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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 [Fee Required]
For the fiscal year ended December 31, 1998
/ / 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)
<TABLE>
<S> <C>
Delaware 54-1831588
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
4206F Technology Court
Chantilly, VA 20151
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (703) 968-4808
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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
Common Stock Purchase Warrants, no par value. Redeemed February 12, 1999.
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./ /
The issuer's revenues for its most recent fiscal year were $1,083,294
The aggregate market value of common stock held by non-affiliates, based on the
closing price at which the stock was sold, at March 11, 1999 approximated $53.0
million.
The total number of shares outstanding of the issuer's common stock as of March
11, 1999, was 6,567,606.
Transitional small business disclosure format (check one): Yes / / No /X/
The Company's Form SB-2 filing dated September 24, 1997, along with the
Company's Post Effective Amendment dated July 2, 1998, and the Company's Form
10-KSB filing dated March 20, 1998 is incorporated by reference in Part III,
Item 13. The Company's Schedule 14-A filing dated March 19, 1999 is incorporated
by reference in Part III, Items 9 through 12.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS
CERTAIN INFORMATION IN THIS ANNUAL REPORT 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," "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 - OUTLOOK AND UNCERTAINTIES"
OVERVIEW
DIDAX INC. is primarily known as the creator and builder of
crosswalk.com(TM) (http://www.crosswalk.com), (formerly CCN: the "Christian
Community Network"), and hereinafter ("crosswalk.com"). Crosswalk.com, we
believe, is the premier Christian community portal Web site which provides
information, resources and retail sales opportunities that we believe generally
appeals to the Christian community. We intend that our Web site provides
"information for Christians, not just Christian information." Members and site
visitors with Internet access may currently enter crosswalk.com free of charge
to view channels on the Web site targeting music, personal finance, careers, and
home schooling; lifestyle channels focusing on men, women, and spiritual life;
and services ranging from free Web access filtering and a full-Web filtered
search engine to online shopping, family-friendly movie reviews, games, chat,
forums, local events, news, free email and more. Content and site resources are
developed and offered both by DIDAX and by ministries, secular retailers, and
publishers.
The Company obtained net proceeds of approximately $6.0 million in
connection with the closing of its initial public offering of securities (the
"IPO") in October of 1997, after the retirement of certain debt. The Company
believes it is positioned to generate increasing revenues from the sale of
advertising space on and sponsorships of crosswalk.com, the retail sale via
crosswalk.com of Christian interest and other products manufactured or developed
by others (primarily books, CDs, and other articles generally appealing to the
Christian marketplace); commissions and referral fees from co-marketing
relationships and affinity memberships. In addition, to an increasingly lesser
extent, the Company continues to generate revenue through providing Web site
development and other Internet technology services ( the "Consulting Services."
To enhance its retail capabilities the Company completed the acquisition of
gofishnet.com, inc. ("gofishnet"), an Internet retailer of Christian music and
videos in February 1998.
The Company has an extremely limited operating history upon which an
evaluation of the Company and its business can be based. In 1998, the Company
remained a "development Stage Company" for financial reporting purposes. For the
fiscal years ended December 31, 1997 and 1998, the Company generated net losses
of $(4,124,710) and $(3,459,055) 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, sponsorships and advertising, retail
or Web site development customers, or otherwise, would have an immediate
material adverse impact on the Company's business, results of operations and
financial condition.
The Company targets the marketing of its sales, products and services and
the content on crosswalk.com to persons of all ages, economic levels, genders,
ethnic backgrounds and nationalities that identify themselves as Christian,
principally Protestant (regardless of denomination, if any) and Catholic, with
particular emphasis upon evangelical Christians. According to 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." In January 1998 another Barna survey
indicated that "83% of Americans asserted that their religious faith was very
important in their life.", and that 62% of Americans consider themselves as
"committed Christians". According to a poll conducted by the Gallup Organization
in March 1997, approximately 27% of Americans identify themselves as Catholic
and approximately 58% identify themselves as Protestant, with 61% of the
respondents indicating that religion is a very important part of their life. 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 wide ranging reports DIDAX traditionally
uses 40% as the percentage of Christians in its target audience.
