founders in May 1993 in
consideration of costs paid on behalf of DIDAX, INC. 17,000 170 22,520 - 22,690
Issuance of common stock throughout 1993 81,000 810 134,190 - 135,000
Net loss - - - (104,002) (104,002)
---------- -------- ------------ ------------- -------------
BALANCE, DECEMBER 31, 1993 278,000 2,780 156,710 (104,002) 55,488
Issuance of common stock to founders in December
1994 in consideration of costs paid on behalf 13,200 132 21,826 - 21,958
of DIDAX, INC.
Issuance of common stock throughout 1994 41,993 420 69,579 - 69,999
Net loss - - - - (224,759) (224,759)
---------- -------- ------------ --------- ------------- -------------
BALANCE, DECEMBER 31, 1994 333,193 3,332 248,115 - (328,761) (77,314)
Issuance of common stock throughout 1995 213,500 2,135 424,865 - 427,000
Net loss - - - - (706,564) (706,564)
---------- -------- ------------ --------- ------------- -------------
BALANCE, DECEMBER 31, 1995 546,693 5,467 672,980 - (1,035,325) (356,878)
Issuance of common stock throughout 1996,
net of offering costs of $19,591 128,305 1,283 216,896 - - 218,179
Issuance of common stock warrants 111,187 111,187
Net loss - - - - (2,630,578) (2,630,578)
---------- -------- ------------ --------- ------------- -------------
BALANCE, DECEMBER 31, 1996 674,998 6,750 889,876 111,187 (3,665,903) (2,658,090)
Issuance of common stock throughout 1997,
net of offering costs of $1,899,805 2,423,449 24,234 10,075,784 - - 10,100,018
Issuance of common stock warrants 555,535 555,535
Net loss - - - - (4,271,249) (4,271,249)
---------- -------- ------------ --------- ------------- -------------
BALANCE, DECEMBER 31, 1997 3,098,447 30,984 10,965,660 666,722 (7,937,152) 3,726,214
Issuance of common stock through March 31, 1998
net of offering costs of $2,125 553,183 5,532 1,642,867 - - 1,648,399
Net loss - - - - (751,720) (751,720)
---------- -------- ------------ --------- ------------- -------------
BALANCE, MARCH 31, 1998 3,651,630 $36,516 $12,608,527 666,722 $ (8,688,872) $ 4,622,893
========== ======== ============ ========= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements. F-5
<PAGE> 54
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
For the Year For the Three Months from Inception
Ended December 31, Ended March 31, (May 12, 1993)
----------------------------- ------------------------ to March
1996 1997 1997 1998 31, 1998
------------- -------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C>
(unaudited) (unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,630,578) $ (4,271,249) $ (496,467) $ (751,720) $ (8,688,872)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 79,098 223,067 29,809 24,917 333,728
Amortization of debt discount charged
to interest expense 41,390 86,270 27,797 - 127,660
Common stock issued in lieu of cash for
professional services 125,000 11,062 - - 161,062
Common stock donated - 200,000 - - 200,000
Common stock issued in lieu of cash for
interest on repayment of long term debt - 1,733,750 - - 1,733,750
Changes in assets and liabilities affecting
operations:
Accounts receivable (46,450) (46,076) (42,920) 20,649 (71,577)
Notes receivable from officer 33,560 (83,000) - - (93,000)
Prepaid expenses (11,050) 3,489 10,800 6,623 (10,492)
Accounts payable 254,003 (186,033) (182,915) 145,389 217,954
Accrued liabilities 101,716 (28,008) 38,988 34,135 190,151
Deferred revenue 4,125 11,894 (1,526) (9,558) 6,460
------------- -------------- ------------ ----------- -------------
Net cash used in operating activities: (2,049,186) (2,344,834) (616,434) (529,565) (5,893,176)
------------- -------------- ------------ ----------- -------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Purchases of property and equipment (193,616) (42,108) (3,140) (108,041) (410,305)
------------- -------------- ------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term debt - 1,564,241 1,564,241 - 1,564,241
Proceeds from notes payable - 82,230 37,230 - 82,230
Proceeds from short-term debt, officer and director 623,000 250,000 - - 873,000
Proceeds from advances due to officer and director 212,000 0 - - 242,000
Repayment of short-term debt - (1,700,000) - - (1,700,000)
Repayment of advances due to officer and director (30,000) (212,000) (212,000) - (242,000)
Repayment of short-term debt, officer and director - (873,000) - - (873,000)
Net proceeds from issuance of common stock
and warrants 1,281,578 8,639,258 - (2,125) 11,172,159
Deferred costs (39,967) 28,868 (4,677) (1,205) (12,304)
------------- -------------- ------------ ----------- -------------
Net cash provided by financing activities 2,046,611 7,779,597 1,384,794 (3,330) 11,106,326
------------- -------------- ------------ ----------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (196,191) 5,392,655 765,220 (640,936) 4,802,845
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 247,317 51,126 51,126 5,443,781 -
------------- -------------- ------------ ----------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 51,126 $ 5,443,781 $ 816,346 $4,802,845 $ 4,802,845
============= ============== ============ =========== =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Interest paid $ 4,884 $ 80,312 $ 2,238 $ 1,756 $ 86,348
============= ============== ============ =========== =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common Stock totaling $2,000 was issued in 1995 in settlement of
a loan from an officer.
