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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
/X/ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1997
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
For the transition period from __________ to __________
DIDAX INC.
(Name of small business issuer in its charter)
Delaware 54-1831588
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
4501 Daly Dr. Suite 103
Chantilly, VA 20151
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (703) 968-4808
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Title of each class
Common Stock, $0.01 par value
Reedemable Common Stock Purchase Warrants
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Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes /X/ No / /
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB./ X /
The issuer's revenues for its most recent fiscal year were $344,955
The aggregate market value of Common Stock and Redeemable Common Stock
Purchase Warrants (the "Purchase Warrants") held by non-affiliates, based on the
closing price at which the stock was sold, at March 19, 1998 approximated $13.0
million.
The total number of shares outstanding of the issuer's Common Stock and
Purchase Warrants, as of March 19, 1998, was 3,672,880, and 2,875,000,
respectively.
Transitional small business disclosure format (check one):
Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Registration Statement on Form SB-2 declared effective by
the Securities and Exchange Commission on September 24, 1997, SEC File No.
333-25937, is incorporated by reference in Part III, Item 13. The Company's
Proxy Statement to be filed in accordance with Rule 14a-101, Schedule 14A is
incorporated by reference in Part III, Items 9 through 12.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
CERTAIN INFORMATION IN THIS ANNUAL REPORT ON FORM 10K-SB MAY CONTAIN
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACT ARE FORWARD-LOOKING STATEMENTS FOR PURPOSES OF THESE PROVISIONS,
INCLUDING ANY PROJECTIONS OF EARNINGS, REVENUES OR OTHER FINANCIAL ITEMS, ANY
STATEMENTS OF THE PLANS AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, ANY
STATEMENTS CONCERNING PROPOSED NEW PRODUCTS OR SERVICES, ANY STATEMENTS
REGARDING FUTURE ECONOMIC CONDITIONS OR PERFORMANCE, AND ANY STATEMENT OF
ASSUMPTIONS UNDERLYING ANY OF THE FOREGOING. IN SOME CASES, FORWARD-LOOKING
STATEMENTS CAN BE IDENTIFIED BY THE USE OF TERMINOLOGY SUCH AS "MAY," "WILL,"
"EXPECTS," "BELIEVES," "PLANS," "ANTICIPATES," "ESTIMATES,"
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"POTENTIAL," OR "CONTINUE," OR THE NEGATIVE THEREOF OR OTHER COMPARABLE
TERMINOLOGY. ALTHOUGH THE COMPANY BELIEVES THAT THE EXPECTATIONS REFLECTED IN
ITS FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT CAN GIVE NO ASSURANCE THAT
SUCH EXPECTATIONS OR ANY OF ITS FORWARD-LOOKING STATEMENTS WILL PROVE TO BE
CORRECT, AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED OR
ASSUMED IN THE COMPANY'S FORWARD-LOOKING STATEMENTS. THE COMPANY'S FUTURE
FINANCIAL CONDITION AND RESULTS, AS WELL AS ANY FORWARD-LOOKING STATEMENTS, ARE
SUBJECT TO INHERENT RISKS AND UNCERTAINTIES, SOME OF WHICH ARE SUMMARIZED IN
ITEM 6, "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - OUTLOOK AND
UNCERTAINTIES"
OVERVIEW
Founded in 1993, DIDAX INC. (the "Company"or "DIDAX") is primarily known
as the creator and builder of CCN: The Christian Community Network(TM)
(http://www.christcom.net). CCN is an interactive Website that provides
information, interaction, and opportunities for involvement to the Christian and
family-friendly community. Content and site resources are developed and offered
both by DIDAX, and by ministries, by secular retailers, and publishers.
DIDAX closed on an initial public offering of 2,500,000 shares of common
stock and 2,875,000 common stock warrants on October 3, 1997, (the "IPO"),
resulting in approximately $8,700,000 received by the company after offering
costs. The Company is now debt-free having used $2,600,000 of the IPO proceeds
to curtail debt to a number of individuals who had supported the Company prior
to its IPO. The remaining funding is intended to be used to pursue the Company's
objective to become the leader in Christian community formation on the Internet.
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, the Company generated net losses of
$(2,464,904), and $(4,124,710), 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.
Since its inception in 1993, the operations of the Company have been
limited to (a) research and development and marketing activities related to CCN:
The Christian Community Network(TM), and (b) providing for a fee, to Christian
organizations, technology consulting services, including website development
services, hosting through various hosting services (including in-house hosting)
and other related Internet services. Access to CCN is currently provided free of
charge to persons who have Internet access.
The Company's market niche is Christians. These are persons of all ages,
economic levels, genders, ethnic backgrounds and nationalities that identify
themselves as Christian,
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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 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.
The Wall Street Journal (September 1996) reported that the number of
individuals on the Internet grew from approximately eight million in September
1995 to approximately 30 million in September 1996. According to Intelliquest, a
marketing research firm, the number of individuals on the Internet grew to
approximately 47 million by February 1997. Given 40% as the size of DIDAX's
target audience and approximately 50 million as the number of individuals on the
Internet in 1997, the the number of Christians already on the Internet could be
as high as 20 million.
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.
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
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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.
COMPLEMENTARY MISSIONS
DIDAX has a business mission to grow both revenue and profit and to
increase shareholder value. The Company believes that the best approach is to
build a virtual community with a goal to become one of the top 25 sites on the
Internet through growth in membership, visits and visitors, good demographics
for advertisers and retailers and high margin revenues which are anticipated
when the Company reaches critical mass.
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).
The virtual community built by DIDAX, called CCN: The Christian Community
Network(TM), is positioned to be the preeminent community for Christians on the
Internet. According to the Internet community modeled by Hagel and Armstrong and
reported in their book net gain (Harvard Business Press), "the average revenue
generated by each member grows from $7 in year one to $159 in year ten." 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.
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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.
1997 OPERATIONS
Employees
The Company's most important asset is its people, and DIDAX is pleased to
have a number of leaders in management positions. Steve Biggerstaff, who just
joined the Company in December, is responsible for marketing efforts and
customer advocacy. Larry Simpson is responsible for advertising sales and retail
relationships. Steve Sedlemeyer is responsible for engineering designs and
services and internal engineering infrastructure. The founders of the Company
are Dane West, President, and William Bowers, Chief Operating Officer. Gary
Struzik is Chief Financial Officer and Secretary. Inclusive of these leaders,
and Robert Varney, Chief Executive Officer, the Company had 23 full time
employees and 2 part time employees at December 31, 1997. Of these full time
employees, four are engaged in engineering, seven are engaged in marketing and
sales, eight are engaged in CCN operations, and four in administration. The part
time employees assist in web development and CCN operations. No employees are
represented by a union and no work stoppages have been experienced.
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, sex, 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 measures website traffic according to the number of "visits"
and "ad impressions." A visit is a sequence of pages viewed by a single user
within a defined time period, normally thirty minutes. An ad impression is the
display of an advertisement to a site visitor. Growth in membership in CCN is
also a key element in determining visitor response and commitment to the
information, products and services afforded to the membership of CCN. For the
year ending December 31, 1997, the Company experienced a 1500% growth in
membership (those who have entered their names in the guest register of the
website signifying
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their desire to receive the benefits and obligations of being members of the
community) to 15,790, compared to just over 1,000 at the end of 1996. Visits
increased 1000% from 10,000 per month in the three months ended December 31,
1996 to nearly 100,000 per month in the three months ended December 31, 1997.
During the same periods, ad impressions grew over 900% from less than 100,000
per month to 874,700 per month.
Advertising revenues commenced for the Company, in the fourth quarter of
1997. Those revenues were over $10,000 for the fourth quarter of 1997.
The Company began negotiations in the fourth quarter of 1997 with
gofishnet.com, inc., the largest retailer of exclusively Christian music on the
Internet, with such negotiations resulting in the acquisition of gofishnet.com,
inc. in February, 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, in
the fourth quarter on 1997 the Company began negotiations with Auto-by-Tel and
Cendant. Auto-by-Tel provides a one-stop shopping source for consumers to buy,
lease, finance, and insure new and used vehicles via the Internet. Cendant is a
global provider of consumer and business products and services through, among
other things, netMarket, a membership based value-oriented Internet interactive
service. Both of those arrangements have been finalized and services will begin
in early 1998. This program, which has been developed in conjunction with an
affinity consulting organization, may be expanded to include various services,
including web-based travel services, overnight delivery service, long-distance
telephone service, business equipment imaging supplies, paging services and
financial services. DIDAX expects to generate referral fees for providing these
services to its members.
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 this activity. As the Company focuses more on the Christian
consumer served through CCN, the Company anticipates that this will be reduced
to not more than 20% in years to come. DIDAX has received more than 20 awards
for our 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.
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Specific Accomplishments during 1997
IMPLEMENTED THE CCN VIRTUAL COMMUNITY CONCEPT
Re-designed CCN site and homepage
Introduced Hit Radio with a dj and artist spotlights
Developed and ran PK radio events (including video images on Oct 4, 1997)
Launched chat (with guestbook e-mail verification)
Introduced CCN Marketspace
Re-designed game area (including Java games)
Upgraded the guestbook
Launched Omnilist
Introduced the daily cartoon
Developed a new forum engine
Developed site-wide frames integration
Removed excessive "cookies" (customer service response)
Integrated CCN services with the PromiseKeepers (PK) website
Developed a customer support database
Launched MovieGuide
Launched CCN Events
INITIATED GOING-FORWARD BUSINESS MODEL
Grew membership - from 1,000 to over 15,000
Increased ad impressions - from less than 100,000 to nearly 1,000,000
Implemented ad server
Hired salesman and initiated ad sales revenue stream
Signed Flycast contract adding to ad sales revenue stream
Built PK product catalog and initiated transaction revenue stream
Contracted with Auto-by-Tel
Contracted with WhoWhere for web based e-mail
Commenced Cendant contract negotiations
Signed LOI for acquisition of gofishnet.com, inc., the largest retailer of
exclusively Christian music on the Internet.
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
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
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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
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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 Gospel Films, currently
supported through donations and does not generate revenue through advertising;
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.
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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 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.
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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.
"The Corporation shall not:
1. Take any position publicly or privately that denies or conflicts with the
tenets of the Statement of Faith.
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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
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<PAGE> 14
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.
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.
ITEM 2. DESCRIPTION OF PROPERTY
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. The Company
considers this space to be sufficient for its corporate headquarters.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of the fiscal year ended December 31, 1997.
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<PAGE> 15
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET
The Company's Common Stock and Purchase Warrants trade on the Nasdaq
SmallCap Stock Market(SM) under the symbols "AMEN", and "AMENW", respectively.
On September 24, 1997 the Company effected its initial public offering (the
"IPO"). The following table sets forth the ranges of high and low sales prices
of the Common Stock and Purchase Warrants since that date, as reported by the
Nasdaq SmallCap Stock Market(SM).
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
September 24, 1997 through December 31, 1997:
AMEN $ 5.5000 $ 2.00000
AMENW $ .7500 $ .15625
January 1, 1998 through March 19, 1998:
AMEN $ 3.50000 $ 1.96875
AMENW $ .46875 $ .15625
</TABLE>
At March 19, 1998 the closing price for the Company's Common Stock and
Purchase Warrants, as reported by Nasdaq SmallCap, was $ 3.1875 and $.43750 per
share, respectively.
At March 17, 1998, the approximate number of holders of record of the
Company's Common Stock and Purchase Warrants was 665 and 478, respectively. A
number of such holders of record are brokers and other institutions holding
shares of Common Stock in "street name" for more than one beneficial owner.