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According to U.S. Internet Clock, as of November 1998 the number of
individuals on the Internet has grown to over 74 million and the Internet adds
one new U.S. user every 1.75 seconds. The Internet is now used by 36% of the
North American population and of people aged 16-24, 50% are online. According to
eMarketer, the Internet population will increase to nearly 142 million by 2002
and per International Data Corporation ("IDC") the percentage of those users
transacting business online will grow from 35% to almost 50%.
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 42% more likely than the general
population to use an interactive computer service for shopping, and over 150%
more likely to purchase books and music online. DIDAX concludes that Christians
are present and active on the Net, can afford to purchase goods and services,
have a propensity to buy on the Internet, and thus represent a good demographic
segment for sponsors, 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. The emergence of the Internet as a
significant communications medium is driving the development and adoption of Web
site content and commerce applications that offer convenience and value to
consumers, as well as unique marketing opportunities and reduced operating costs
to businesses. By hosting information about products and services on a Web site,
a company or organization can enable potential customers or constituents in any
geographical area to gather relevant, in-depth information about products,
services or organization activities and messages at their convenience and
according to their preferences. A growing number of consumers have begun to
transact business electronically, such as paying bills, booking airline tickets,
trading securities and purchasing consumer goods, including personal computers,
consumer electronics, compact disks, books and vehicles. Moreover, online
transactions can be faster, less expensive and more convenient than transactions
conducted through a human intermediary. In addition, Web site 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 $4.3 billion in 1997 to $54 billion in
2002.
COMPANY MISSION AND BUSINESS
Our mission is to be the preferred and comprehensive host for the online
Christian community, featuring unique, integrated and often exclusive content
and services which are inviting, family-friendly, and morally sound. In
addition, we desire to serve as an advocate for the Christian community, helping
them use the Web to apply biblical values to everyday life experiences.
The Company generates revenues through the sale of sponsorships and
advertising; the online retailing of Christian and family-friendly products
manufactured or developed by others (music, books, apparel, gifts, etc.);
commissions and referral fees from co-marketing relationships; memberships in
affinity marketing programs (affording participants price discounts and other
benefits of group purchasing power); and to a lesser extent, the continuing
provision of Consulting Services to various Christian organizations.
Companies and organizations alike engage crosswalk.com on many
levels--from linking their sites, taking advantage of community-building
interactive services, to sponsoring content- rich sections of crosswalk.com to
working together with DIDAX to create new traffic producing content channels,
all of which gain them access to the audience served by crosswalk.com. In this
way, our business clients share the dual benefits of Internet technology and
marketing to a consumer niche that they believe identifies with them.
The Company's approach to business growth is to continue building the
crosswalk.com Internet community, by offering content, products and services
with distinction geared toward the needs of the Christian and family-friendly
niche, with a goal to become one of the top sites on the Internet through growth
in membership, pageviews, visitors and attractive demographics for sponsors,
advertisers and retailers. The Company believes that generating revenues
commensurate with critical mass in the Internet marketplace will ultimately
drive profitability and recognition as the preferred online resource for
Christians in search of information, interaction and involvement opportunities
that help them apply a biblical world view across the breadth of their life and
interests.
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1998 OPERATIONS
Employees
The Company's most important asset is its people, and DIDAX is pleased to
have a number of leaders in management positions. The Chief Executive Officer
and President is William Parker, who replaced the retiring Dr. Robert C. Varney
in April 1998. In 1998, the Company was also pleased to have retained Neal
Joseph, former president of Warner Bros.' Christian music division as its Vice
President and General Manager of crosswalk.com Entertainment. In addition, Scott
Fehrenbacher joined DIDAX in August 1998, responsible for the operation of the
Money Channel on crosswalk.com. Stephen Biggerstaff is responsible for marketing
and customer advocacy. Larry Simpson is responsible for product management and
crosswalk.com operations. Steve Sedlmeyer is responsible for engineering design
and internal engineering infrastructure. The founders of the Company are Dane
West, who serves as Vice President of Business Development and Sales, and
William Bowers, the Company's Chief Technical Officer. Gary Struzik is Chief
Financial Officer and Secretary. The Company had 33 full time employees and 4
part time employees at December 31, 1998. Of these full time employees, three
are engaged in engineering, nine are engaged in marketing and sales, sixteen are
engaged in crosswalk operations and five in administration. The part time
employees assist in web development and administration.