The accompanying notes are an integral part of these consolidated
financial statements. F-6
<PAGE> 55
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
A. ORGANIZATION
Prior to April 11, 1997, the accompanying financial statements include
the accounts of Didax On-Line, L.C. ("DIDAX ON-LINE"), a Virginia
limited liability company incorporated in Virginia on January 12, 1995,
and Didax, Inc. an S-Corporation ("DIDAX, Inc.") incorporated on May
12, 1993 in Virginia. The assets and liabilities of DIDAX ON-LINE were
previously held by DIDAX, Inc. The net assets of DIDAX, Inc. were
contributed to DIDAX ON-LINE in exchange for 366,193 membership units
in DIDAX ON-LINE on January 12, 1995. The members of DIDAX ON-LINE and
the stockholders of DIDAX, Inc. voted to merge into DIDAX INC., a
Delaware corporation ("DIDAX") which was effective on April 11, 1997.
All references to number of shares, per share amounts, stock option
data, and market prices of Common Stock for the year ended December 31,
1996, were restated to reflect the merger. Under the terms of this
merger, DIDAX , among other things, issued a total of 1,160,376 shares
of its Common Stock, representing 100% of its outstanding Common Stock
subsequent to the Merger. DIDAX's business includes the development of
computer communications and information services specifically designed
to meet the needs of Christian users of the Internet and World Wide
Web.
The Company's initial public offering (IPO) of securities listed on the
Nasdaq Small Cap Market went effective on September 24, 1997. The IPO
closed on October 3, 1997 with gross proceeds of $10,539,063, comprised
of $10,000,000 from the issuance of 2,000,000 shares of common stock,
$468,750 from the issuance of 2,500,000 purchase warrants, and $70,313
for the over-allotment of an additional 375,000 purchase warrants.
Proceeds, net of underwriter commission and offering costs, amounted to
approximately $8,639,000. The proceeds from this offering were used to
repay approximately $2,645,000 in outstanding debt. The remaining funds
have been invested in an interest bearing money market account and will
be used for continued product development and marketing, working
capital, and to facilitate the expansion of the Company's business. See
also Note J.
On February 18, 1998, DIDAX purchased all of the outstanding shares of
gofishnet.com, inc. for 130,292 shares of the Company's common stock.
gofishnet.com, inc. ("gofishnet"), an Internet retailer of Christian
music and videos, operates as a wholly owned subsidiary of DIDAX. DIDAX
accounted for the merger as a pooling-of-interests based on the
guidelines described in Accounting Principles Board Opinion No. 16,
"Business Combinations". Accordingly, the financial statements
presented for the years ended December 31, 1996 and 1997, and the three
months ended March 31, 1997 and 1998, respectively are presented on a
consolidated basis. For the years ended December 31, 1996 and 1997, and
the three months ended March 31, 1997 and March 31, 1998, gofishnet
earned revenues of $221, $77,412, $1,881, and $26,756 respectively, and
incurred a net loss of $165,674, $146,539, $25,889 and $43,310
respectively.
The Company intends to increase expenditures in connection with
marketing and product development activities. The Company anticipates
that losses will continue until such time as the Company is able to
build an effective marketing and sales organization, and achieve
further market acceptance of its products and services.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The accompanying consolidated financial
statements include the accounts of DIDAX ON-LINE, L.C. and DIDAX, INC.,
for year ended 1996 and for the three months ended March 31, 1997, all
of which are under common control. For year ended 1996 and for the
three months ended March 31, 1997, the acquisition of
gofishnet.com,inc. is also included. The year ended 1997 and the three
month period ended March 31, 1998, reflects DIDAX INC. pursuant to the
merger of DIDAX ON-LINE L.C. and DIDAX, Inc. effective April 11, 1997,
and the acquisition of gofishnet.com,inc., effective February 23, 1998.
Intercompany transactions and balances have been eliminated in
F-7
<PAGE> 56
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
combination all periods. Certain items in the accompanying 1996 and
1997 financial statements have been reclassified to conform with the
1998 presentation.
Basis of accounting - The Company's principal activities to date have
been planning and organization, initiating product development
projects, conducting market research and securing adequate financing
for the development of its products and marketing to potential
customers. Accordingly, the Company's financial statements are
presented as those of a development stage enterprise, as prescribed by
Statement of Financial Accounting Standards ("SFAS") No. 7, "Accounting
and Reporting by Development Stage Enterprises."
Use of estimates - Management uses estimates and assumptions in
preparing financial statements in accordance with generally accepted
accounting principles. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses. Actual results could vary from the estimates that were used.
Cash equivalents - Cash and cash equivalents include cash and
investments with maturities of three months or less.
Depreciation and amortization - Property and equipment are stated at
cost. Depreciation is determined using the straight-line method over
estimated useful lives ranging from three to seven years. Leasehold
improvements are amortized over the life of the related lease.
Consistent with Financial Accounting Standards Board ("FASB")
Interpretation No. 6, "Applicability of FASB Statement No. 2 to
Computer Software" and SFAS No. 86, "Accounting for the Costs of
Computer Software to Be Sold, Leased, or Otherwise Marketed", along
with FASB Statement of Concepts 6, purchased software with alternative
uses of future benefit to the Company, directly associated with revenue
producing activities has been capitalized when the software is acquired
and accounted for in accordance with its use.