USE OF PROCEEDS
On October 3, 1997, the Company completed the initial public offering of
its securities, (SEC File No. 333-25937, effective September 24, 1997) issuing
2,000,000 shares of Common Stock at a price of $5.00 per share and 2,875,000
purchase warrants at $.1875 per Purchase Warrant. The Purchase Warrant grants
the holder the right to purchase shares of the Company's Common Stock for a five
year period at a price of $5.75. The offering was underwritten by Barron Chase
Securities, Inc. The following table describes the use of proceeds through
December 31, 1997:
15
<PAGE> 16
<TABLE>
<S> <C>
Gross proceeds of the offering ..................................... $10,539,063
Less:
Underwriting fees and offering costs ............................... 1,899,805
-----------
Subtotal: Proceeds net of underwriting fees and offering costs $ 8,639,258
Repayment of short term debt, including interest payment of $75,111 2,648,111
($1,248,111 of which was remitted to officers and directors)
Marketing and Sales and consulting services ........................ 200,000
Product development ................................................ 100,000
Working capital .................................................... 150,000
Notes to officers .................................................. 83,000
Purchases of computer equipment .................................... 27,266
-----------
Net proceeds remaining at December 31, 1997 .................. $ 5,430,881
</TABLE>
The following table reports the anticipated use of proceeds at December 31, 1997
compared to the use of proceeds portrayed in the prospectus:
<TABLE>
<CAPTION>
APPROXIMATE APPROXIMATE
APPLICATION OF NET PROCEEDS PROSPECTUS % OF PROCEEDS ANTICIPATED % OF PROCEEDS
--------------------------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marketing and sales and consulting services(1) $2,408,000 28.0% $1,700,000 20.0%
Product Development (2) 1,200,000 14.0% 1,900,000 22.0%
Retirement of Debt (3) 2,596,000 30.0% 2,648,111 30.0%
Working Capital (4) 2,473,065 28.0% 2,391,147 28.0%
---------- ----- ---------- -----
Total $8,669,065 100.0% $8,639,258 100.0%
</TABLE>
(1) Represents anticipated costs for the promotion of CCN, participation in
trade shows, multimedia presentations, market research; the hiring of at least
four additional marketing and sales personnel and three additional personnel to
the Company's editorial staff.
(2) Includes continuing enhancements of CCN and related technology.
(3) Represents (i) the satisfaction of $623,000 principal amount of Promissory
Notes held by Robert C. Varney, Ph.D., the Company's Chief Executive Officer and
a director, and Bruce E. Edgington, a director of the Company, including
interest payable thereon of $72,419; (ii) the satisfaction of $1,700,000
principal amount of Promissory Notes pursuant to a private placement clsode in
February, 1997, and (iii) the satisfaction of $250,000 principal amount of
Promissory Notes held by Robert C. Varney, Ph.D., and Bruce E. Edgington, Clay
T. Whitehead and W. Max Carey, directors of the Company, including interest
payable thereon of $2,961. See ITEM 6. "Management's Discussion and Analysis or
Plan of Operation - Liquidity and Capital Resources."
(4) Includes payment of salaries to executive officers of $360,000 per annum
over the next two years.
The $700,000 reduction in marketing and sales and consulting services and
offsetting increase in product development is only caused by staff realignments,
taking the functions of editing, CCN operations and CCN channel development out
of marketing and into product development.
The Company has never paid a cash dividend on its Common Stock and the
Company's Board of Directors intends to continue this policy for the forseeable
future.
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<PAGE> 17
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND
Founded in 1993, the Company has developed the Christian Community Network(TM)
(CCN) (www.christcom.net), an interactive website which provides information and
resources that the Company generally believes appeals to the Christian
community. Most of the information and resources are made available by Christian
and secular retailers, publishers, charities and ministries. To date, the
Company has derived most of its revenues from 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 (www.worldvision.org). The Company's website services
and development clients also include Maranatha! Music, the Salvation Army,
Ministry Business Services, Family Research Council, Evangelical Council for
Financial Accountability (ECFA), Christian Liberty Academy, Billy Graham
Institute of Evangelism, Young Life and Presbyterian Church in America.
Subsequent to its IPO, the Company is attempting to position itself to generate
revenues through the sales of advertising space on CCN, memberships in
Christianity-based affinity marketing programs (affording participants price
discounts and other benefits of group purchasing power), Christian interest
products manufactured or developed by others (primarily Christian books,
Christian music and other Christian articles) on CCN, and to a much lesser
extent, the continuing provision of technology consulting services to Christian
organizations. Because of its "Community" focus, the Company is moving toward
more of an individual consumer focus as compared to an organizational client
focus. However, until critical mass is achieved in pursuing a consumer oriented
business model , work effort shifted in this manner and/or changes in the
organizational customer base may have an adverse affect on revenue.
The opportunity for the Company to begin generating significant advertising and
retail revenues is predicated on increasing the membership base and traffic on
CCN measured in "visits" and "ad impressions". Membership on CCN is free and
occurs when a CCN visitor joins CCN by filling out an on-line enrollment form,
giving the Company demographic data which allows us to better serve the members'
needs. A visit is a sequence of pages viewed by a single user within a defined
time period, normally thirty minutes. An ad impression is the display of a
banner advertisement to a site visitor. For the year ending December 31, 1997,
the Company experienced a 1500% growth in membership (those who have entered
their names in the guest register of the website signifying their desire to
receive the benefits and obligations of being members of the community) to
15,790, compared to just over 1,000 at the end of 1996. Visits increased 1000%
from 10,000 per month in the three months ended December 31, 1996 to nearly
100,000 per month in the three months ended December 31, 1997. During the same
periods, ad impressions grew over 900% from less than 100,000 per month to
874,700 per month. To the extent the Company continues to have advertisements on
CCN for which it receives a fee, in the event there is an increase in the
website traffic on CCN, the Company's revenues from advertising should increase.
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<PAGE> 18
In 1997, the Company released several new products which have been instrumental
in generating this traffic pattern. The Company hosted several audio events live
on the Internet, the largest of which was the Promise Keeper's sponsored "Stand
in the Gap" event attended by some estimates over one million people, not
including close to 20,000 who listened and watched video clips over the Internet
from around the world. CCN Chat has been an active service allowing for
discussion in a uniquely monitored environment with safeguards in place to
protect participants from language and tone averse to the Christian mind set. In
addition, a productivity enhancement was introduced which provides for database
driven distribution of content which refreshes content without labor intensive
efforts. In the third quarter, the Company launched a Marketspace offering
products specifically targeted toward specific ministries. In 1997, the Company
received royalties of over $9,000 from the Marketspace activity, which is
included in the Company's Retail Sales. In December, the Company introduced
Movieguide into its range of services. This segment of CCN allows visitors to
review critiques of the movies and live entertainment from a Christian world
view. The Company generates advertising revenue from this activity. Also in
December of 1997, CCN Events was released which provides a forum for members to
post Christian events such as seminars, concerts, fund raising events and more.
Over 1,000 events have been entered which visitors to CCN can search for and
obtain information. The value of these services to Christians on the Internet
has been noted as CCN received the award, among others, for the "Best Christian
Website for the Year 1997" from Internet watchdog "The Best of the Christian
Web". In February 1998, the Company added free web-based e-mail to its
interactive service menu. Through an advertising revenue sharing arrangement
with WhoWhere? Inc., members of CCN can take advantage of this additional
service. The Company plans to continue enhancement of product and service
offerings in the years to come in an effort to provide for the needs of the
interactive Christian community from a single source....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 December
31, 1997, the Company had an accumulated deficit of approximately $7,625,000.
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
18
<PAGE> 19
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.
RESULTS OF OPERATIONS
THE YEAR ENDED DECEMBER 31, 1997 AND 1996
NET LOSS
The Company incurred a net loss of $4,124,710 for the year ended December 31,
1997, as compared to a loss of $2,464,904 for the same period ended December 31,
1996. This increased loss of $1,659,806 (67%) 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 $164,180
(91%) increase in revenues, and the fact that during the year 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 1% to $2,375,024 in 1997 versus $2,402,341. This
reduction would have been 10% without the recognition of the donation of stock.
REVENUES
In the year ended December 31, 1997 and 1996, the Company earned $344,956 and
$180,776 of revenue, respectively. Of the revenue recognized during the year
ended December 31, 1997, $278,563 was generated from Consulting Services,
$33,942 from Internet Access, $15,575 from Retail Sales, and $16,876 from
Advertising. This compares to $90,571 of Consulting Service revenue, $81,371 of
Internet Access revenue, and $8,834 of Retail Sales revenue for the comparable
period in 1996. The $187,992 increase in Consulting Service 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 $169,938 for the
year ended December 31, 1997 as compared to $226,220 for the year ended December
31, 1996. Although revenues increased by 91%, the corresponding costs decreased
by 25% since, as noted above, the Company did not
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<PAGE> 20
actively market 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.
PRODUCT DEVELOPMENT AND CCN OPERATIONS
Product Development expenses decreased by $146,030 (26%) primarily because of
the 85% decrease in services provided at no charge 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 $454,244 for the year ended December 31,
1997, as compared to $248,198 for the same period in 1996. The cost of CCN
Operations increased by 83% because 1997 includes a full year of activity as
compared to six months in 1996. In addition, 1997 CCN Operations includes two
additional employees and the cost of a consultant whereas 1996 does not.
SALES AND MARKETING
Sales and marketing costs, decreased to $834,570 during the year ended December
31, 1997 from $901,630 in the comparable period ended December 31, 1996. This
marginal ($67,060 or 7%) decrease is due to the fact that the Company is no
longer marketing Internet Access which precipitated a reduction in head count.
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 $855,095 and $654,907
for the year ended December 31, 1997 and 1996. G&A expenses increased by
$200,188 (31%) 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 $1,840,481 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
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<PAGE> 21
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. See
"Liquidity and Capital Resources" below and Notes C and D to the Financial
Statements dated December 31, 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization increased from $77,480 in the year ended December
31, 1996, to $219,710 in the year ended December 31, 1997. The 1997 increase is
the result of increased amortization of the discount on warrants mentioned
above.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1997 and 1996, net cash used in operating
activities was $2,227,463 and $2,023,558, respectively. Net cash used in
investment activities was $42,108 and $180,668 in the year ended December 31,
1997 and 1996, respectively.
Net cash provided by financing activities was $7,697,367 and $1,958,841 for the
year ended December 31, 1997 and 1996, respectively. In 1997, the Company raised
$10,539,063 gross proceeds from an initial public offering and issued $250,000
of short term debt, from an officer and director, and $1,700,000 of short term
debt. Offering costs were $1,899,805 for the IPO, yielding net proceeds of
$8,639,258. Proceeds from the IPO were used to repay the short term debt noted
above, as well $623,000 of short term debt from an officer and director, raised
in 1996. The Company paid $75,111 interest in repayment of the short term debt
and issued warrants to purchase 172,639 vested shares of common stock at $4.00
per share. Shares issued pursuant to exercise of these warrants are subject to
an eighteen month lockup agreement. Offering costs for the $1,700,000 short term
debt were $135,759, netting $1,564,241 of proceeds. $212,000 of which was used
to repay director advances made in 1996. The liquidation of the $1,700,000 short
term debt was accompanied by an interest expense of $1,700,000 since the debt
holders received a total of 340,000 shares of Common Stock, derived by dividing
this principal amount by the $5.00 initial public offering price, in addition to
the repayment of the principal. These shares are subject to a twenty four month
lockup agreement. For the year ended December 31, 1996, in addition to the
activity previously mentioned, net proceeds of $1,213,399 were generated from
private equity placements and a $30,000 advance from an officer was repaid.
The Company currently anticipates that its $5,326,075 working capital balance at
December 31, 1997, consisting primarily of remaining proceeds from the Company's
initial public offering after the debt liquidation and liquidation of accrued
offering costs; will be sufficient to meet the Company's anticipated working
capital, lease commitments, and capital expenditure requirements for the next
twenty one 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
21
<PAGE> 22
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.
OUTLOOK AND UNCERTAINTIES
The Company's future financial condition and results are subject to
substantial risks and uncertainties, some of which are summarized in this
section.
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 December 31, 1997, the Company had an
accumulated deficit of approximately $7,625,000. 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 ITEM 6. "Management's Discussion and
Analysis or Plan of Operation - Liquidity and Capital Resources."
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
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<PAGE> 23
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 had generated most of its revenue in 1996 and 1997 from
Internet access and consulting services. The advent of unlimited access to the
Internet at a fixed price eroded the Company's ability to compete without
incurring extensive losses, so marketing this product was essentially abandoned
in early 1997. From 1995 through the third quarter of 1997, the Company also
provided consulting services to numerous Christian ministries. In 1995 and 1996,
much of this work was performed without charge in an effort to establish
recognition within the Christian community that the Company was capable of
providing quality Internet services of great value to this market niche. While
generating $278,562 in revenue from consulting services in 1997, the Company was
resource limited in its ability to expand its core business of developing CCN to
a point of generating highly leveragable advertising and retail revenues from
its members and visitors. Now that the Company has the resources to be fully
focused on the development of CCN, the Company will be offering consulting
services to a lesser extent, concentrating on 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.
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. 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,
23
<PAGE> 24
critical issues concerning the commercial use of the Internet (including
security, reliability, cost, ease of use, access, quality of service and
acceptance of advertising), remains 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 mature as an effective commerce medium, the Company's business, results
of operations and financial condition will be materially adversely affected.