Crosswalk.com "1998 Christian Web Site of the Year"
For the second consecutive year, crosswalk.com was awarded the 1998
Christian Web Site of the Year", an accolade given annually to recognize the
Christian Web site which provides the most useful information and services and
does so in an attractive and easy to use manner. This award is rendered by "Best
of the Christian Web", a project of NetCross, Inc., which was founded in 1995 to
help users find the best Christian Web sites on the Internet.
Also in April 1998, two of its Web sites, crosswalk.com Events and
Crosswalk.com Music (then gofishnet.com) were awarded the #1 and #2 Christian
Music Web Site Awards, respectively, in an annual review by the Mining Company.
The Mining Company's Christian Music Guide, awarding the #1 slot to
crosswalk.comEvents, gave the site perfect scores for graphics, usefulness,
ease-of-use, and frequently updated content being the most comprehensive and
up-to-date events site for Christians on the Web. The #2 position, awarded to
wholly owned DIDAX subsidiary, gofishnet.com, an extensive Christian Music
retail site, stated the site is "the Christian music site that sets the standard
for all others to live up to." In March of 1999, the Music channel at
crosswalk.com, was named the #1 Christian music Website in The Mining Company's
third annual awards. The Mining Company indicated that the Music Channel at
crosswalk.com had "the most compelling and useful Christian music site on the
Net."
Traffic on Crosswalk.com
The Company's progress in developing crosswalk.com is evidenced, among
other things, by the growth in membership and page views. Membership in
crosswalk.com is free and requires filling out an online registration form with
one's name, e-mail address, and limited demographic data. Membership benefits
include a free Web-based email account, access to crosswalk.com's chat and
forums, permission to post local events in the award winning crosswalk.com
events database directory, free filtered Web access, and monthly email updates
on the latest additions to our site and the latest in Christian music news. Page
views are a measure of total pages viewed by visitors to crosswalk.com in a
given month.
At December 31, 1998, crosswalk.com had 147,405 members as compared to
40,888 members at December 31, 1997, an annual growth rate of 260%. Average
monthly page views tallied in the fourth quarter reached 2,200,000 from less
than 217,600 a year earlier, representing more than a tenfold increase. In order
to enhance traffic flow to crosswalk.com, the Company has integrated
crosswalk.com into AOL through the keyword "crosswalk" providing a direct link
to crosswalk.com from the AOL network.
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Emphasizing what works on the Internet
DIDAX's product development strategy, centered around the theme of
"information for Christians, not just Christian information," is to target the
most in-demand consumer-driven information areas and applications on the
Internet and then deliver them to the Christian marketplace with what we believe
is meaningful distinction. For example, a recent analysis by ZDNet.com showed
four of the top ten Web activities to be online shopping, money management,
career management, and "learning something new." In 1998, crosswalk.com launched
or began development on major new channels designed to tap into all of these
traffic and revenue streams: The Music Channel at crosswalk.com, The Money
Channel at crosswalk.com, The Career Channel at crosswalk.com, and The
HomeSchool Channel at crosswalk.com.
The Music Channel was launched in November to address three major growth
factors: the double-digit growth rate of the Christian music industry throughout
the `90s; the explosive rate of growth in online music sales; and the ongoing
distribution problem in the Christian music industry. According SOMA
Communications, to Since 1992, Christian music has grown faster than any musical
genre other than rap and is now larger than classical and jazz combined. The
e-commerce explosion includes music, which Jupiter Communications, and Internet
marketing research firm, predicts will expand from $70 million in 1997 online
sales to $2.8 billion in online sales by 2002, a 100% annual growth rate. And,
compared with most other musical genres, the ability to listen to Christian
music on the radio or buy it at traditional offline retail outlets is severely
limited. Most Christian radio, which is rarely found in more than one or two
stations per market and not at all in many markets nationally, consists of
ministry and talk radio programming. Musical programming that does exist is
necessarily narrow in scope. At the same time, retail distribution of Christian
music is still largely focused on Christian bookstores, with limited
geographical distribution, shelf space and audio sampling capabilities. The
Music Channel at crosswalk.com resolves these distribution issues by providing
artist interviews, CD sampling, 24-hour radio streams in a variety of musical
formats, concert schedules and ticketing information, and direct online
purchasing at the crosswalk.com MusicStore (formerly gofishnet.com). Sales of
music related products and sponsorships in 1998 - even including months of
interruption due to site development and enhancement work - increased to
$200,000 in 1998 from $51,000 in 1997.