Revenue recognition - Revenue is principally derived from customer
contracts for various Internet services, including consulting and web
site development and is recognized as earned on a percentage of
completion method in accordance with the provisions of the individual
customer contracts. Advertising revenue is recognized over the period
that an ad is run on the Christian Community Network(TM) at contracted
rates. Retail revenue is based on the sales price of products offered
before application of sales tax, if applicable. The Company also
offered semi-annual subscriptions to its customers for Internet access.
Advance payments for these services were deferred and recognized
ratably over the period that such access was provided.
Net loss per common share - During 1997, the Company adopted SFAS No.
128, "Earnings Per Share," which replaces the presentation of primary
and fully diluted earnings per share ("EPS") with basic and diluted
EPS, respectively. SFAS No. 128 requires the presentation of basic EPS
and, for companies with complex capital structures, diluted EPS. SFAS
No. 128 is effective for periods ending after December 15, 1997. As the
Company has common stock and common stock equivalents outstanding,
basic and diluted EPS are presented. Basic EPS excludes dilution and is
computed by dividing net income (loss) available to common stockholders
by the weighted average number of common shares outstanding during the
period. Diluted EPS is computed by dividing net income (loss) available
to common stockholders, adjusted by any convertible preferred
dividends; the after-tax amount of interest recognized in the period
associated with any convertible debt; and any other changes in income
or loss that would result from the assumed conversion of those
potential common shares, by the weighted number of common shares and
common share equivalents (unless their effect is anti-dilutive)
outstanding. All prior period EPS data have been restated.
F-8
<PAGE> 57
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capital Structure - The FASB recently issued SFAS No. 129, "Disclosure
of Information about Capital Structure," which requires a summary
presentation of the pertinent rights and privileges of the various
securities outstanding. SFAS No. 129 is effective for financial
statements for periods ending after December 15, 1997. The Company's
outstanding stock is completely comprised of voting common stock. There
are no other rights or privileges to disclose. In addition, entities
are required to disclose the number of shares issued upon conversion,
exercise, or satisfaction of required conditions during the periods
presented. The Company issued 340,000 shares of common stock upon the
liquidation of $1,700,000 of short-term debt, 40,000 shares of common
stock issued as a donation to Promise Keepers, Inc. and 2,212 shares of
common stock for services rendered. See Notes E and G. In addition, in
1997, the Company granted 385,570 of options to purchase common stock
to employees, directors and consultants, and 22,260 of warrants to
purchase common stock to an officer and director, all in accordance
with the Company's 1997 Stock Option Plan. See Note K.
Comprehensive Income - Effective for financial statements for periods
ending after December 15, 1997, the FASB recently issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for
reporting comprehensive income and its components. Comprehensive income
is defined as the change in equity during a period from transactions
and other events from nonowner sources. Entities that do not have items
of other comprehensive income in any period presented are not required
to report comprehensive income, accordingly the Company has not made
any such disclosure in the statements presented herein.
Segment Information - Effective for financial statements for periods
beginning after December 15, 1997, the FASB issued SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information."
This pronouncement requires public enterprises to report certain
information about operating segments, including products and services,
geographic areas of operation, and major customers. The Company does
not plan to adopt the pronouncement in 1997 as it does not have a
significant impact, if any, on results of operations or financial
position.
Stock-based compensation - In October 1995, the FASB issued SFAS No.
123, "Accounting for Stock-Based Compensation", which encourages
companies to recognize expense for stock-based awards based on their
estimated value on the date of grant. SFAS No. 123 is effective
beginning with the year ending December 31, 1996. SFAS No. 123 permits
companies to account for stock based compensation based on provisions
prescribed in SFAS No. 123, or based on the authoritative guidance in
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for
Stock Issued to Employees." The Company has elected to continue to
account for its stock based compensation in accordance with APB 25
which uses the intrinsic value method, however, as required by SFAS No.
123, the Company has disclosed the pro forma impact on the financial
statements assuming the measurement provisions of SFAS No. 123 had been
adopted. See Note K. The Company does account for all other issuances
of equity instruments in accordance with SFAS No. 123.
Deferred Costs - Deferred costs at December 31, 1996 consisted of
legal, accounting and other expenses associated with (1) the August 16,
1996 private placement of 9.75% junior subordinated notes, which are
being amortized using the straight-line method over the term of the
notes, see Note D; (2) the December 3, 1996 private placement of units
of junior convertible subordinated notes which were being amortized
using the straight-line method over the term of the notes, see Note D;
and (3) specific incremental costs directly attributable to the
Company's IPO, which were charged against the gross proceeds of the
offering, see Note A. In the event the offering is not completed, the
costs will be charged to expense at that time. During the three months
ended March 31, 1997, the Company incurred $120,968 and $11,926 of
additional legal, accounting and underwriting costs in connection with
the December 3, 1996 private placement mentioned above and the IPO,
respectively.
Deferred costs at December 31, 1997 consisted of commission costs
attributable to advertising revenues deferred as of that date. These
costs will be charged to the cost of sales when the revenues are earned
and recognized as income.
F-9
<PAGE> 58
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Underwriter's commission and offering costs associated with the IPO
were captured in deferred charges during 1997. Once the IPO closed,
these costs were netted against the proceeds. The legal, accounting,
and other expenses associated with the December 3, 1996 private
placement of units of junior convertible subordinated notes were also
captured in deferred charges in 1997. These costs were charged to
expense when the debt was repaid with the IPO proceeds. See Note A.