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.
24
<PAGE> 25
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 ITEM
1 "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 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 ITEM 1 "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.
25
<PAGE> 26
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 ITEM 2.
"Description of Property."
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.
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.
26
<PAGE> 27
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 twenty one 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 ITEM 6.
"Management's Discussion and Analysis or Plan of Operation - Liquidity and
Capital Resources."
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 Item 1, "Business"
DEPENDENCE ON STRATEGIC RELATIONSHIPS. The Company has entered into
certain material agreements with numerous businesses which provide services and
products. The following table provides information pertinent to these
relationships:
27
<PAGE> 28
<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,
bandwith 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 Cancellable 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 ITEM 1 "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
28
<PAGE> 29
costs, decreased 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 ITEM 1 "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 its
special 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. Article XIII of the Company's Bylaws cannot be amended or superseded
except by a super majority vote of the Company's stockholders at a meeting. See
ITEM 1 "Business-Christian Statement of Faith; the Company's Policy."
POSSIBLE SECURITIES LAW VIOLATION. In April 1996, the Company became aware
that certain previously completed private offerings of equity securities closed
between January 1994 and March 1996 at a per share price ranging from $2.00 to
$4.00, 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
shareholders to exercise rescission rights, if any, related to their investment
in the Company. The Company believes that there may be valid legal defenses to
any and/or all such rescission actions, if initiated. The potential of
inadvertent exemption violations was communicated by the Company to the
investors concerned in August, 1996. Furthermore, in December, 1996, each
shareholder and member who the Company believed may have had certain claims to
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 by the Company and
to further release the Company and its affiliates from liability associated with
such possible breaches of the law (the "Waivers"). Stockholders representing
approximately 84% of the proceeds raised by the Company in connection with such
prior offerings delivered the Waivers to the Company. Assuming the Waivers are
valid and enforceable by the Company, if in the future, it is determined that
the prior offerings were effected in violation of federal securities and/or
certain state securities laws, the Company may have to refund an aggregate of
approximately $388,000, plus interest, from the date of purchase, to purchasers
of securities in the prior offerings who have not delivered the
29
<PAGE> 30
Waiver and bring an action for rescission within the applicable limitations
period. If the Waivers are not deemed valid, the Company could be obligated to
refund up to $1,733,399. The Company has been informed by the Commonwealth of
Virginia that pursuant to its investigation, the Commonwealth of Virginia
believes the Waivers were issued in violation of the Virginia Securities Act.
The Commonwealth of Virginia has requested that the Company notify each Virginia
investor of their rights and remedies in connection with their investment in the
Company as stipulated under the Virginia Securities Act (generally, to recover
the consideration paid, together with nominal interest) and that evidence of
such compliance be in the form of an affidavit signed by the Company's President
which contains the date on which each investor received the notice. 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. The Company has
not been made aware of the institution by any other state, federal or regulatory
authority proceeding against the Company for potential securities law
violations. The Company's financial statements do not include a reserve for any
amounts the Company may be required to deliver in connection with a rescission
of the prior offerings. The 574,434 shares subject to possible rescission
representing $1,733,399, however, are reflected in the Company's balance sheets
as Common Stock Subject to Possible Rescission account on the balance sheet. By
March 20, 1998, all but 21,250 shares of common stock subject to rescission
representing $85,000 of capital will revert to common stock outstanding and
additional paid in capital, as appropriate. In December 1998, these remaining
21,250 shares of common stock subject to rescission will be 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. See ITEM 7. "Financial Statements-Commitments and
Contingencies."
NASDAQ ELIGIBILITY AND MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM
NASDAQ SMALLCAP. 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.
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
listing requirements or in what are commonly referred to as the "pink sheets."
As a
30
<PAGE> 31
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 SmallCap, 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 SmallCap, 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.
ITEM 7. FINANCIAL STATEMENTS
The Financial Statements as required by Item 310 of Regulation S-B are included
in this report commencing on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Incorporated by reference to the Company's definitive Proxy Statement to be
filed in accordance with Rule 14a-101, Schedule 14A.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive Proxy Statement to be
filed in accordance with Rule 14a-101, Schedule 14A.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNER AND MANAGEMENT
Incorporated by reference to the Company's definitive Proxy Statement to be
filed in accordance with Rule 14a-101, Schedule 14A.
31
<PAGE> 32
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's definitive Proxy Statement to be
filed in accordance with Rule 14a-101, Schedule 14A.
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
2+ Articles and Certificates of Merger and Reorganization of DIDAX
ON-LINE L.C. and DIDAX INC. into the Registrant
3.1+ Certificate of Incorporation and Certificates of Amendments thereto
of DIDAX INC.
3.1(a)+ Certificate of Correction regarding Certificate of Incorporation
3.2+ Bylaws and amendments thereto of the Registrant
4.5+ Form of Stock Option Agreement
5.1+ Opinion of Berman Wolfe & Rennert, P.A.
5.2+ Opinion of Gammon & Grange, P.C.
10.1+ Office Building Lease by and between 4501 Daly Dr. Inc. and the
Registrant dated September 12, 1995
10.2+ Amended office Building Lease by and between 4501 Daly Dr. Inc.
and the Registrant dated January 30, 1996
10.3+ 1997 Stock Option Plan
10.4+ Promissory Note and Warrant Certificate between the Registrant and
Robert Varney dated July 10, 1996
10.5+ Promissory Note and Warrant Certificate between the Registrant and
Robert Varney dated September 26, 1996
10.6+ Amendment to terms of promissory notes between Registrant and Robert
Varney dated November 13, 1996
10.7+ Amendment to terms of promissory notes between Registrant and Robert
Varney dated July 10, 1997
10.8+ Promissory note and Warrant Certificate between the Registrant and
Bruce Edgington dated July 30, 1996
10.9+ Promissory note and Warrant Certificate between the Registrant and
Bruce Edgington dated October 30, 1996
10.10+ Amendment to terms of promissory notes between Registrant and Bruce
Edgington dated November 13, 1996
10.11+ Amendment to terms of promissory notes between Registrant and
Bruce Edgington dated July 24, 1997
</TABLE>
+ Incorporated by reference to the Company's Registration Statement on Form
SB-2 declared effective by the Securities and Exchange Commission on
September 24, 1997, SEC File No. 333-25937
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
10.12+ Promissory note between the Registrant and John and Holli Meindl
dated January 9, 1997
10.13+ Form of Promissory Note between Registrant and Holders of Junior
Notes
10.14+ Agreement between the Registrant and NetRadio dated June 21, 1996
10.15+ Agreements between the Registrant and Digital Nation dated
March 19, 1997 and November 12, 1996
10.16+ Agreement between the Registrant and Promisekeepers dated March 13,
1996 with amendment dated February 10, 1997
10.17+ Agreement between the Registrant and World Vision dated
February 11, 1997
10.18+ Employment Agreement between the Registrant and Robert Varney, Ph.D.
dated as of June 6, 1997
10.19+ Employment Agreement between the Registrant and Dane West dated as
of June 6, 1997
10.20+ Employment Agreement between the Registrant and William Bowers dated
as of June 6, 1997.
10.21+ Employment Agreement between the Registrant and Gary Struzik dated
as of June 6, 1997.
10.22+ Agreement between the Registrant and ichat, Inc. dated
February 28, 1997
10.23+ Agreement between the Registrant and Spring Arbor Distribution
Company dated October 1, 1996
10.24+ Agreement between the Registrant and Intermind Corporation dated
January 19, 1997
10.25+ Agreement between the Registrant and CyberCash, Inc. dated
February 11, 1997
10.26+ Promissory note between Registrant and Bruce Edgington dated
August 8, 1997
10.27+ Promissory note between Registrant and Bruce Edgington dated
August 22, 1997
10.28+ Promissory note between Registrant and Bruce Edgington dated
September 5, 1997
10.29+ Promissory note between Registrant and Robert Varney dated
August 22, 1997
10.30+ Promissory note between Registrant and Robert Varney dated
September 5, 1997
10.31 Promissory note between Registrant and Dane West dated
October 31, 1997
10.32 Promissory note between Registrant and William Bowers dated
October 31, 1997
10.33 Agreement between the Registrant and Corporate Resource Development,
Inc. dated February 18, 1998
10.34 Agreement between the Registrant and GTE Internetworking dated
December 15, 1997
10.35 Agreement for Conclusion of Employment Agreement between the
Registrant and Robert Varney dated February 17, 1998
11 Statement of computation of earnings per share
23.1+ Consent of Berman Wolfe and Rennert, P.A.
</TABLE>
+ Incorporated by
reference to the Company's Registration Statement on Form SB-2 declared
effective by the Securities and Exchange Commission on September 24, 1997, SEC
File No. 333-25937
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
23.2+ Consent of Hoffman, Morrison & Fitzgerald P.C.
23.3+ Consent of Gammon & Grange, P.C.
27.1 Financial Data Schedule - Restatement of 1996 Fiscal Year
27.2 Financial Data Schedule - For Fiscal Year 1997
</TABLE>
+ Incorporated by reference to the Company's Registration Statement on Form
SB-2 declared effective by the Securities and Exchange Commission on
September 24, 1997, SEC File No. 333-25937
(b) Reports on Form 8-K
The Company filed no Reports on Form 8-K during the fourth quarter of the fiscal
year ended December 31, 1997.
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the Exchange
Act, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DIDAX INC.
March 20, 1998 By: /s/ Robert C. Varney
---------------------------------------
Robert C. Varney,
Chief Executive Officer and director
March 20, 1998 By: /s/ Gary A. Struzik
----------------------------------------
Gary A. Struzik, Chief Financial Officer
and
Secretary, Chief Accounting Officer
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
March 20, 1998 By: /s/ Robert C. Varney
----------------------------------------
Robert C. Varney,
Chief Executive Officer and director
34
<PAGE> 35
March 20, 1998 By: /s/ Gary A.Struzik
----------------------------------------
Gary A. Struzik, Chief Financial Officer
and
Secretary, Chief Accounting Officer
March 20, 1998 By: /s/ James G. Buick
----------------------------------------
James G. Buick, Chairman of the Board of
Directors
March 20, 1998 By: /s/ Dane B. West
----------------------------------------
Dane B. West, President and director
March 20, 1998 By: /s/ William H. Bowers
----------------------------------------
William H. Bowers, Chief Operating Officer
and director
March 20, 1998 By: /s/ Bruce E. Edgington
----------------------------------------
Bruce E. Edgington, director
March 20, 1998 By: /s/ John J. Meindl
----------------------------------------
John J. Meindl, director
March 20, 1998 By: /s/ Clay T. Whitehead
----------------------------------------
Clay T. Whitehead, director
March 20, 1998 By: /s/ Earl E. Gjelde
----------------------------------------
Earl E. Gjelde, director
March 20, 1998 By: /s/ W.R. `Max' Carey
----------------------------------------
W.R. `Max' Carey, director
35
<PAGE> 36
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- - ------ -----------
<S> <C>
10.31 Promissory note between Registrant and Dane West dated
October 31, 1997
10.32 Promissory note between Registrant and William Bowers dated
October 31, 1997
10.33 Agreement between the Registrant and Corporate Resource Development,
Inc. dated February 18, 1998
10.34 Agreement between the Registrant and GTE Internetworking dated
December 15, 1997
10.35 Agreement for Conclusion of Employment Agreement between the
Registrant and Robert Varney dated February 17, 1998
11 Statement of computation of earnings per share
27.1 Financial Data Schedule - Restatement of 1996 Fiscal Year
27.2 Financial Data Schedule - For Fiscal Year 1997
</TABLE>
36
<PAGE> 37
DIDAX INC.
(A DEVELOPMENT STAGE
COMPANY)
Financial Statements from May 12, 1993
(Date of Inception) to December 31, 1997
and For the Years Ended December 31, 1997 and 1996
With Independent Auditors' Report
<PAGE> 38
DIDAX INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS FROM MAY 12, 1993
(DATE OF INCEPTION) TO DECEMBER 31, 1997 AND
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
WITH INDEPENDENT AUDITORS' REPORT
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
INDEPENDENT AUDITORS' REPORT F-2
FINANCIAL STATEMENTS:
Balance sheets at December 31, 1997 and 1996 F-3
Statements of operations for the years ended
December 31, 1997 and 1996, and cumulative
from Inception (May 12, 1993) to December 31,
1997 (unaudited) F-4
Statements of stockholders' equity (deficit)
from Inception (May 12, 1993) to
December 31, 1997 F-5
Statements of cash flows for the years ended
December 31, 1997 and 1996, and cumulative
from Inception (May 12, 1993) to December 31,
1997 (unaudited) F-6
NOTES TO FINANCIAL STATEMENTS F-7-23
</TABLE>
F-1
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
DIDAX INC.