In November 1998, the Money Channel at crosswalk.com was launched around
the theme of "making your money count." In addition to services provided by
Quote.com, an unaffiliated Web site content provider thath provides quotes,
charts, research, planning calculators, and more, this channel is focused around
the proprietary INVESTigator(TM) values-based investing research. This online
mutual fund software allows visitors to evaluate the companies comprising a
mutual fund portfolio to determine whether their investments are consistent with
their personal values and provides them with alternative mutual funds with
similar investment goals. Through the use of this values-based investing
software, visitors can screen out companies that engage in practices
inconsistent with their values, while identifying alternative investment
portfolios with comparable historical performance. This product was quickly
noticed by the investment community and led to the appearance of CEO and
President William Parker on CNBC's "Mutual Fund Report" in November 1998. In the
fourth quarter the Company also entered into a co-marketing arrangement with
Quantum American, Inc. and Quantum/Gabelli, LP for the creation of a family of
cobranded values-based financial products including mutual funds and a debit
card. In addition, the site provides an insurance center with products provided
by Zurich Kemper and others through a sponsorship agreement with M.A.I.N.
Financial Services, Inc. With these product offerings, a number of financial
tools and calculators, the ability to chat with leading experts in managing
money prudently and biblically, and the advent in 1999 of online banking, online
trading and online tax preparation, the Company believes that there is no other
financial web site of its kind on the Web. Sponsorship revenue of $350,000 was
generated through agreements related to crosswalk.com Money Channel in 1998.
The Career Channel at crosswalk.com was launched in June of 1998 through
an alliance with CareerMosaic, the largest job site on the Internet. This
channel provides online job seeking and recruiting services, both in conjunction
with CareerMosaic and directly for Christian-community-related job postings,
plus in-depth career assessment and planning services from Alston-Kline, Inc., a
leading human resource and organizational development company which has been
serving the Christian community for ten years. Resources in life planning from
Dr. Ron Jenson, and CollegeWalk; a leading directory of Christian colleges,
universities, seminaries and graduate schools on the Internet, are also offered
on the Career Channel. $44,000 of revenue was generated from sponsorships
related to crosswalk.com Career Channel in 1998.
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In December 1998, the Company began working on developing the HomeSchool
Channel at crosswalk.com. Mike Farris, president of the Home School Legal
Defense Association (HSLDA) and the National Center for Home Education and one
of the recognized leaders in this booming educational trend, is leading the
development and management of the channel, which launched during the first
quarter of 1999. The home education marketplace is estimated to encompass two
million children and roughly $400 million in home educational spending in 1999;
the HomeSchool Channel will target this audience with a comprehensive array of
free and fee-based resources as well as a premier selection of retail products
and services, collectively designed to drive revenues, membership and visits.
Crosswalk.com uniquely serves this marketplace with a combination of Web safety
applications including CrossingGuard(TM), a free Web filtering solution
available only to crosswalk.com members, and a full-Web filtered search engine
that blocks adult/explicit links from search results.
Fee-Based Advertising, Sponsorships, Affinity Memberships and Other Retail Sales
Access to crosswalk.com is provided by the Company 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 and to sponsors and
advertisers on crosswalk.com. Site wide advertising and sponsorship revenue on
crosswalk.com amounted to $253,000 in 1998.
The Company has arrangements with numerous organizations such as
Amazon.com, Auto-by-Tel, The Flower Club, Promisekeepers, Cendant, eToys, Family
Christian Stores, Movieguide, Dreamworks, Christian Liberty Academy and more
whereby the Company receives revenue for the sale of or referral fee for the
sale of memberships or/and products marketed by these organizations. In 1998,
revenue associated with this activity was $26,000.
Web site Development and Technology Consulting Services
The Company has been engaged in providing the Consulting Services
consisting of web development, hosting and Internet access 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 crosswalk.com, the Company anticipates that this will be reduced to not
more than 5% in years to come. The Company has received more than 20 awards for
its Web site development activities. In addition to Promisekeepers and
Christianity Today, Inc., for which the Company developed websites in April
1996, the Company's Web site services and development clients include World
Vision, Maranatha! Music, the Salvation Army, Ministry Business Services, Prison
Fellowship, Family Research Council, Evangelical Council for Financial
Accountability (ECFA), Christian Liberty Academy and Billy Graham Institute of
Evangelism. Because other firms in the Christian niche market (some of which
have longer operating histories and may have greater financial and other
resources) offer Web site development and computer consulting services at
competitive prices, there can be no assurances that the Company will derive
significant revenues from providing Consulting Services in the future. Sales of
Consulting Services in 1998 amounted to $210,000 or 19% of total revenues.