Income Taxes - Prior to April 11, 1997, DIDAX, Inc. was a qualified S-
Corporation under Section 1361 of the Internal Revenue Code and Didax
On-Line, L.C. was a Limited Liability Company, taxable as a
partnership. As such, these entities were not subject to Federal and
State income taxes, rather items of income, deduction, expense and
credits pass through pro-rata directly either to the stockholders or
the members to be reported on their individual income tax returns.
Effective April 11, 1997, DIDAX, a C-corporation, accounts for income
taxes under SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax basis of assets and
liabilities and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. The principal items
relate primarily to differences between the net operating loss
carryforwards, deferred interest, marketing expenses and accumulated
depreciation. Prior to February 23, 1998, gofishnet was also a
qualified S-Corporation under Section 1361 of the Internal Revenue
Code. Thus gofishnet was not subject to Federal and State income taxes,
rather items of income, deduction, expense and credits pass through
pro-rata directly to the stockholders to be reported on their
individual income tax returns. Effective February 23, 1998, gofishnet
became a C-Corporation and began accounting for income taxes based on
SFAS No. 109.
Fair value of financial instruments - The carrying value of cash and
cash equivalents, accounts receivable and notes payable approximate
fair value because of the relatively short maturity of these
instruments.
Interim financial information - The financial statements of the Company
as of March 31, 1997 and 1998 are unaudited and include, in the opinion
of management, all adjustments consisting of only normal recurring
adjustments, which the Company considers necessary to present fairly
the financial position, results of operations and cash flows of the
Company for those interim periods. The operating results for the three
months ended March 31, 1998 are not necessarily indicative of the
results that may be expected for the full year 1998.
Product Development Costs - SFAS No. 86, "Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed," requires
capitalization of certain software development costs subsequent to the
establishment of technological feasibility. Costs incurred by the
Company between the completion of technological feasibility and the
point at which the product is ready for general release have been
insignificant and all product development costs have been expensed to
date.
F-10
<PAGE> 59
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
C. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
March 31,
1996 1997 1998
-------- --------- (Unaudited)
-----------
<S> <C> <C> <C>
Computer equipment $ 229,232 $ 249,409 $ 302,922
Furniture and equipment 28,007 28,007 29,041
Leasehold improvements 2,300 2,300 2,300
Office equipment --- 8,300 28,464
Software assets --- --- 33,329
Organization costs 1,750 1,750 1,750
------- --------- --------
261,289 289,766 397,806
Less: accumulated depreciation
and amortization (83,036) (150,000) (173,282)
------- -------- --------
$ 178,253 $ 139,766 $ 224,524
========= ========= ==========
</TABLE>
D. SHORT-TERM DEBT, OFFICER AND DIRECTOR
A director and an officer of the Company purchased junior subordinated
notes in conjunction with the Company's private placement offering
dated August 16, 1996 in the aggregate face value amount of $623,000.
As part of the purchase of these junior subordinated debt securities,
the purchasers earned warrants for the right to purchase shares of the
Company's Common Stock at $4.00 per share, exercisable at the time of
the IPO.
The portion of the proceeds of the above debt securities allocated to
these warrants is $127,659 and is included in stockholders' equity in
the accompanying financial statements. The Company recognized interest
expense of $86,269 and $41,390 for the years ended December 31, 1997
and 1996, respectively, related to this discount. The Company retired
the $623,000 of junior subordinated notes when the IPO closed on
October 3, 1997, including interest accrued of $72,149, for a total of
$695,149. Additionally, the Company issued 172,638 warrants to purchase
stock at a price of $4.00. In accordance with the underwriting
agreement underlying the initial public offering of the Company's
securities, the common stock issued from exercise of these warrants is
locked-up until March 24, 1999.
In August and September of 1997, an officer and three directors
advanced $250,000 to the Company at an interest rate of 11.5% to cover
operating costs during that period. During the year ended December 31,
1997, the Company recognized related interest expense of $2,961. These
advances and the accrued interest were repaid from the IPO proceeds on
October 3, 1997.
E. NOTES PAYABLE
On January 9, 1997, the Company closed on the minimum portion of a
private placement offering dated December 3, 1996, placed by the
underwriter of the Company's IPO, for units consisting of junior
convertible subordinated notes with total gross proceeds to the Company
from this offering of $750,000. The maximum portion of the offering for
an additional $750,000 was oversubscribed and the Company closed this
offering on February 21, 1997, with $950,000 in additional gross
proceeds. In accordance with this offering, 340,000 unregistered shares
were issued at no additional cost to the note holders at the time of
the IPO by dividing the principal of each holder's note by the IPO
price of $5 per share. The issuance of these shares was recognized as
$1,700,000 of interest expense, or the fair value of the shares issued,
representing an effective rate of
F-11
<PAGE> 60
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
E. NOTES PAYABLE (CONTINUED)
interest of approximately 150%. Additionally, the note holders were
repaid the principal of $1,700,000 on the closing of the IPO. The
Company incurred total offering costs of $135,759 relating to this debt
placement. These costs were captured as deferred costs until the
offering closed, at which point they were amortized using the straight
line method over the life of the notes. Once the notes were repaid, the
remaining balance in deferred costs was charged to expense. See Note B.