Chantilly, Virginia
We have audited the accompanying balance sheets of DIDAX INC. (a development
stage company) as of December 31, 1997 and 1996, and the related statements of
operations and cash flows for the years ended December 31, 1997 and 1996 and
stockholders' equity (deficit) for the period May 12, 1993 (date of inception)
to December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of DIDAX INC. as of December 31,
1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
HOFFMAN, MORRISON & FITZGERALD, P.C.
McLean, Virginia
February 18, 1998
F-2
<PAGE> 40
DIDAX INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,932 $ 5,429,728
Accounts receivable including unbilled of $24,978 and
$35,712 at December 31, 1996 and 1997, respectively 46,450 86,156
Prepaid expenses 10,800 16,319
Deferred costs, net 29,367 1,045
----------- ------------
Total current assets 88,549 5,533,248
PROPERTY AND EQUIPMENT, net 166,923 131,783
OTHER ASSETS:
Notes receivable from officers 10,000 93,000
Deposits 9,553 --
Deferred costs, net 7,249 --
----------- ------------
Total other assets 26,802 93,000
----------- ------------
$ 282,274 $ 5,758,030
=========== ============
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 --
Accounts payable 252,541 40,035
Accrued liabilities 170,835 151,120
Deferred revenue 4,125 16,018
----------- ------------
Total current liabilities 1,192,704 207,173
OTHER LIABILITIES:
Accounts payable 6,356 25,551
COMMITMENTS AND CONTINGENCIES -- --
COMMON STOCK SUBJECT TO POSSIBLE RECISSION
$.01 par value, 607,434 and 574,434 shares issued
and outstanding at December 31, 1996 and 1997, respectively 1,788,399 1,733,399
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value, 20,000,000 shares
authorized; 552,943 and 2,968,155 shares issued and
outstanding at December 31, 1996 and 1997, respectively 5,530 29,682
Common stock warrants 111,187 666,722
Additional paid-in capital 678,327 10,720,442
Deficit accumulated during development stage (3,500,229) (7,624,939)
----------- ------------
Total stockholders' equity (deficit) (2,705,185) 3,791,907
----------- ------------
$ 282,274 $ 5,758,030
=========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 41
DIDAX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
For the Year from Inception
Ended December 31, (May 12, 1993)
------------------------------ to December 31,
1996 1997 1997
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
OPERATING REVENUES:
Consulting services $ 90,571 $ 278,562 $ 369,133
Internet access 81,371 33,942 115,313
Retail sales 8,834 15,575 24,409
Advertising sales -- 16,876 16,876
----------- ----------- -----------
Total revenues 180,776 344,955 525,731
OPERATING EXPENSES:
Cost of goods and services 226,220 169,938 396,158
Product development 552,162 406,132 1,291,758
CCN operations 248,198 454,244 702,442
Sales and marketing 901,630 834,570 2,066,499
General and administrative 654,907 855,095 1,885,917
----------- ----------- -----------
Total operating expenses 2,583,117 2,719,979 6,342,774
----------- ----------- -----------
LOSS FROM OPERATIONS (2,402,341) (2,375,024) (5,817,043)
OTHER INCOME (EXPENSE):
Interest income 11,412 90,145 105,910
Gain on exchange of assets 3,091 -- 3,091
Miscellaneous income 749 650 1,399
Interest expense (77,815) (1,840,481) (1,918,296)
----------- ----------- -----------
Total other income (expenses) (62,563) (1,749,686) (1,807,896)
----------- ----------- -----------
NET LOSS $(2,464,904) $(4,124,710) $(7,624,939)
=========== =========== ===========
Net loss per common share (basic) $ (4.47) $ (3.54)
=========== ===========
Weighted average number of common
shares outstanding 551,679 1,166,705
=========== ===========
Net loss per common share (diluted) $ (4.35) $ (3.38)
=========== ===========
Weighted average number of common shares and
common share equivalents outstanding 566,981 1,219,802
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 42
DIDAX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM MAY 12, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1997
<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 6,250 63 5,347 -- -- 5,410
Issuance of common stock warrants 111,187 111,187
Net loss -- -- -- -- (2,464,904) (2,464,904)
--------- -------- ----------- ------- ----------- -----------
BALANCE, DECEMBER 31, 1996 552,943 5,530 678,327 111,187 (3,500,229) (2,705,185)
Issuance of common stock throughout 1997,
net of offering costs of $1,899,805 2,415,212 24,152 10,042,115 -- -- 10,066,267
Issuance of common stock warrants 555,535 555,535
Net loss -- -- -- -- (4,124,710) (4,124,710)
--------- -------- ----------- ------- ----------- -----------
BALANCE, DECEMBER 31, 1997 2,968,155 $ 29,682 $10,720,442 666,722 $(7,624,939) $ 3,791,907
========= ======== =========== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 43
DIDAX INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cumulative
For the Year from Inception
Ended December 31, (May 12, 1993)
------------------------------- to December 31,
1996 1997 1997
----------- ----------- ------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,464,904) $(4,124,710) $ (7,624,939)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 77,480 219,718 304,489
Amortization of debt discount charged
to interest expense 41,390 86,270 127,660
Common stock issued in lieu of cash for
professional services -- 11,062 36,062
Common stock donated -- 200,000 200,000
Common stock issued in lieu of cash for
interest on repayment of long term debt -- 1,700,000 1,700,000
Changes in assets and liabilities affecting operations:
Accounts receivable (46,450) (39,706) (86,156)
Advances due from officer 33,560 (83,000) (93,000)
Prepaid expenses (10,800) 4,035 (16,318)
Accounts payable 254,003 (193,311) 65,586
Accrued liabilities 88,038 (19,715) 151,120
Deferred revenue 4,125 11,894 16,018
----------- ----------- ------------
Net cash used by operating activities: (2,023,558) (2,227,463) (5,219,478)
----------- ----------- ------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Purchases of property and equipment (180,668) (42,108) (290,450)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term debt -- 1,564,241 1,564,241
Proceeds from short-term debt, officer and director 623,000 250,000 873,000
Proceeds from advances due to officer and director 212,000 -- 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) (242,000)
Repayment of short-term debt, officer and director -- (873,000) (873,000)
Net proceeds from issuance of common stock
and warrants 1,193,808 8,639,258 11,086,514
Deferred costs (39,967) 28,868 (11,099)
----------- ----------- ------------
Net cash provided by financing activities 1,958,841 7,697,367 10,939,656
----------- ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (245,385) 5,427,796 5,429,728
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 247,317 1,932 --
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,932 $ 5,429,728 $ 5,429,728
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Interest paid $ 4,884 $ 78,154 $ 83,038
=========== =========== ============
</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 financial statements.
F-6
<PAGE> 44
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
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"
or "the Company") 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, the Company, 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.
The Company'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 Notes J and M.
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 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."
F-7
<PAGE> 45
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
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.
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 offers semi-annual
subscriptions to its customers for Internet access. Advance payments for
these services are deferred and recognized ratably over the period that
such access is provided.
Net loss per common share - During 1997, the Company adopted Statement of
Financial Accounting Standards ("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> 46
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES(CONTINUED)
Capital Structure - The Financial Accounting Standards Board 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 Notes I and K.
Comprehensive Income - Effective for financial statements for periods
ending after December 15, 1997, the Financial Accounting Standards Board
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 Financial Accounting Standards Board
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 Financial Accounting
Standards Board 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 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 proforma 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.
F-9
<PAGE> 47
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Deferred Costs - 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.
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 and Note E.
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, they 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 Statement of Financial
Accounting Standards 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.
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.
Product Development Costs - Statement of Financial Accounting Standards 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.
Reclassifications - Certain items in the accompanying 1996 financial
statements have been reclassified to conform with the 1997 presentation.
F-10
<PAGE> 48
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
C. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Computer equipment $ 219,169 $ 239,345
Furniture and equipment 26,873 26,873
Leasehold improvements 2,300 2,300
Office equipment -- 8,300
--------- ---------
248,342 276,818
Less: accumulated depreciation and amortization (81,419) (145,035)
--------- ---------
$ 166,923 $ 131,783
========= =========
</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.
F-11
<PAGE> 49
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
E. SHORT-TERM DEBT
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 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.
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>
F-12
<PAGE> 50
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
F. INCOME TAXES (CONTINUED)
Deferred tax assets and liabilities at December 31, 1997 were as follows:
<TABLE>
<S> <C>
Deferred tax assets:
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.
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. See Notes I and K.
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 E. 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.
F-13
<PAGE> 51
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
H. RELATED PARTY TRANSACTIONS (CONTINUED)
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 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.
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. At present, the
Company intends to negotiate a new lease for the same location. The
equipment leases provide for three-year lease terms.
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 was $66,944 and
$63,325 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.
F-14
<PAGE> 52
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
I. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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.
By March 20, 1998, all but 21,250 shares of common stock subject to
rescission representing $85,000 of capital will revert to common stock
outstanding and additional paid in capital, as appropriate. In December
1998, these remaining 21,250 shares of common stock subject to rescission
will be beyond the statute of limitations as indicated above.
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-15
<PAGE> 53
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
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 there were no uninsured cash balances.
Cash equivalents are maintained in a U.S. government money market fund.
These cash equivalents are not insured by the FDIC, but are collateralized
by the underlying assets of the federal government. At December 31, 1997
and 1996, cash equivalents totaled approximately $5,429,000 and $200.
During 1997 and 1996, revenue was generated from major customers in amounts
exceeding 10% of total revenue as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
------------------------------ --------------------------------
Accounts Accounts
Receivable Receivable
Revenue % Balance Revenue % Balance
------- --- ---------- --------- --- ----------
<S> <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
Customer #3 $ - -% $ - $ 64,109 19% $ 4,063
</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.
F-16
<PAGE> 54
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
K. STOCK OPTION PLAN (CONTINUED)
At December 31, 1997 and 1996, the Company had outstanding options to sell
1,150,456 and 936,931 shares of common stock, respectively 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 December 31, 1996
options for 284,956 and 204,431 shares are vested, respectively, and
options for 45,000 shares are scheduled to vest during 1998. 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
94,500 and 49,500 shares of common stock, respectively, to various outside
consultants and a marketing partner at exercise prices ranging from $1.66
to $5.00 per share. As of December 31, 1997 and December 31, 1996, options
for 64,500 and 19,000 were vested. 8,000 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, 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 December 31, 1996, options for 240,704 and 169,444
shares are vested with the remainder scheduled to vest through 1999. The
options expire through 2007.
A summary of activity for the period ended December 31, 1997, 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
========= =============
</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-17
<PAGE> 55
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
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>
1996 1997
------------- -------------
<S> <C> <C>
Net loss
As reported $ (2,464,904) $ (4,124,710)
Proforma $ (2,715,065) $ (4,222,353)
Net loss per common share
Basic
As reported $ (4.47) $ (3.54)
Proforma $ (4.92) $ (3.62)
Diluted
As reported $ (4.35) $ (3.38)
Proforma $ (4.79) $ (3.46)
</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.
F-18
<PAGE> 56
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
L. 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>
1996 1997
----------- -----------
<S> <C> <C>
Net loss (numerator) $(2,464,904) $(4,124,710)
Weighted average shares (denominator) 551,679 1,166,705
Basic net loss per share $ (4.47) $ (3.54)
=========== ===========
Dilutive effect of stock options &
purchase warrants 15,302 53,097
Dilutive shares (denominator) 566,981 1,219,802
Diluted net loss per share $ (4.35) $ (3.38)
=========== ===========
</TABLE>
SFAS No. 128 also requires disclosure of any transaction occurring after
the end of the most recent period but before issuance of the financial
statements that would have materially changed the number of common shares
or potential common shares outstanding at the end of the period if the
transaction had occurred before the end of the period. On March 20, 1998,
553,183 common shares will no longer be subject to rescission which will
increase the number of shares in both the basic and the diluted EPS
calculations. See Notes I and M.
M. SUBSEQUENT EVENTS
DIVERSIFICATION OF INVESTMENTS
In January 1998, the Company implemented its Investment Policy as approved
by the Board of Directors which diversifies its investment portfolio in a
manner which preserves principal, and maintains liquidity, while attempting
to maximize portfolio rate of return through investment in short term
government securities, commercial paper, and commercial money market funds,
in addition to its already existing government money market fund.