Crosswalk.com Services and Sense of Community
The Company believes that Christians and values-sensitive families will
fully embrace the potential of the Web when they can be assured of a safe
environment that doesn't expose them or their children to the offensive,
adult-oriented, explicit content now available online. To this end,
crosswalk.com launched CrossingGuard(TM) - a server-level, continuously updated
Web filtering system that blocks over five million Web pages - in the fourth
quarter of 1998. CrossingGuard(TM) is free to crosswalk.com members, who
otherwise must pay $25-$125 per year for filtering solutions that are
software-based or add-ons to basic Web access fees. Along with the filtered
access, crosswalk.com also offers its own filtered search engine, giving users
access to more than 100 million Web pages, while stopping objectionable ones
from even being listed in a search screen. Additional services include: free
email; chats and discussion forums; an entertainment area full of online games,
daily features and columns; up to date religious news and headline news from
Reuters; an award-winning directory of nationwide events of special interest to
the Christian community; the "Omnilist" comprehensive directory of thousands of
the best Christian and family-friendly Web sites; the exclusive online
MovieGuide site, with current reviews and a subscription-based archive of
family-friendly reviews; and ICRN Radio, a comprehensive library of online radio
messages from a variety of leading Christian broadcasters.
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In addition to interactive services like chat and forums, crosswalk.com
provides for the formation and growth of online community through several
channels that touch on the day to day challenges that life brings. The Men's
Channel and the Women's Channel provide the environments for men and women to be
encouraged in their spiritual walk by sharing life's experiences with one
another, tapping into expert commentaries and recommended resources, reviewing a
daily devotional and even clicking on the daily humor column. On a deeper level,
the Spiritual Life Channel provides content and resources conducive to prayer,
personal worship, and Bible study plus feature articles on practical topics like
"How to Find a Church". Although a Christian context is provided throughout
crosswalk.com, these channels collectively round out the emphasis on practically
applying one's faith and values to everyday life.
Investments in Technology
In 1998, the Company invested in the selection of Vignette's StoryServer
4.0 as the technology platform for underlying the continuing growth of
crosswalk.com. The StoryServer 4.0 Web site content management software has
expanded the Company's premier content management capabilities to include a
suite of Internet relationship management (IRM) applications. IRM tools enable a
lifecycle approach to customer relationship management by targeting lifecycle
personalization, open customer profiling, advanced content management and
decision support.
The Company also implemented the use of Net Gravity ad server software
for database management of Web site traffic and ad placement statistics. The
software also reports traffic and ad statistics and demographics, which the
Company and its clients depend on for assessing performance.
In 1998 the Company enhanced its utilization of the GTE Internetworking
for expansion of hosting of crosswalk.com for increased bandwidth and reliance
on professional 7/24 monitoring of operations and direct connections to the
Internet backbone.
MARKETING
In September 1998, the Company rebranded and relaunched its Christian
community Web portal as crosswalk.com, replacing the previous name of CCN:
Christian Community Network. At the same time, the site Universal Resource
Locator (URL) was changed to www.crosswalk.com from www.christcom.net. In
conjunction with a steady shift away from Web site development and hosting and
towards a fully consumer-driven business, DIDAX INC. has rebranded itself as
crosswalk.com and will focus on this brand going forward.
Crosswalk.com, as a brand, embodies two key aspects of the Company's
vision for the site. First, it represents a strong Web safety positioning and
the provision of safe passage in a dangerous area. Second, it speaks to our
strategy of "information for Christians, not just Christian information", which
is a unique position for Christian-based Web sites and one that provides
resources for the full spectrum of a Christian's daily walk.
With a focused name and URL in place, the Company initiated its first
nationwide multimedia advertising campaign - primarily utilizing Christian radio
and targeted periodicals - which it believes was largely responsible for the 73%
traffic growth experienced in the fourth quarter of 1998. In 1999, the Company
intends to expand these campaign efforts in order to drive volume gains in
membership, traffic and associated revenues.