In the first quarter of 1997, gofishnet borrowed $37,230 at an interest
rate of 7% from a former majority shareholder of gofishnet. gofishnet
borrowed an additional $45,000 at an interest rate of 10% from the same
party during the third and fourth quarters of 1997. gofishnet
recognized $37,060, $1,752 and $382 interest expense for the year ended
December 31, 1997 and the three months ended March 31, 1998 and 1997,
respectively in connection with these notes. The $37,060 of interest
expense includes $33,750 for the equivalent of 8,237 shares of the
Company's stock issued to the note holder in lieu of interest. Both
notes were due and repaid in full on April 1, 1998.
F. INCOME TAXES
The benefit for income tax for the year ended December 31, 1997 is
as follows:
<TABLE>
<S> <C>
Current $ -
Deferred tax expense -
-----------
Balance at year end $ -
===========
</TABLE>
A reconciliation of income tax at the statutory rate to the Company's
effective rate is as follows:
<TABLE>
<S> <C>
Computed at the expected statutory rate $ (1,402,000)
State income tax - net of Federal tax benefit (164,000)
Decrease related to income not taxed due to
merger accounted for as a pooling of
Interests (see Note A) 273,200
Less valuation allowance 1,292,800
----------
Balance at year end $ -
==========
</TABLE>
Deferred tax assets and liabilities at December 31, 1997 were
as follows:
<TABLE>
Deferred tax assets:
<S> <C>
Net operating loss carryforward $ (591,000)
Interest expense (646,000)
Consulting fees (4,200)
Depreciation (51,600)
-------
Gross deferred tax assets (1,292,800)
Deferred tax liability -
Valuation allowance 1,292,800
---------
Net deferred tax assets $ -
=========
</TABLE>
The Company has net operating loss carryforwards totaling approximately
$1,556,000 for federal and state income tax purposes expiring in 2012.
F-12
<PAGE> 61
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
G. SERVICES PROVIDED WITHOUT CHARGE AND DONATIONS
As part of an effort to obtain a large and reputable Christian
organization as a key customer, the Company provided $35,000 and
$241,000 worth of products and services to this organization, at no
charge, for the years ending December 31, 1997 and 1996, respectively.
This work was performed to demonstrate the Company's capabilities and
to develop a growing relationship. Another incentive to attract this
customer was to commit 50,000 shares of the Company to them as a
donation. In 1997, the Company recognized $200,000 of marketing expense
for the donation of 40,000 of these shares, equivalent to the fair
value of the shares at the time of the donation. No services were
provided without charge in the three month period ending March 31,
1998. See Note I.
H. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1996, the Company had notes receivable due
from officers of the Company totaling $93,000 and $10,000 respectively.
The Company is collecting interest on these notes through payroll
deductions at the minimum federal statutory rate at the time of
issuance of 5.7%. The notes are due to be repaid on October 31, 1999.
An officer and a director advanced $212,000 to the Company to cover
operating costs for certain periods during 1996. These advances bore
interest of 9.75% and were repaid from the proceeds from the private
placement offering which closed in February 1997. See Note A. Included
in accrued liabilities at December 31, 1996, is $1,569 in interest due
to the officer and director.
In 1996, the Company borrowed $623,000 from an officer and a director.
This was repaid with the proceeds from the Company's IPO. See Note D.
On January 9, 1997, the Company borrowed $300,000 from a director of
the Company as part of the December 3, 1996 private placement offering
of the junior convertible subordinated notes. This was repaid with the
proceeds from the Company's IPO. See Note E.
In the first quarter of 1997, gofishnet borrowed $37,230 at an interest
rate of 7% from a former majority shareholder. Gofishnet borrowed an
additional $45,000 at an interest rate of 10% from the same individual
during the third and fourth quarters of 1997. Both notes were due and
repaid in full on April 1, 1998.
In August and September of 1997, an officer and three directors
advanced $250,000 to the Company. This was repaid with the proceeds
from the Company's IPO. See Note E.
To enhance process and achieve product efficiencies, the Company hired
Corporate Resource Development, Inc. ("CRD") in February 1998, for
consulting services for the period March 1, 1998 through May 31, 1998.
Max Carey, a member of DIDAX's board of directors, is CRD's Chairman
and CEO.
Gofishnet rents office space and equipment from a company whose
principals are also former principals of gofishnet and current
shareholders of DIDAX. The Company believes that the cost incurred for
the use of this office space and equipment is at fair market value.
I. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE OBLIGATIONS
The Company leases office space and certain equipment under
non-cancelable operating leases. The office lease provides for a
three-year term, an annual increase in base rent of 3%, and additional
rent representing the Company's pro-rata share of operating expenses as
defined in the lease agreement. The office lease expires on September
30, 1998. The Company is in negotiations to lease a facility near its
current location with a 20% increase in floor space. The equipment
leases provide for three-year lease terms.
F-13
<PAGE> 62
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
I. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Minimum future lease payments under non-cancelable operating leases are
as follows for each of the years ending December 31:
<TABLE>
<S> <C>
1998 $55,853
1999 3,062
2000 766
-------
$59,681
</TABLE> =======
Rent expense for the years ended December 31, 1997 and 1996 and the
three months ended March 31, 1998 was $66,944, $63,325 and $18,266 and
is included in general and administrative expenses.