CONCENTRATION OF CREDIT RISK
In January 1998, the Company diversified its investment portfolio. As of
that date, cash equivalents are maintained in U.S. government and
commercial money market funds, obligations of U.S. Government agencies and
Corporate debt obligations. These cash equivalents are not insured by the
FDIC, but are collateralized by the underlying assets of the federal
government and the related companies.
F-19
<PAGE> 57
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
M. SUBSEQUENT EVENTS (CONTINUED)
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%.
CHAIRMAN OF THE BOARD
In January 1998, James G. Buick was appointed Chairman of the
Board of Directors in place of Dr. Robert C. Varney. The Board
of Directors also approved the formation of an ad hoc Executive
Search Committee to seek out a new Chief Executive Officer. No
time limit has been set for the completion of the search. Dr.
Varney will continue as Chief Executive Officer until a
replacement is found.
RELATED PARTY TRANSACTIONS
To enhance process and achieve product efficiencies, the Company hired
Corporate Resource Development, Inc. ("CRD") in February 1998, for
consulting services commencing in March 1998 on a month to month basis,
cancelable within 30 days of notice from the firm in the month following
such notice. Max Carey, a member of DIDAX's board of directors, is CRD's
Vice Chairman.
MERGER
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., an Internet retailer of Christian music and videos,
operates as a wholly owned subsidiary of the Company. The Company accounted
for the merger as a pooling of interests based on the guidelines described
in Accounting Principles Board No. 16, "Business Combinations". Had the
merger occurred prior to December 31, 1997, the financial statement impact
would have been as follows:
<TABLE>
<CAPTION>
DIDAX DIDAX/gofishnet.com
as reported Consolidated
----------- ------------
<S> <C> <C>
Revenue $ 344,955 $ 420,647
Net Loss $ (4,124,710) $(4,253,580)
Net Loss Per Share - basic $ (3.54) $ (3.30)
Net Loss Per Share - diluted $ (3.38) $ (3.17)
</TABLE>
F-20
<PAGE> 58
DIDAX INC.
(A Development Stage Company)
Notes to Financial Statements
December 31, 1996 and 1997
M. SUBSEQUENT EVENTS (CONTINUED)
RESCISSION
By March 20, 1998, 553,183 shares of common stock subject to rescission
will be 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. As a result,
common stock at par and paid in capital will increase by $5,534 and
$1,642,865, respectively. In December 1998, the remaining 21,250 shares of
common stock subject to rescission will be beyond this statute of
limitations. Thus common stock at par and paid in capital will increase at
that time by $213 and $84,787, respectively.
F-21
\
<PAGE> 1
EXHIBIT 10.31
PROMISSORY NOTE
$75,000 CHANTILLY, VIRGINIA OCTOBER 31, 1997
For VALUE RECEIVED of $75,000, DANE B. WEST, MAKER, as represented by signature
below, promises to pay to DIDAX INC., the HOLDER, as authorized by the Board of
Directors on October 28, 1997, the principal sum of SEVENTY FIVE THOUSAND
DOLLARS ($75,000). Interest from date at a rate of 5.75% percent per annum will
be remitted to DIDAX INC. by the Maker, through biweekly payroll deductions of
One hundred sixty five dollars and eighty six cents ($165.86). The said
principal shall be payable in lawful money of the United States of America at
Chantilly, Virginia or at such place as may hereafter be designated by written
notice from the HOLDER to the MAKER hereof, on the date and in the manner
following:
UPON DEMAND ON OCTOBER 31, 1999 during normal business hours.
MAKER'S Address:
DANE B. WEST /s/ GARY A. STRUZIK (Holder)
4501 Daly Dr., Suite 103 -----------------------------
Chantilly, Va. 20151
/s/ DANE B. WEST (Maker)
-----------------------------
<PAGE> 1
EXHIBIT 10.32
PROMISSORY NOTE
$18,000 CHANTILLY, VIRGINIA OCTOBER 31, 1997
For VALUE RECEIVED of $18,000, WILLIAM H. BOWERS, MAKER, as represented by
signature below, promises to pay to DIDAX INC., the HOLDER, as authorized by the
Board of Directors on October 28, 1997, the principal sum of EIGHTEEN THOUSAND
DOLLARS ($18,000). Interest from date at a rate of 5.75% percent per annum will
be remitted to DIDAX INC. by the Maker, through biweekly payroll deductions of
Thirty nine dollars and eighty cents ($39.80). The said principal shall be
payable in lawful money of the United States of America at Chantilly, Virginia
or at such place as may hereafter be designated by written notice from the
HOLDER to the MAKER hereof, on the date and in the manner following:
UPON DEMAND ON OCTOBER 31, 1999 during normal business hours.
MAKER'S Address:
WILLIAM H. BOWERS /s/ GARY A. STRUZIK (Holder)
4501 Daly Dr., Suite 103 ---------------------------
Chantilly, Va. 20151
/s/ WILLIAM H. BOWERS (Maker)
----------------------------
<PAGE> 1
EXHIBIT 10.33 DIDAX/CRD Partnership Contract
BETWEEN
CORPORATE RESOURCE DEVELOPMENT AND DIDAX INC.
W. R. 'Max' Carey, Jr., CEO Robert C. Varney, CEO
700 Galleria Parkway, Suite 450 4501 Daly Drive, Suite 103
Atlanta, GA 30339 Chantilly, VA 20151
(770) 953-8016 (703)968-4808
Date: February 17, 1998
Principal Contacts: Max Carey and Phil Hayden
CRD Consulting Team: TBA
BILLING ARRANGEMENTS
Initial Payment: Due Upon Contract Signing $ 25,000.00
Monthly Payment: $ 12,500.00, due not later than the 1st of each month,
beginning March 1, 1998 and the vesting of 5,715 five-year options to
purchase shares at $2.185. There will be 28,575 such options granted at
contract signing and they will vest at the beginning of each month
while this contract remains in force.
Cancellation Clause: DIDAX INC. has the option to terminate the agreement at
any time during the partnership, with a 30 day written notice,
beginning with the 1st day of the following month the notice is given.
At that point, future payments, less expenses already incurred, will be
rendered null and void.
Expense Payments: Travel, dining and lodging expenses to be paid by DIDAX INC.
as required. All expenses are billed at cost, and payable on receipt of
bill.
Checks are to be made payable to: CORPORATE RESOURCE DEVELOPMENT, INC.
/s/ W.R. 'Max' Carey Jr. /s/ Robert C. Varney
- - ------------------------------- -------------------------------
Corporate Resource Development, Inc. DIDAX Inc.
Vice Chairman CEO
- - ------------------------------- -------------------------------
Title Title
2/17/98 2/17/98
- - ------------------------------- -------------------------------
Date Date
CRD and DIDAX INC. reserve the right to make changes mutually agreed upon, to
the approach and subject content utilized in this engagement, based upon
knowledge and information gained during the engagement. PLEASE SIGN AND RETURN
ORIGINAL. RETAIN A COPY FOR YOUR RECORDS.
<PAGE> 1
[GTE LOGO]
SERVICE QUOTATION FOR DIDAX
TO: Steve Sedlmeyer QUOTE DATE: 12/9/97
Didax QUOTE VALID TO: 12/31/97
4501 Daley Drive QUOTE NUMBER: 25181.0000.1
Suite 103 SERVICE LEVEL: INTERNET ADVANTAGE, FLEX T1,
BRONZE
Chantilly, VA 22021
USA
Service Period (please check one as applicable):
/ / 1 Year /X/ 2 Years / / 3 Years
The Service Period shall commence upon the provisioning by BBN Corporation, a
subsidiary of GTE Internetworking Incorporated ( "we", "our", or "us" ), to you
of the services listed on this Service Quotation.
<TABLE>
<CAPTION>
RECURRING FEES (1 YEAR CONTRACT) LIST PRICE DISCOUNT MONTHLY ANNUAL
- - -------------------------------- ---------- -------- ------- ------
<S> <C> <C> <C> <C>
Bronze T1 service Fee - Usage at 64kb $995.00 5.0% 5.00 $945.25 $11,343.00
Leased circuit monthly recurring 5.00 $582.28 $ 6,987.36
------- ----------
$1,527.53 $18,330.36
ONE-TIME FEES DISCOUNT ONE-TIME
- - ------------- -------- --------
Teleinstall - Bronze, T1 $0.00 100.0% 0.00 $0.00
Leased Circuit Installation Fee 0.00 $0.00
$0.00
</TABLE>
Internet Advantage v4.0 Bronze Connection Service has been designed for
customers who view the Internet as a strategic resource and require a high level
of reliability, quality, and performance to use the Internet as a vehicle for
collaboration and commerce.
Internet Advantage Bronze Connection Service is monitored and maintained 24
hours per day, 365 days a year by experienced operators, technicians, and
analysts. Even if a problem lies beyond our network, we will help you resolve
it.
We are committed to providing a reliable, high quality network to support the
Internet Advantage Service. Service level guarantees are available to eligible
Internet Advantage customers who experience unplanned network outages. Please
consult our home page on the World Wide Web at http://www.bbn.com for more
details on our current service level guarantee.
Internet Advantage Bronze Connection Service includes the following services at
no additional charge:
- - - Domain Name Service (DNS): Primary and secondary DNS are provided for up to 10
domains and 100 kilobytes of associated zone data file storage. We will also
register up to 10 domain names for you with InterNIC. Initial registration and
ongoing maintenance fees for each domain name will be billed to you directly by
InterNIC.
- - - Usage Reporting: Provides graphical weekly summaries of traffic statistics
from your Internet connection for monitoring and capacity planning purposes.
- - - Network News Feed: Access to a virtually unlimited number of Internet news
groups, bulletin boards, and discussion forums.
<PAGE> 2
[GTE LOGO]
SERVICE QUOTATION FOR DIDAX
TO: Steve Sedlmeyer QUOTE DATE: 12/9/97
Didax QUOTE VALID TO: 12/31/97
4501 Daley Drive QUOTE NUMBER: 25181.0000.1
Suite 103 SERVICE LEVEL: INTERNET ADVANTAGE, FLEX T1, BRO
Chantilly, VA 22021
USA
For an additional charge, customer premises equipment (router and CSU/DSU) and
associated maintenance may be purchased from us.
New customer orders for Internet Advantage Bronze Connection Service must be
placed for at least an initial one-year term. Service discounts may be available
for multi-year commitments, multiple connections, educational institutions, and
charitable organizations. Activation, advanced service, and hardware-related
fees are not discountable.
Telco-related fees contained within this quotation may be estimates and are not
discountable. In all cases, we will bill customers for actual incurred telco
charges.
An invoice for the first prorated month of service plus the activation fees will
be issued at the time of activation. Flexible-rate T1 customers whose service
activation date occurs after the first of the month will receive a prorated bill
for that first partial month based on the rate of the 2 kbps usage band,
regardless of actual usage. Normal 95th percentile usage-based monthly billing
will commence with the first full month following service activation, according
to the following schedule:
<TABLE>
<CAPTION>
Usage Monthly Fee
<S> <C>
Up to 2 kbps $ 350
Up to 64 kbps $ 995
Up to 128 kbps $1,150
Up to 256 kbps $1,650
Up to 384 kbps $1,995
Up to 768 kbps $2,350
Over 768 kbps
$2,850
</TABLE>
All invoices are payable net 30 days. Applicable taxes will be additional.
This Service Quotation is applicable only for Version 4.0 of Internet Advantage
Bronze. This Service Quotation does not entitle you to any future versions or
releases of such service which we may make available during the Service Period
unless separately agreed to in writing by the parties.
*ENCLOSED PRICING INCLUDES THREE MONTHS OF FREE SERVICE
<PAGE> 3
[GTE LOGO]
SERVICE QUOTATION FOR DIDAX
TO: Steve Sedlmeyer QUOTE DATE: 12/9/97
Didax QUOTE VALID TO: 12/31/97
4501 Daley Drive QUOTE NUMBER: 25181.0000.1
Suite 103 SERVICE LEVEL: INTERNET ADVANTAGE, FLEX T1, BRO
Chantilly, VA 22021
USA
Additional Terms:
(a) The Service Quotation and all Services that may be provided pursuant to
this Service Quotation are subject to the terms and conditions of (a)
the Master Agreement for Internet Services or the Internet Services and
Products Master Agreement previously signed by you (or, if you have not
signed such a Master Agreement, the terms and conditions of the current
Master Agreement for Internet Services), and (b) the Service Schedule
for the applicable Services you are purchasing as indicated in this
Service Quotation.