Also in 1999, the Board of Directors of the Company will request that the
stockholders of the Company approve aproposal to amend the Company's Articles of
Incorporation to change the Company name to crosswalk.com, which the company
believes will simplify marketing communications with consumers and potential
business partners and provide both continuity and leverage to the overall
branding strategy.
The Company believes that solidifying its growing national recognition
and position as the leading Web portal for the online Christian community is
critical to its ongoing efforts to generate Web site traffic, membership and
revenues. This effort is highlighted by aggressive media and public relations
campaigns, which will accelerate in 1999, but begins with the development and
application of unique, value-added, market-driven content and services within
the crosswalk.com community. Many of these applications are internally developed
or managed, while a few are available via partnerships - often exclusive - with
other leading online content and service providers. All,
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however, stem from an ongoing analysis of consumer needs, Web trends, and online
business opportunities. The dynamics of the Internet create an upward
opportunity spiral that converts unique applications into traffic and
membership, and then converts traffic and membership into a stream of new
opportunities from external organizations seeking a receptive audience.
The Company believes that crosswalk.com's ability to generate this
audience and the continued stream of content and service applications is a
current distinctive of the site and one that must be continuously supported via
aggressive consumer spending and relationship/affinity marketing efforts within
the Christian and non-profit communities.
The value of this distinctive can be quantified in the attention
crosswalk.com has enjoyed among high-impact national media. In 1998,
crosswalk.com received favorable press - ranging from on-air and in-print
interviews to news commentaries and press release pick-ups -- in media as
widespread as CNBC, Money magazine, CBS Market Watch, The Washington Post, CCM
Update, Christian Businessman Magazine, Christian Computing, Beverly LaHaye
Today, and numerous radio interviews.
With the stream of new channel and new service launches and the increased
investment in traffic and membership generating initiatives, the Company
anticipates exponential growth in its position as the leading Web portal for the
online Christian community. With this position - and the ability to act as
responsible advocate for the largest Christian community on the Web - in place,
the Company expects to significantly accelerate closure of revenue opportunities
ranging from site sponsorships and advertising to member/donor acquisition fees
to retail sales, transaction fees, and more.
COMPETITION
To the extent the Company engages in sales of sponsorship and advertising
space on crosswalk.com, the Company competes 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 crosswalk.com. 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.
The Internet is currently characterized by minimal barriers to entry, and
current and new competitors can launch new retail websites at relatively low
cost. 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,
drive a critical mass of members and site visitors to a purchase decision,
effectively market its services, and successfully differentiate its Web site.
Certain of the Company's current and potential competitors have longer operating
histories, greater name recognition and greater financial resources. Such
competitors could undertake more aggressive and costly marketing campaigns than
the Company, which may adversely affect the Company's marketing strategies and
have a material adverse effect on the Company's business, results of operations
or financial condition.
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
<PAGE> 9
service; the volume and quality of traffic to and purchase requests from a Web
site; 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 Web site operated by Christianity Today, Inc. The Company has
developed Christianity.Net, another Web site operated by Christianity Today,
Inc. which is available through crosswalk.com pursuant to an agreement between
the Company and Christianity Today, Inc. In addition, OnePlace.com, acquired by
Salem Communications is a Christian community which has developed databases of
Christian products, churches, retail stores, Christian counselors and other
ministry partners designed to attract, retain and integrate traffic into an
on-line community. OnePlace also generates revenue from advertising, technology
licensing and the sale of products and services through its Christian
SuperStore. Other known competitors include Gospel Communications Network (GCN),
a Web site operated by a division of Gospel Films, currently supported through
donations and does not generate revenue through advertising; Goshen, a Web site
operated by Media Management, which provides limited news services and
advertising space; ICRN (Involved Christian Radio Network by Domain), a Web site
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. (In 1998, the Company signed an agreement with the Domain
Group for content exchange and marketing promotion); Lightsource Online (by
KMA), a Web site operated by KMA Media Group (KMA), a for-profit marketing and
fund raising organization currently operating an Internet radio service geared
to the Christian community; and Christian Answers.Net, a Web site operated by
Eden Communications supported entirely by donations, including an area of
interest to young Christians and movie reviews.