SECURITIES
In April of 1996, the Company became aware that certain prior private
placements may be deemed not to have been properly exempted from
registration under federal and/or state law. This may give rise to the
opportunity for certain stockholders and members to exercise rescission
rights, if any, related to their investment in the Company. The Company
believes there may be valid legal defenses to any and/or all such
rescission actions, if initiated. The potential of inadvertent
exemption violations was communicated to the investors concerned in
August of 1996.
Furthermore, in late December of 1996, each stockholder and member who
might have rescission rights was sent a written request to waive such
rights (if any) to rescission and other remedies in connection with any
past omissions or violations of federal or state securities laws or
regulations, and also to agree not to pursue any litigation against the
Company or its directors on the basis of such rights. Approximately 80%
of the members responded with waivers, representing approximately 89%
of the outstanding shares. The value of funds received of those that
have not responded as of December 31, 1997 is approximately $388,000.
It is the Company's expectation (but there can be no assurance) that
only a minority of the investors concerned will elect to exercise their
rescission rights, if indeed any in fact elect so to exercise. Any
assertion of rescission rights will be evaluated at the time made, in
light of all the facts and circumstances. In September 1997, the
Commonwealth of Virginia ("the Commonwealth") ruled that solicitation
of waivers in this case to Virginia shareholders was in violation of
Virginia Securities Law. As a remedy, the Commonwealth required the
Company to send written notice to each investor to the effect that
their rights remain unimpaired. As of December 31, 1997, $1,733,399 is
the total amount of common stock subject to rescission if all the
waivers were deemed invalid as compared to $1,788,399 at December 31,
1996. This $55,000 reduction represents 33,000 shares which are now
beyond the statute of limitations under Section 13 of the Securities
Act of 1933 and Section 10b-5 of the Securities Exchange Act of 1934
along with the Securities Law of State jurisdictions, which the Company
uses as a reasonable basis for establishing the potential exposure.
In October 1997, the Company completed the requirements imposed by the
Commonwealth with regard to the request for waivers of rescission
rights related to prior private placements. Pursuant to this action,
this matter is now considered closed by the Commonwealth and there are
no further investigations pending.
As of March 20, 1998, all but 21,250 shares of common stock subject to
recission are beyond the statue of limitations under Section 13 of the
Securities Act of 1933 and Section 10b-5 of the Securities Exchange Act
of 1934 along with the Securities Law of State jurisdictions, which the
Company uses as a reasonable basis for establishing the potential
exposure. In December 1998, these remaining 21,250 shares of common
stock subject to recission will be beyond the statute of limitations.
Thus, common stock at par and paid in capital will increase at that
time by $213 and $84,787, respectively.
OTHER
50,000 common shares were reserved for donation to the Company's first
customer and ministry partner. 40,000 were donated to this customer and
was reflected as marketing expense at a fair value of $200,000,
equivalent to $5 per common share, in April 1997. The remaining 10,000
common shares will be donated upon completion of several customer tasks
relevant to product promotion. See Note G.
F-14
<PAGE> 63
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
J. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents. The Company maintains its cash accounts in commercial
banks located in Virginia. Cash balances are insured by the Federal
Deposit Insurance Corporation ("FDIC") up to $100,000 per financial
institution. At December 31, 1997 and 1996 and March 31, 1998, there
were no uninsured cash balances.
Cash equivalents are maintained in money market funds, top grade
corporate debt obligations, U.S. treasury notes and other obligations
of U.S. Government agencies, consistent with the Company's Investment
Policy. These cash equivalents are not insured by the FDIC, but are
collateralized by the underlying assets of the federal government or
corporate entities issuing debt obligations. At December 31, 1997 and
1996, and March 31, 1998, cash equivalents totaled approximately
$5,429,000, $200 and $4,755,000 respectively.
During 1996 and 1997, and for the three months ending March 31, 1998,
revenue was generated from major customers in amounts exceeding 10% of
total revenue as follows:
[CAPTION]
<TABLE>
December 31, 1996 December 31, 1997 March 31, 1998 (Unaudited)
----------------------- ------------------------- ---------------------------
Accounts Accounts Accounts
Receivable Receivable Receivable
Revenue % Balance Revenue % Balance Revenue % Balance
----------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Customer #1 $62,842 35% $ 2,994 $ - - % $ - $ - - % $ -
Customer #2 $58,056 32% $28,085 $148,623 44% $31,074 $ 19,654 22% $ 10,919
Customer #3 $ - - % $ - $ 64,109 19% $ 4,063 $ 12,102 13% $ 9,027
Customer #4 $ - - % $ - $ - - % $ - $ 12,000 13% $ 8,000
</TABLE>
The Company's customers are located throughout the United States. In
the normal course of business, the Company extends unsecured credit to
its customers.
K. STOCK OPTION PLAN
Since the inception of the Company, various options have been granted
by the Board of Directors to founders, directors, employees,
consultants and ministry partners. In February 1997, the Incorporators
authorized 268,400 additional shares of common stock to underlie
additional options reserved for key employees and for future
compensation to members of the Board of Directors. The Board of
Directors also adopted and the Stockholders approved, the 1997 Stock
Option Plan, which provides for the granting of either qualified or
non-qualified options to purchase an aggregate of up to 2,057,937
shares of common stock, inclusive of the 268,400 shares mentioned
above, and any and all options or warrants granted in prior years by
the Company.