(b) Final acceptance of this Service Quotation by us is subject to credit
check approval, and confirmation of a valid Master Agreement and
Service Schedule signed by Customer.
(c) Any terms and conditions (including but not limited to those contained
in a purchase order issued by Customer) which are different from or in
addition to the terms and conditions contained in this Service
Quotation, the applicable Master Agreement, and/or the applicable
Service Schedule(s) signed by Customer, shall not be binding on us
unless expressly accepted in writing, herein or otherwise, by our
authorized representative, and we hereby object to and reject all terms
and conditions not so accepted.
Customer (Type or Print Full Name): DIDAX INC.
---------------------------------------------
Signature: /s/ William H. Bowers Date: 12/15/97
------------------------------- -------------------------------
Print Name: William H. Bowers Title: Chief Operations Officer
------------------------------- -------------------------------
PURCHASE ORDERS SHOULD BE MADE OUT TO:
GTE Internetworking
Attention: Cecilia Brooks
22 Moulton Street MS 3/a
Cambridge, MA 02138
Should you have questions about this quotation, please contact Cecilia Brooks at
617-873-5622, Fax: 617-873-3599, E-mail: [email protected]
<PAGE> 4
[GTE LOGO]
SERVICE QUOTATION FOR THE DIDAX
TO: Steve Sedlmeyer QUOTE DATE: 11/30/97
Didax QUOTE VALID TO: 12/31/97
4501 Daley Drive, Suite 103 QUOTE NUMBER: 22891.0000.2
Chantilly, VA 22021 SERVICE LEVEL: WEB ADVANTAGE, COLLOCATED
USA
Service Period (please check one as applicable):
/ / 1 Year /X/ 2 Years / / 3 Years
The Service Period shall commence upon the provisioning by BBN Corporation, a
subsidiary of GTE Internetworking Incorporated ( "we", "our", or "us" ), to you
of the services listed on this Service Quotation.
<TABLE>
<CAPTION>
RECURRING FEES (2 YEAR CONTRACT) LIST PRICE DISCOUNT MONTHLY ANNUAL
- - -------------------------------- ---------- -------- ------- ------
<S> <C> <C> <C> <C>
WA Collocated Premier 0.5 mbps Bandwidth Fee 0.00 $800.00 $9,600.00
Full Rack monthly Fee $2,000.00 10% $1,800.00 $21,600.00
50 Additional IP Monthly Fee $450.00 10% $405.00 $4,860.00
------- ---------
$3,005.00 $36,060.00
ONE-TIME FEES ONE-TIME
- - ------------- --------
**WA Collocated Setup Fee $0.0
(Set-up Fee waived through 12/31/97, List price $1,000.00)
50 Additional IP Set-up Fee $500.00
-------
(List price $75.00/IP, discounted at $10.00/IP) $500.00
</TABLE>
Web Advantage is a high performance, highly reliable, high bandwidth, Web
hosting service designed for organizations who see an expanding role for the Web
in reaching their strategic business goals. Web Advantage Collocation service
provides usage up to 0.5 Mbit/sec in the first monthly bandwidth usage fee. An
invoice for the first prorated month of service plus the setup fees will be
issued at the time of setup. Web Advantage Collocation customers whose service
setup date occurs after the first of the month will receive a prorated bill for
that first partial month based on the service fee, regardless of the actual
usage. Normal 95th percentile usage-based monthly billing will commence with the
first full month following setup, according to the following fee schedule:
- - - Up to 0.5 Mbit/sec is included in $800 Monthly bandwidth usage fee
- - - Up to 1.0 Mbit/sec $1,400 Monthly bandwidth usage fee
- - - Up to 2.0 Mbit/sec $2,200 Monthly bandwidth usage fee
- - - Up to 5.0 Mbit/sec $5,000 Monthly bandwidth usage fee
- - - Up to 10.0 Mbit/sec $8,000 Monthly bandwidth usage fee
**WA COLLOCATED SET-UP FEE WAIVED IF PURCHASE IS MADE BY 12/31/97
Tape Backup: $300 per server (daily incremental, full weekly, with off-site
rotation).
<PAGE> 5
[GTE LOGO]
SERVICE QUOTATION FOR THE TALENT ALLIANCE
TO: Steve Sedlmeyer QUOTE DATE: 11/30/97
Didax QUOTE VALID TO: 12/31/97
4501 Daley Drive, Suite 103 QUOTE NUMBER: 22891.0000.2
Chantilly, VA 22021 SERVICE LEVEL: WEB ADVANTAGE, COLLOCATION
USA
Additional Terms:
(a) The Service Quotation and all Services that may be provided pursuant to
this Service Quotation are subject to the terms and conditions of (a)
the Master Agreement for Internet Services or the Internet Services and
Products Master Agreement previously signed by you (or, if you have not
signed such a Master Agreement, the terms and conditions of the current
Master Agreement for Internet Services), and (b) the Service Schedule
for the applicable Services you are purchasing as indicated in this
Service Quotation.
(b) Final acceptance of this Service Quotation by us is subject to credit
check approval, and confirmation of a valid Master Agreement and
Service Schedule signed by Customer.
(c) Any terms and conditions (including but not limited to those contained
in a purchase order issued by Customer) which are different from or in
addition to the terms and conditions contained in this Service
Quotation, the applicable Master Agreement, and/or the applicable
Service Schedule(s) signed by Customer, shall not be binding on us
unless expressly accepted in writing, herein or otherwise, by our
authorized representative, and we hereby object to and reject all terms
and conditions not so accepted.
Customer (Type or Print Full Name): DIDAX INC.
---------------------------------------------
Signature: /s/ William H. Bowers Date: 12/15/97
------------------------------- -------------------------------
Print Name: William H. Bowers Title: Chief Operations Officer
------------------------------- -------------------------------
PURCHASE ORDERS SHOULD BE MADE OUT TO:
GTE Internetworking
Attention: Cecilia E. Brooks
22 Moulton Street, MS 3/a
Cambridge, MA 02138
Should you have questions about this quotation, please contact Cecilia E. Brooks
at 617-873-5622, E-mail: [email protected]
<PAGE> 6
[GTE INTERNETWORKING LOGO]
This Service Schedule ("Service Schedule"), together with:
- - - The Master Agreement for Internet Services, or the Internet Services and
Products Master Agreement (one of which has been signed by you) (the "Master
Agreement"); and
- - - The applicable service quotation signed by you describing the particular
Internet services you are purchasing ("Quotation");
collectively constitute an agreement ("Agreement") between BBN Corporation
("we", "our", or "us"), a subsidiary of GTE Internetworking Incorporated, and
the customer listed below ("you", "your", or "yours"). The terms and conditions
of the Master Agreement are incorporated herein by reference.
1. Covered Services. We will provide you with Internet Advantage(SM)
Connection Service ("IA Service") and/or Site Patrol(SM) Security Service ("SP
Service"), to the extent listed in the applicable Quotation and in any future
Quotations which we may provide to you in the future for additional IA Service
and/or SP Service (hereinafter individually referred to as a "Service" and
collectively as "Services"). Our commencement of providing the applicable
Service to you shall constitute our acceptance of this Service Schedule.
2. Service Description. We will provide you with the Services as described
in the Service Description ("Service Description") for the version of the IA
Service and/or the SP Service, as indicated on the applicable Quotation.
Service Descriptions are available from your sales representative.
3. Service Quality Assurances. We are committed to providing you with
reliable, high quality Services, and we may offer certain assurances about the
quality of Services. Descriptions of any such current assurances for the IA
Service and/or the SP Service ("Service Quality Assurances") are available on
the Internet at http://www.bbn.com or from your sales representative. We
reserve the right to change, amend, or revise Service Quality Assurances at any
time. In the event of any change in any Service Quality Assurances, your
warranties and/or remedies may change. Any warranties and/or remedies described
in the then-current Service Quality Assurances for the applicable Service are
your sole remedies under the Agreement.
4. Service Period. We will provide the Services to you for the period
specified in the applicable Quotation (the "Service Period").
5. Renewal. We encourage you to contact us prior to the expiration of the
then-current Service Period to renew the applicable Services for an additional
term of one (1) year or greater. If the Service Period expires before it has
been renewed in writing, then we may continue to provide you with the Services
on a month-to-month basis, at 105% of our then-current undiscounted list
prices, until the Service Period has been renewed in writing. Either party may
terminate the Services without penalty during the month-to-month holdover
period by providing at least sixty (60) days prior written notice to the other
party.
6. Prices and Invoices. Prices for Services are listed in the applicable
Quotation. We will invoice you in accordance with the applicable Quotation. All
invoices are payable net thirty (30) days. Prices are exclusive of any
applicable taxes, tariffs, telecommunications surcharges, or other governmental
fees or charges that may be imposed from time to time by applicable law or
regulation. We may suspend or terminate Services if any invoice remains unpaid
for more than sixty (60) days. Any such suspension or termination will not
relieve you from your payment obligations.
7. Price Changes. Prices are valid for the then-current Service Period. In
the event that we change the prices for a Service, the change will be effective
(a) upon expiration of the then-current Service Period (if you are receiving
the Service under a defined Service Period), or (b) within thirty (30) days of
the announcement of such price change (if you are receiving the Service on a
month-to-month basis).
8. Service Cancellation. You may cancel a Service at any time during the
Service Period by providing sixty (60) days prior written notice. If you
cancel, you agree to pay us (a) all Service fees accrued as of the cancellation
date, (b) an early cancellation fee in an amount equal to seventy-five percent
(75%) of Service fees due for the cancelled portion of the Service Period, and
(c) any telephone company circuit cancellation charges incurred by us as a
result of your cancellation. If you elect IA Service with flexible pricing, the
cancellation fees shall be calculated based upon the applicable price for the
lowest IA Service usage band.
9. Provisions Applicable to IA Service and SP Service. Certain additional
terms apply to IA Service and SP Service, as set forth on Page 2 of this
Service Schedule.
10. Miscellaneous. Any changes, additions, or amendments to this standard
Service Schedule are not effective unless agreed to in writing by our authorized
representative.
PLEASE SIGN BELOW TO INDICATE YOUR UNDERSTANDING AND ACCEPTANCE OF THE TERMS OF
THIS SERVICE SCHEDULE.
Company (Type or Print Full Customer Name): DIDAX INC.
-----------------------------------
Signature: /s/ William H. Bowers Date: 12/15/97
------------------------------- ----------------------------
Print Name: William H. Bowers Title: Chief Operations Officer
------------------------------- ----------------------------
IA/SP Service Schedule Page 1 of 2
<PAGE> 7
[GTE INTERNETWORKING LOGO]
Internet Advantage Service Provisions. If you are purchasing IA Service, the
following additional terms apply:
Software License. In the event that you are provided with or purchase any
equipment containing software in conjunction with IA Service, you agree to
comply with any applicable third party software license terms relating to
such software. The limitation of liability and indemnification terms in
the Master Agreement apply to the manufacturers and licenses of such third
party equipment and/or software.
Compliance with Law. You agree to comply with all applicable laws,
including U.S. export laws relating to the transmission of technical data
or other information through the IA Service.
Network Disruptions. You agree not to use the IA Service for illegal
purposes, or to interfere with or disrupt other network users, network
services or network equipment. Interference or disruptions include, but are
not limited to, distribution of unsolicited advertising or chain letters,
propagation of computer worms and viruses, mass mailings of unsolicited
electronic mail ("spamming"), and use of the network to make unauthorized
entry to any other machine accessible via the network. Violation of the
foregoing may result in early termination of the IA Service.
Resale of Internet Access. You agree not to resell access to the IA Service
to third parties, unless you have signed a separate reseller agreement with
us.
IP Address. If we assign IP addresses to you as part of the IA Service, you
agree to relinquish use of such IP address or address blocks upon
expiration or termination of such IA Service pursuant to this Service
Schedule.
Return of Equipment and Software. Upon termination or expiration of the
Service Period (unless extended by the parties), you agree to return to us
all hardware and software (other than hardware and software which you have
purchased from us) which we have provided to you in connection with the IA
Service. In the event such hardware and software is not returned to us
within thirty (30) days following such termination or expiration, we will
charge you the undepreciated list price of the unreturned hardware and
software, in addition to all applicable late return fees.
Domain Name Fees. Domain name registration and maintenance fees are the
responsibility of Customer and will be billed directly to Customer by
InterNIC. Such fees are not included in the prices for the IA Service.