OPERATIONS AND TECHNOLOGY
The Company believes that its future success is dependent on its ability
to improve continuously the speed and reliability of crosswalk.com, 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 Web
site, improve the speed with which purchase requests are processed and heighten
Web site 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 GTE Networking. 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 is in the process of developing comprehensive
out-of-state disaster recovery plans to safeguard consumer information. The
Company maintains business interruption insurance for the actual loss of
business income sustained due to the suspension of its operations over a
twelve-month period as a result of direct physical loss of or damage to property
at the Company's offices. However, in the event of a prolonged interruption, it
is probable that this business interruption insurance will not be sufficient to
fully compensate the Company. In the event that the Company experiences
significant system disruptions, the Company's business, results of operations or
financial condition could be materially adversely affected.
The Company's services also may be vulnerable to break-ins and similar
disruptive problems caused by Internet users. Further, weaknesses in the
Internet may compromise the security of confidential electronic information
exchanged across the Internet. This includes, but is not limited to, the
security of the physical network and security of the physical machines used for
the information transfer. Any such flaws in the Internet or the end-user
environment, or weaknesses or vulnerabilities in the Company's services or the
licensed technology incorporated in such service, would jeopardize the
confidential nature of information transmitted over the Internet and could
require the Company to expend significant financial and human resources to
protect against future breaches, if any, in order to alleviate or mitigate
problems caused by such security breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company, or third
<PAGE> 10
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 Web site 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 asserts common law protection on certain names and marks that
it has used in connection with its business activities. There can be no
assurance that the Company will be able to secure registration for any of its
marks. The Company has also invested resources in purchasing Internet domain
names for existing and potential Internet sites from the registered owners of
such names. There is a substantial degree of uncertainty concerning the
application of federal trademark law to the protection of Internet domain names,
and there can be no assurance that the Company will be entitled to use such
domain names.
CHRISTIAN STATEMENT OF FAITH; THE COMPANY'S POLICY
Article XIII of the Company's Bylaws provides that the Company is a
"religious corporation." To this end and in order to best identify with and
service its selected Christian market niche and to generate its Internet product
which is heavily content laden, the Company's policy is generally to include
among its officers and directors unconditionally, and employees, where a bona-
fide occupation qualification exists, only persons who, upon request, subscribe
to the Company's Christian Statement of Faith as follows:
"1. We believe that there is one God, eternally existing in three persons:
the Father, the Son, and the Holy Spirit.
2. We believe that the Bible is God's written revelation to man and that it
is verbally inspired, authoritative, and without error in the original
manuscripts.
3. We believe in the deity of Jesus Christ, His virgin birth, sinless life,
miracles, death on the cross to provide for our redemption, bodily
resurrection and ascension into heaven, present ministry of intercession
for us, and His return to earth in power and glory.
4. We believe in the personality and deity of the Holy Spirit, that He
performs the miracle of the new birth in an unbeliever and indwells
believers, enabling them to live a godly life.
5. We believe that man was created in the image of God, but because of sin,
was alienated from God. That alienation can be removed only by accepting
through faith, God's gift of salvation which was made possible by
Christ's death."
In order to implement the Christian Statement of Faith, the Company
intends generally to act in accordance with the following policy, as stated in
its Bylaws: "The Corporation shall:
"1. Actively seek to market the services of the [C]orporation to those
persons, entities, and agencies which are actively involved in
propagating a pattern of beliefs and actions consistent with the tenets
of the Statement of Faith. Nothing herein shall be construed to prohibit
marketing such services to other persons, entities, or agencies except as
specifically set forth in the prohibitions or corporate action set forth
below.
<PAGE> 11
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.
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
voting. Such vote must be made at an actual special meeting of the
shareholders called by written notice delivered to each shareholder not
less than 10 nor more than 60 days prior to the date of the meeting. Time
is of the essence as to this notice provision and no extension of the
time of the meeting or adjournment of the meeting to a date outside the
notice period shall be permitted except upon the affirmative vote of not
less than 70 percent of the shares then issued and outstanding."
<PAGE> 12
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
6,100 square feet of space at 4206F Technology Court, Chantilly, Virginia
pursuant to a five year lease agreement terminating in September, 2003 with an
unaffiliated third party at an annual rental of approximately of $87,000. The
Company considers this space to be currently 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, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET
The Company's Common Stock is listed for trading on the Nasdaq SmallCap
Stock Market(SM) ("Nasdaq SmallCap") under the symbol "AMEN." The Company's
Purchase Warrants had been listed for trading on Nasdaq SmallCap through
February 12, 1999, the date the Purchase Warrants were redeemed by the Company.