All options are stated in common stock of DIDAX. The Board of Directors
determines the option price (not less than fair market value) at the
date of grant. The objectives of the stock plan are to advance the
interests of DIDAX by providing an opportunity to its selected key
employees, consultants, and minority partners, to purchase shares of
DIDAX. By encouraging stock ownership, DIDAX seeks to attract, retain
and motivate key employees, consultants, and ministry partners. The
plan is administered by the Board of Directors.
At December 31, 1997 and 1996, the Company had outstanding options to
sell 1,164,456 and 950,931 shares of common stock, respectively, and
1,334,456 at March 31, 1998, to various officers and directors of the
Company at exercise prices ranging from $1.50 to $5.00 per share. As of
December 31, 1997 and March 31, 1998 options for 284,956 and 398,956
shares are vested, respectively. All but 25,000 options, scheduled to
vest during the remaining part of 1998 and 20,000 options scheduled to
vest in 1999 will only vest based on performance criteria. The options
expire ten years from the date granted, except 185,000 options granted
to directors in 1997, which expire five years from the date
exercisable.
At December 31, 1997 and 1996, the Company had outstanding options to
sell 80,500 and 35,500 shares of common stock, respectively, and
113,575 at March 31, 1998, to various outside consultants and a
marketing
F-15
<PAGE> 64
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
K. STOCK OPTION PLAN (CONTINUED)
partner at exercise prices ranging from $1.66 to $5.00 per share. As of
December 31, 1997 and March 31, 1998, options for 50,500 and 56,965
were vested. 41,075 options expire five years from the date granted.
All other options expire ten years from the date granted.
At December 31, 1997 and 1996, the Company granted to employees options
for 360,676 and 233,631 shares of common stock, respectively, and
340,676 at March 31, 1998, at exercise prices ranging from $2.00 to
$5.00 per share. The grant prices of $2.00 to $5.00 were determined by
the Board of Directors to represent fair value. As of December 31, 1997
and March 31, 1998, options for 240,704 and 248,524 shares are vested
with the remainder scheduled to vest through 1999. The options expire
through 2007.
A summary of activity for the period ended March 31, 1998, is
as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Number of Per Unit
Shares Exercise Price
-------- --------------
<S> <C> <C>
OUTSTANDING, JANUARY 1, 1995 72,500 $1.50 - $1.66
Options granted 246,203 $2.00
Options exercised - -
Options expired - -
----------- -------------
OUTSTANDING, DECEMBER 31, 1995 318,703 $1.50 - $2.00
Options granted 941,759 $3.00 - $5.00
Options exercised - -
Options expired 40,400 $2.00 - $5.00
----------- -------------
OUTSTANDING, DECEMBER 31, 1996 1,220,062 $1.50 - $5.00
Options granted 439,920 $3.89 - $5.00
Options exercised - -
Options expired 54,350 $2.00 - $5.00
----------- -------------
OUTSTANDING, DECEMBER 31, 1997 1,605,632 $1.50 - $5.00
Options granted 303,075 $2.00 - $3.00
Options exercised - -
Options expired 120,000 $2.00 - $4.00
----------- -------------
OUTSTANDING, MARCH 31, 1998 1,788,707 $1.50 - $5.00
========= =============
</TABLE>
The Company accounts for the fair value of its options granted to
employees in accordance with APB 25. Accordingly, no compensation
expense has been recognized for the options granted, since the options
are granted, at the discretion of the Board of Directors, at an option
price per share not less than fair market value, as determined by the
Board of Directors, at the date of grant.
F-16
<PAGE> 65
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
K. STOCK OPTION PLAN (CONTINUED)
Had compensation expense been determined based on the fair value of the
options at the grant dates consistent with the method of accounting
under SFAS 123, the Company's net loss and net loss per share would
have been increased to the proforma amounts indicated below:
<TABLE>
<CAPTION>
For the three
Months Ended
March 31,
1996 1997 1998
------------ ------------ -------------
(Unaudited)
<S> <C> <C> <C>
Net loss
As reported $(2,630,578) $(4,271,249) $ (751,720)
Proforma $(2,880,739) $(4,368,892) $(1,241,577)
Net loss per common share
Basic
As reported $(3.95) $(3.31) $(0.24)
Proforma $(4.32) $(3.39) $(0.39)
Diluted
As reported $(3.95) $(3.31) $(0.24)
Proforma $(4.32) $(3.39) $(0.39)
</TABLE>
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option-pricing model with the following
assumptions used for grants during the years ended December 31, 1997
and 1996: dividend yield of 0%, volatility of effectively 0%, risk-free
interest rate based on the 10-year bond Treasury yield at the date of
grant, and expected term of 10 years. SFAS No. 123 provides for the use
of a 0% volatility assumption for grants made prior to becoming a
public company. For grants made subsequent to the IPO, the Company used
a volatility of 13.9% and an expected term of five years. All options
granted to employees have been granted at an exercise price of $1.50 to
$5.00 per share.
During August 1996, the Company issued a private placement to secure
$3,000,000 in junior subordinated debt coupled with 375,000 warrants to
purchase membership units (shares) after July, 1998 at $4.00 per unit
(share). This offering was closed with $623,000 in notes and with
61,209 and 172,638 warrants earned and granted as of December 31, 1996
and December 31, 1997, respectively. See Note D. Since the only
participants in this offering were an officer and a director of the
Company, the warrants earned pursuant to this offering have been
adopted in the 1997 Stock Option Plan, as approved by the Board of
Directors of DIDAX, and therefore are referred to as options by the
Company. However, these securities are not included in the summary of
activity table.