Site Patrol Service Provisions. If you are purchasing SP Service, the following
additional terms apply:
SP Service. SP Service is a managed security firewall and proxy gateway
service which is designed to make unauthorized connections to your host
computers through the Internet connection service on which it is installed
more difficult and detectable. SP Service provides monitoring service
twenty-four (24) hours per day to assist you to respond to any detected
unauthorized connections.
Software We Provide. In the event we provide any software to you in
connection with SP Service, we hereby grant to you a non-exclusive license
during the Service Period to use such software on hardware provided by us
for the sole purpose of enabling you to use SP Service. Except for the
foregoing limited license, you acknowledge that you have no rights in any
SP Service-specific software we provide which is installed on hardware
provided by us. All right and title in such software shall remain with us
or our suppliers.
Approved Internet Connectivity. You agree to use only such Internet
connection service and filtering routers (which must have an Ethernet
connection) which we approve.
Security Policy. You are responsible for your network security policy and
security violation response procedures. You understand and acknowledge that
SP Service is an important component of a comprehensive network security
system, but does not by itself guarantee network security or prevent
security incidents. You acknowledge that we are not liable for
unauthorized access to your facilities or for damages arising out of
unauthorized access. In addition to using SP Service, you understand that
to implement a comprehensive security program you should implement a
variety of other security measures on your network and on computers
connected to your network. A network security program should be tailored to
your facility in consultation with skilled professionals.
Networks with Multiple Connections to Internet. Each SP Service monitors
one or more connections to the Internet. If SP Service is installed on an
Internet connection to a network and the network has other Internet
connections not monitored by SP Service, you should arrange for
installation of additional SP Services or other comparable firewall
products on these other Internet connections to provide adequate network
security.
Return of Equipment and Software. Upon termination or expiration of the
Service Period (unless extended by the parties), you agree to return to us
all hardware and software which we have provided to you in connection with
the SP Service. In the event such hardware and software is not returned to
us within thirty (30) days following such termination or expiration, you
agree to permit us to remove such hardware and software from your premises
upon reasonable notice during your normal business hours, at your cost and
expense. You will also be responsible for all applicable late return fees.
IA/SP Service Schedule Page 2 of 2
<PAGE> 8
[GTE INTERNETWORKING LOGO]
This Service Schedule ("Service Schedule"), together with:
- - - The BBN Master Agreement for Internet Services, or the BBN Internet Services
and Products Master Agreement (one of which has been signed by you) (the
"Master Agreement"); and
- - - The applicable BBN service quotation signed by you describing the particular
BBN Internet services you are purchasing ("Quotation");
collectively constitute an agreement ("Agreement") between BBN Corporation
("we", "our", or "us") and the customer listed below ("you", "your", or
"yours"). The terms and conditions of the Master Agreement are incorporated
herein by reference.
1. Covered Services. We will provide you with the Web Advantage(SM) Service
("WA Service" or "Services") listed in the applicable Quotation and in any
future Quotations which we may provide to you in the future for additional WA
Service. Our commencement of providing Services to you shall constitute our
acceptance of this Service Schedule.
2. Service Description. We will provide you with the Services as described in
the Service Description ("Service Description") for the version of the WA
Service indicated on the Quotation. The Service Description for the WA Service
is available from your BBN sales representative.
3. Service Quality Assurances. We are committed to providing you with
reliable, high quality Services, and we may offer certain assurances about the
quality of Services. A description of any such current assurances for the WA
Service ("Service Quality Assurances") is available on the Internet at
http://www.bbn.com or from your BBN sales representative. We reserve the right
to change, amend, or revise the Service Quality Assurances at any time. In the
event of any change in the Service Quality Assurances, your warranties and/or
remedies may change. Any warranties and/or remedies described in the
then-current Service Quality Assurances are your sole remedies under the
Agreement.
4. Service Period. We will provide the Services to you for the period
specified in the applicable Quotation (the "Service Period").
5. Renewal. We encourage you to contact us prior to the expiration of the
then-current Service Period to renew the applicable Services for an additional
term of one (1) year or greater. If the Service Period expires before it has
been renewed in writing, then we may continue to provide you with the Services
on a month-to-month basis, at 110% of our then-current undiscounted list prices,
until the Service Period has been renewed in writing. Either party may terminate
the Services without penalty during the month-to-month holdover period by
providing at least sixty (60) days prior written notice to the other party.
6. Prices and Invoices. Prices for Services are listed in the applicable
Quotation. We will invoice you in accordance with the applicable Quotation. All
invoices are payable net thirty (30) days. Prices are exclusive of any
applicable taxes, tariffs, telecommunications surcharges, or other
governmental fees or charges that may be imposed from time to time by
applicable law or regulation. We may suspend or terminate Services if any
invoice remains unpaid for more than sixty (60) days. Any such suspension or
termination will not relieve you from your payment obligations.
7. Price Changes. Prices are valid for the then-current Service Period. In
the event that we change the prices for the Services, the change will be
effective (a) upon the expiration of the then-current Service Period (if you
are receiving the WA Service under a defined Service Period), or (b) within
thirty (30) days of the announcement of such price change (if you are receiving
the WA Service on a month-to-month basis).
8. Service Cancellation. You may cancel the WA Service at any time during the
Service Period by providing sixty (60) days prior written notice. If you
cancel, you agree to pay us (a) all Service fees accrued as of the cancellation
date, and (b) an early cancellation fee in an amount equal to seventy-five
percent (75%) of Service fees due for the cancelled portion of the Service
Period.
9. Provisions Applicable to WA Service. Certain additional terms apply to WA
Service, as set forth on Page 2 of this Service Schedule.
10. Miscellaneous. Any changes, additions, or amendments to this standard
Service Schedule are not effective unless agreed to in writing by our
authorized representative.
PLEASE SIGN BELOW TO INDICATE YOUR UNDERSTANDING AND ACCEPTANCE OF THE TERMS OF
THIS SERVICE SCHEDULE.
Company (type or Print Full Name of Customer): DIDAX INC.
----------------------------------
Signature: /s/ William H. Bowers Date: 12/15/97
-------------------------- -----------------------------
Print Names: William H. Bowers Title: Chief Operations Officer
------------------------ ----------------------------
WEB ADVANTAGE SERVICE PROVISIONS. The following additional terms apply to the WA
Service you are purchasing under the Agreement:
WA Service Schedule Page 1 of 2
<PAGE> 9
[GTE INTERNETWORKING LOGO]
SERVICE SCHEDULE
WEB ADVANTAGE SERVICE
Riches in Content. The provision of Services hereunder does not alter any of
your rights, title, or interest in and to content material (including but not
limited to text, software, scripts, multimedia images, graphics, audio, video,
and other data) which you install or have installed on the BBN server computer
(collectively called "Content").
Content Responsibility. You are responsible for installation of and all updates
to Content. You assure us that Content: (i) does not infringe or violate the
rights of any third party including, but not limited to, intellectual property
rights; (ii) is not defamatory or obscene; and (iii) does not violate
applicable law. We reserve the right (but shall have no obligation) to
disconnect Internet access to any WA Service which we believe in good faith
breaches any of the foregoing assurances.
Third Party Software Licenses. If you have purchased any optional functionality
which involves the acquisition of third party software through BBN (e.g. Real
Audio Software), you agree to sign any required third party license agreements
prior to delivery of the third party software.
Compliance with Law. You agree to comply with all applicable laws, including
U.S. export laws relating to the transmission of software, technical data and
other information through the WA Service.
IP Addresses. Upon termination of your WA Service, you must relinquish use of
the IP addresses or address blocks assigned to you by us in connection with
such WA Service.
WEB ADVANTAGE DEDICATED UNIX (RELEASE 3.1 AND ABOVE ON SELECT AND PREMIER
SERVICES) AND DEDICATED NT (ALL RELEASES AND ALL LEVELS) PROVISIONS. If you are
purchasing Web Advantage Dedicated UNIX (Release 3.1 and above on Select and
Premier services) and/or Dedicated NT (collectively "WA Ded U/NT Service"),
the following terms apply to the WA Ded U/NT Service you are purchasing (in
addition to the Web Advantage Service Provisions listed above):
Time & Materials Services. Upon receipt of a written or electronic request
from you, we will provide certain optional "Time & Materials Services" in
accordance with and to the extent described in the Web Advantage(SM) Server
Support Services Service Description. All Time & Materials Services shall be
provided on an "AS IS" basis. For Time and Materials Services we shall provide
the services of our professional staff at our then current standard hourly
rates and shall provide materials at our then current standard prices. Costs
incurred by us for travel, subsistence, supplies and/or services shall be
billed at our cost plus our standard administrative handling charge. You agree
to pay for any such Time & Materials Services, costs, and handling charges
promptly in accordance with the terms of this Agreement. You agree that our
liability to you for any and all claims or damages relating to or arising out
of our provision of Time & Materials Services, whether in contract, text, or
otherwise, will not exceed (a) the total amounts paid by you to us for Time &
Materials Services during the one (1) year period immediately preceding the
event which caused the liability, or (b) One Thousand Dollars (USD$1000),
whichever is less; provided, however, that this limitation will not apply to
damages to you for bodily injury or destruction of real or tangible personal
property proximately caused by our negligence or intentional acts or omissions.
WEB ADVANTAGE SERVICE CUSTOMER ADMINISTRATION PROVISIONS. If you are purchasing
Web Advantage Service Customer Administration Service (the "CA Service"), the
following terms apply to the CA Service you are purchasing (in addition to the
Web Advantage Service Provisions listed above):
Customer Administrative Capability. As part of the CA Service, you will have
full server access, including root console access and remote power cycling.
Because you have full server access, you will be solely responsible for
administration and support of the server, including the operating system,
application software and Content. Your responsibilities are detailed in the
then-current Service Description for the CA Service, which you acknowledge you
have read and understand. You agree to designate qualified personnel to manage
such access.
WA Service Schedule Page 2 of 2
<PAGE> 10
[GTE INTERNETWORKING LOGO]
MASTER AGREEMENT FOR INTERNET SERVICES
THIS MASTER AGREEMENT FOR INTERNET SERVICES, TOGETHER WITH:
- THE APPLICABLE SERVICE QUOTATION(S) SIGNED BY YOU ("QUOTATION"); AND
- THE APPLICABLE SERVICE SCHEDULE(S) SIGNED BY YOU ("SERVICE
SCHEDULES");
COLLECTIVELY CONSTITUTE AN AGREEMENT ("AGREEMENT") BETWEEN BBN CORPORATION
("WE", "OUR", OR "US"), A SUBSIDIARY OF GTE INTERNETWORKING INCORPORATED, AND
THE CUSTOMER LISTED BELOW ("YOU", "YOUR", AND "YOURS").
1. SERVICES. We will provide you with the Internet services ("Services")
specified in the applicable Quotation and as further described in the
applicable Service Schedules. Our commencement of providing Services to you
under each applicable Service Schedule shall constitute our acceptance of such
Service Schedule.
2. SERVICE QUALITY ASSURANCES. We are committed to providing you with
reliable, high quality Services, and we may offer certain assurances about the
quality of Services, as described in the applicable Service Schedules. These
assurances are the only representations which we make about Services and the
remedies described in the Service Schedules are your sole remedies if we fail
to comply with such assurances. Except for these express assurances, WE
DISCLAIM ALL OTHER WARRANTIES OR REPRESENTATIONS, BOTH EXPRESS AND IMPLIED,
INCLUDING BUT NOT LIMITED TO THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR
A PARTICULAR PURPOSE. UNDER NO CIRCUMSTANCES WILL WE BE LIABLE FOR ANY DAMAGES
THAT MAY RESULT FROM YOUR USE OF OR INABILITY TO USE SERVICES.
3. IP ADDRESSES. If we assign IP addresses to you as part of a Service, you
agree to relinquish use of such IP addresses or address blocks upon expiration
or termination of the applicable Service Schedule.
4. RESALE PROHIBITION. Unless expressly permitted by a Service Schedule or
separate reseller agreement, you agree not to resell Services to third parties.
Your business activity of hosting web sites from a Web Advantage Collocated
Server does not violate this clause.
5. INDEMNITY. We will defend you against any claim and indemnify and hold you
harmless against any judgment finally awarded against you based on a claim that
any hardware or software provided hereunder infringes a copyright, patent,
trade secret or other intellectual property right under the laws of the United
States, Canada, Japan, or any country which was a member of the European Union
on January 1, 1997. Except as stated in the previous sentence, you agree to
defend, indemnify and hold us harmless from any claims or damages resulting
from your use of Services.