In April 1998, the Board of Directors resolved to amend the 1997 Stock
Option Plan. The substance of this change was to amend the actual
administration of the plan by making all options subject to the
approval of the Board of Directors, and in the case of a merger or a
similar reorganization that the Company does not survive, to cause only
non vested stock options to be subject to termination should the
surviving entity not assume the obligation of all granted options.
L. EMPLOYEE BENEFIT PLAN
In January 1998, the Company adopted an Employee Benefit Plan, in the
form of a 401K Plan, that covers all full time and permanent part time
employees, the cost of which is substantially covered through
additional after-tax payroll deductions of participants. Employees may
elect to participate by contributing a percentage of their
compensation. Participation is at 73% and the maximum percentage
allowed is 15%. The Company is not required to contribute to the 401K
Plan and has made no contributions since its inception.
F-17
<PAGE> 66
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO MARCH 31, 1998 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
M. NET LOSS PER COMMON SHARE
As required by SAFS No. 128, the following is a reconciliation of the
basic and diluted EPS calculations for the periods presented:
<TABLE>
<CAPTION>
For the Three
Months Ended
March 31,
1996 1997 1998
------------- --------------- ------------
<S> <C> <C> <C>
Net loss (numerator) $(2,630,578) $(4,271,249) $ (751,720)
Weighted average shares (denominator) 666,808 1,289,460 3,172,204
Basic net loss per share $ (3.95) $ (3.31) $ (0.24)
----------- ----------- ------------
Dilutive shares (denominator) 666,808 1,289,460 3,172,204
Diluted net loss per share $ (3.95) $ (3.31) $ (0.24)
----------- ---------- ------------
</TABLE>
As required by Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 98, the above calculation of EPS is based on
SFAS No. 128 "Earnings Per Share," for the quarter ended March 31,
1998. The years ending December 31, 1996 and 1997 have been restated to
reflect SFAS 128 treatment. Thus, 55,414, 55,414 and 50,962 stock
options and purchase warrants granted at below market prices
outstanding in the quarter ended March 31, 1998 and the years ended
December 31, 1997 and 1996, respectively, are not included in the
calculation of diluted EPS as their inclusion would be antidilutive.
N. SUBSEQUENT EVENTS
EMPLOYEE BENEFIT PLAN
On June 1, 1998, the Company implemented an Internal Revenue Code
Section 125 "Premium Only Plan", which allows participating employees
of the Company to contribute toward the cost of medical and newly
established dental plan expenses with pretax dollars. Through this
plan, set on a calendar year, employees contribute toward paying 20%
and 93% of the medical and dental plans, respectively.
1998 ANNUAL STOCKHOLDER MEETING
On Wednesday, April 29, 1998, the Company's shareholders of record as
of the close of business on March 20, 1998 approved the election of the
Board of Directors, ratified and approved the adoption of the 1998
Stock Option Plan (the "1998 Plan"). The Common Stock (the "shares")
subject to the 1998 Plan that may be purchased (through the exercise of
options) shall not exceed in the aggregate 400,000 shares. If any stock
options granted under the 1998 Plan shall terminate, expire or be
canceled as to any shares, new stock options may thereafter be granted
covering such shares. In addition, any shares purchased under this 1998
Plan subsequently repurchased by the Company pursuant to the terms
hereof may again be granted under the 1998 Plan. The shares issued upon
exercise of stock options under the 1998 Plan may, in whole or in part,
be either authorized but unissued shares or issued shares reacquired by
the Company. The 1998 Plan will be administered by the Compensation
Committee of the Board of Directors or by the Board of Directors as a
whole.
F-18
<PAGE> 67
No dealer, salesman or any other person has been authorized to give any
information or to make any representation, other than those contained in this
Prospectus, in connection with the offering described herein, and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus in connection with
the Offering does not constitute an offer to sell or solicitation of any offer
to buy, by any person in any jurisdiction in which it is unlawful for such
person to make such offer or solicitation. Neither the delivery of this
Prospectus nor any offer, solicitation or sale made hereunder, shall under any
circumstance, create any implication that the information herein is correct as
of any time subsequent to the date of the Prospectus.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ----
<S> <C>
Prospectus Summary........................................ 4
Risk Factors.............................................. 7
Use of Proceeds........................................... 16
Capitalization............................................ 17
Dilution.................................................. 18
Management's Discussion and
Analysis or Plan of Operation........................... 19
Proposed Business......................................... 26
Management................................................ 35
Principal Shareholders.................................... 41
Description of Securities................................. 44
Underwriting.............................................. 47
Legal Proceedings......................................... 47
Legal Matters............................................. 47
Experts................................................... 48
Financial Statements...................................... F-1
</TABLE>
DIDAX INC.
190,000 COMMON STOCK UNDERWRITER WARRANTS
250,000 WARRANT UNDERWRITER WARRANTS
250,000 UNDERWRITER UNDERLYING WARRANTS
3,315,000 SHARES OF COMMON STOCK UNDERLYING
2,875,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS AND
190,000 COMMON STOCK UNDERWRITER WARRANTS AND
250,000 UNDERWRITER UNDERLYING WARRANTS
PROSPECTUS