6. LIMITATION OF LIABILITY. You agree that our liability to you for any and
all claims or damages relating to or arising out of this Agreement, whether in
contract, tort, or otherwise, will not exceed (a) the total amounts paid by
you to us during the one (1) year period immediately preceding the event which
caused the liability, or (b) One Hundred Thousand Dollars (USD $100,000),
whichever is less; provided, however, that this limitation will not apply to
damages to you for bodily injury or destruction of real or tangible personal
property proximately caused by our negligence or intentional acts or omissions.
7. CONSEQUENTIAL DAMAGES. IN NO EVENT WILL WE OR OUR SUPPLIERS BE LIABLE FOR
SPECIAL, CONSEQUENTIAL, INCIDENTAL OR INDIRECT DAMAGES INCLUDING, WITHOUT
LIMITATION, LOST PROFITS OR LOSS OR DAMAGE TO DATA ARISING OUT OF THE USE OR
INABILITY TO USE SERVICES, EVEN IF WE HAVE BEEN ADVISED OF THE POSSIBILITY OF
SUCH DAMAGES.
8. ACKNOWLEDGMENTS. You acknowledge that you are responsible for the security
of your facilities and we are not liable for unauthorized access to such
facilities or any damages arising out of unauthorized access. You acknowledge
that we may include your name in directories and listings of our customers.
9. MISCELLANEOUS. The terms and conditions of this Agreement supercede all
previous agreements or understandings with respect to Services provided under
this Agreement. Any changes to this Master Agreement for Internet Services, or
to any Service Schedules and/or Quotations, are not effective unless agreed to
in writing by our authorized representative. Any terms in this Agreement which
you change, or any inconsistent terms on your purchase order or on other forms
provided by you, will have no effect unless agreed to in writing by our
authorized representative.
PLEASE SIGN BELOW TO INDICATE YOUR UNDERSTANDING AND ACCEPTANCE OF THE TERMS OF
THIS AGREEMENT.
Customer (Type or Print Full Name): DIDAX, Inc.
-------------------------------------------
Signature: /s/ William H. Bowers Date: 12/15/97
----------------------- -------------------------------------
Print Name: William H. Bowers Title: Chief Operations Officer
---------------------- ------------------------------------
<PAGE> 1
EXHIBIT 10.35
DIDAX, INC.
CONCLUSION OF EMPLOYMENT AGREEMENT
THIS AGREEMENT is made February 27, 1998 by and between Dr. Robert C.
Varney of Reston, Virginia ("Varney") and DIDAX INC., a Delaware business
corporation with its principal place of business in Chantilly, Virginia
("DIDAX").
1. CONCLUDES EMPLOYMENT. Varney agrees to continue as Chief Executive Officer
("CEO") of DIDAX until a new CEO is recruited and hired by the Board, but hereby
tenders his resignation which the Board intends to accept when the new CEO is
hired.
2. CONTINUES ON BOARD AS VICE CHAIR. Varney agrees to continue as a member of
the DIDAX Board, and to serve the Board as Vice Chair commencing with the
effectiveness of this Agreement and subject to the processes prescribed in
Articles IV and VII of the DIDAX Bylaws.
3. OPTIONS. Varney shall continue to have the option rights to acquire shares of
DIDAX' outstanding common stock in the amounts, price and terms indicated in
Attachment "A" to this Agreement, which reflects a 100,000 share reduction in
the shares (from 145,312 to 45,132) exercisable at $5.00.
4. HEALTH CARE BENEFITS. Upon conclusion of his employment with DIDAX, Varney
shall have full rights to continue at DIDAX' expense health care benefits
comparable to group coverage provided by DIDAX from time to time to its
employees. This benefits coverage will cease upon the date Varney is eligible
for coverage by a succeeding employer or under other health care coverage such
as Medicare.
5. SEVERANCE. Upon conclusion of his employment with DIDAX, Varney shall
continue to receive as severance his current salary for an additional eighteen
(18) months.
6. ENTIRE AGREEMENT. This Agreement (and the Attachment hereto) embodies the
entire agreement and understanding of the parties and supersedes any and all
prior agreements, arrangements and understandings relating to Varney's
association with DIDAX including his employment as CEO and the conclusion of
that employment and any rights and obligations which might have been asserted by
the parties under an agreement dated June 10, 1997.
7. RELEASE. In consideration of the mutual promises and the benefits conferred
in this Agreement the parties hereby waive and release any and all claims and
causes of action for damages or other relief that either may have against the
other (or their personal representatives, agents, assigns, attorneys, and their
officers, directors, employees, agents, or representatives) based on Varney's
employment or other association with DIDAX, the conclusion of employment, or any
event or transaction that occurred before the date of this Agreement.
40
<PAGE> 2
8. NON-DEFAMATION. Neither party will make or provide any defamatory or false
information about or relating to Varney or DIDAX or its management, employees,
Board or other agents to anyone not a party to this Agreement. Both parties
agree that such defamatory or false information will be of irreparable harm and
therefore the harmed party can seek injunctive relief to cease and desist.
9. COLLECTION. Should either party fail to abide by this Agreement, the other
party may exercise all its rights under the law and consistent with the
conciliation provision below to enforce this Agreement, and the prevailing party
shall be entitled to reasonable interest and attorneys fees for any award or
judgement it may be awarded against the other party under this Agreement.
10. CONCILIATION. The parties believe that the Bible commands them to make every
effort to live at peace and to resolve disputes with each other in private or
within the Christian church (see Matthew 18:15-20, 1 Corinthians 6:1-8).
Therefore, the parties agree that any claim or dispute arising from or related
to this Agreement shall be settled by biblically based mediation and, if
necessary, legally binding arbitration in accordance with the Rules of Procedure
for Christian Conciliation of the Institute for Christian Conciliation, 1537
Avenue D, Suite 352, Billings, MT 59102. Judgment upon an arbitration decision
may be entered in any court otherwise having jurisdiction. These methods shall
be the sole remedy for any controversy or claim arising out of this Agreement
and the parties expressly waive our respective right to file a lawsuit in any
civil court against one another for such disputes, except to enforce an
arbitration decision.
IN WITNESS WHEREOF, THE PARTIES HERETO HAVE DULY EXECUTED THIS AGREEMENT AS OF
THE DATE FIRST WRITTEN ABOVE.
DR. ROBERT C. VARNEY DIDAX INC.
/s/ Dr. Robert C. Varney /s/ James Buick
- - ------------------------ -----------------------
Dr. Robert C. Varney Mr. James Buick
Chairman of the Board
<PAGE> 3
ATTACHMENT "A"
Robert Varney
<TABLE>
<CAPTION>
Shares Exercise Vesting Expiration
Price Date
- - ----------------------------------------------------------------------------------
<S> <C> <C> <C>
116,000 $2.00 Fully Vested 06/29/05
45,312 $5.00 $.125 EPS For Quarter OR $.50 EPS For Year 09/30/06
17,524 $4.00 Fully Vested 12/31/06
8,075 $5.00 Fully Vested 03/31/07
8,075 $5.00 Fully Vested 06/30/07
</TABLE>
<PAGE> 1
EXHIBIT 11
DIDAX INC.
COMPUTATION OF EARNINGS PER SHARE
12/31/97
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE: YEAR ENDED DECEMBER 31, 1997
Common Exercise Assumed Assumed Net Shares
Shares Price Proceeds IPO Price Treas. Stk. Added
------ ----- -------- --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 1,160,376
Rescission reduced on 8/1/97 by 6,000 shares 1,160,376
Rescission reduced on 8/4/97 by 6,000 shares 1,160,376
Rescission reduced on 9/5/97 by 15,000 shares 1,160,376
Rescission reduced on 12/16/97 by 6,000 shares 1,160,376
Stock sold during the year:
PK 40,000
Lasmanis 2,212
IPO 2,000,000
Junior Notes 340,000
gofishnet stock:
122,055
122,611
123,611
125,055
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 50,962
Detachable Warrants 22,260 4.00 89,040 5.00 17,808 4,452
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE: YEAR ENDED DECEMBER 31, 1997 01/01/98
Shares subject Total Grant/Purch. Days
to Recission Shares Date Outstanding
------------ ------ ---- -----------
<S> <C> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 607,434 552,942 01/01/97 212
Rescission reduced on 8/1/97 by 6,000 shares 601,434 558,942 08/01/97 3
Rescission reduced on 8/4/97 by 6,000 shares 595,434 564,942 08/04/97 32
Rescission reduced on 9/5/97 by 15,000 shares 580,434 579,942 09/05/97 102
Rescission reduced on 12/16/97 by 6,000 shares 574,434 585,942 12/16/97 16
---
365
Stock sold during the year:
PK 0 40,000 04/21/97 255
Lasmanis 0 2,212 04/23/97 253
IPO 0 2,000,000 10/03/97 90
Junior Notes 0 340,000 10/06/97 87
gofishnet stock:
0 122,055 01/01/97 273
0 122,611 10/01/97 31
0 123,611 11/01/97 30
0 125,055 12/01/97 31
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 0 50,962 01/01/97 365
Detachable Warrants 0 4,452 07/10/97 175
</TABLE>
<TABLE>
<CAPTION>
Diluted Basic
BASIC EARNINGS PER SHARE: Diluted Basic WithGofish WithGofish
Weighted Weighted Weighted Weighted
Shares Shares Shares Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 117,223,704 117,223,704 117,223,704 117,223,704
Rescission reduced on 8/1/97 by 6,000 shares 1,676,826 1,676,826 1,676,826 1,676,826
Rescission reduced on 8/4/97 by 6,000 shares 18,078,144 18,078,144 18,078,144 18,078,144
Rescission reduced on 9/5/97 by 15,000 shares 59,154,084 59,154,084 59,154,084 59,154,084
Rescission reduced on 12/16/97 by 6,000 shares 9,375,072 9,375,072 9,375,072 9,375,072
----------- ----------- ----------- -----------
205,507,830 205,507,830 205,507,830 205,507,830
Stock sold during the year:
PK 10,200,000 10,200,000 10,200,000 10,200,000
Lasmanis 559,636 559,636 559,636 559,636
IPO 180,000,000 180,000,000 180,000,000 180,000,000
Junior Notes 29,580,000 29,580,000 29,580,000 29,580,000
gofishnet stock:
33,321,015 33,321,015
3,800,927 3,800,927
3,708,317 3,708,317
3,876,705 3,876,705
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 18,601,130 18,601,130
Detachable Warrants 779,100 779,100
----------- ----------- ----------- -----------
445,227,696 425,847,466 489,934,660 470,554,430
365 365 365 365
----------- ----------- ----------- -----------
End of period 12/31/97 Weighted average
share outstanding 1,219,802 1,166,705 1,342,287 1,289,190
Net loss (4,124,710) (4,124,710) (4,253,580) (4,253,580)
----------- ----------- ----------- -----------
Net loss per share (3.38) (3.54) (3.17) (3.30)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,932
<SECURITIES> 0
<RECEIVABLES> 46,450
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 88,549
<PP&E> 248,342
<DEPRECIATION> 81,419
<TOTAL-ASSETS> 282,274
<CURRENT-LIABILITIES> 1,192,704
<BONDS> 0
0
0
<COMMON> 2,472,256
<OTHER-SE> 111,187
<TOTAL-LIABILITY-AND-EQUITY> 282,274
<SALES> 8,834
<TOTAL-REVENUES> 180,776
<CGS> 5,932
<TOTAL-COSTS> 220,288
<OTHER-EXPENSES> 2,356,897
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 77,815
<INCOME-PRETAX> (2,464,904)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,464,904)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,464,904)
<EPS-PRIMARY> (4.47)
<EPS-DILUTED> (4.35)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 5,429,728
<SECURITIES> 0
<RECEIVABLES> 86,156
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 5,533,248
<PP&E> 276,818
<DEPRECIATION> 145,035
<TOTAL-ASSETS> 5,758,030
<CURRENT-LIABILITIES> 207,173
<BONDS> 0
0
0
<COMMON> 12,483,523
<OTHER-SE> 666,722
<TOTAL-LIABILITY-AND-EQUITY> 5,758,030
<SALES> 15,575
<TOTAL-REVENUES> 344,955
<CGS> 8,096
<TOTAL-COSTS> 161,842
<OTHER-EXPENSES> 2,550,041
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,840,481
<INCOME-PRETAX> (4,124,710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,124,710)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,124,710)
<EPS-PRIMARY> (3.54)
<EPS-DILUTED> (3.38)
</TABLE>