See "ITEM 6. "Managements' Discussion and Analysis or Plan of Operation-
Liquidity and Capital Resource."
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).
<PAGE> 13
<TABLE>
<CAPTION>
High Low
------ -------
<S> <C> <C>
September 24, 1997 through December 31, 1997:
AMEN $ 5.500 $ 2.00000
AMENW $ .750 $ .15625
January 1, 1998 through March 31, 1998:
AMEN $ 3.438 $ 1.87500
AMENW $ .625 $ .12500
April 1, 1998 through June 30, 1998:
AMEN $ 8.000 $ 3.25000
AMENW $ 2.750 $ .37500
July 1, 1998 through September 30, 1998:
AMEN $ 5.125 $ 1.87500
AMENW $ 1.625 $ .50000
October 1, 1998 through December 31, 1998:
AMEN $ 40.000 $ 2.00000
AMENW $ 27.000 $ .37500
January 1, 1999 through March 11, 1999:
AMEN $ 15.000 $ 7.37500
AMENW* $ 9.250 $ 2.75000
</TABLE>
* On January 6, 1999, pursuant to the terms and conditions of the
Purchase Warrant Agreement, the Company announced the redemption of its Purchase
Warrants (AMENW). The redemption notice and accompanying prospectus was mailed
to the registered holders of the Warrants by Wednesday January 13, 1999, and the
redemption date was Friday, February 12, 1999. The aggregate results of this
call for redemption was the exercise of 2,841,526 Purchase Warrants or 98.8% of
the 2,875,000 Purchase Warrants outstanding which, along with the exercise of
44,000 Underwriter Warrants, raised $16,701,775 for the Company while increasing
the total shares of common stock outstanding to 6,567,606.
At March 11, 1999 the closing price for the Company's Common Stock, as
reported by NASDAQ SmallCap, was $ 9.00 per share.
At March 19, 1998, the approximate number of holders of record of the
Company's Common Stock was 6,100. 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.
<PAGE> 14
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
BACKGROUND
DIDAX INC. ("the Company") is primarily known as the creator of
crosswalk.com(TM) (WWW.CROSSWALK.COM), formerly known as the CCN: Christian
Community Network. crosswalk.com(TM) ("crosswalk.com") is an interactive Web
site, which provides information and resources that the Company believes
generally appeals to the Christian community. The information and resources are
developed and made available both by the Company and by Christian and secular
retailers, publishers, charities and ministries. The Company generates revenues
through the sale of sponsorships and advertising; the online retailing of
Christian and family-friendly products manufactured or developed by others
(music, books, apparel, gifts, etc.); commissions and referral fees from
co-marketing relationships; memberships in affinity marketing programs
(affording participants price discounts and other benefits of group purchasing
power); and to a lesser extent, the continuing provision of technology services,
including services related to Web site development and hosting to Christian
organizations, (the "Consulting Services").
The Company has transitioned from deriving the majority of its revenues from
providing Consulting Services to Christian organizations as mentioned above, to
revenue generation through: the sale of advertising and sponsorship
opportunities on crosswalk.com; direct retail sales and royalties/fees from the
sale of Christian interest products manufactured or developed by others
(primarily CDs, tapes, and other articles generally appealing to the Christian
marketplace); and membership and/or purchase-driven fees from online promotional
partners (currently ranging from insurance, retailers, to affinity buying
clubs). The Company's strategy going forward is one of making crosswalk.com a
community portal with deep Channel content and a breadth of information for
Christians, not just Christian information. It is the Company's belief that this
strategy, coupled with crossmedia marketing and promotional activities will
accelerate traffic and thus revenue growth over time. The Company plans to
continue enhancing crosswalk.com in order to become the preferred online
resource for Christians in search of information, interaction and involvement
opportunities that help them apply a Christian world view across the breadth of
their life and interests.
68% of the Company's total 1998 revenue was generated from advertising and
sponsorships and retail sales, as compared to 4% in 1997. The increases in the
Company's revenue derived by the Company from advertising, sponsorships,
affinity memberships, and retail sales exceeded the decline in revenue derived
by the Company from providing Consulting Services by 517% in 1998. Overall, the
Company also experienced a 156% increase in revenue in 1998 as compared to 1997.
Additionally, the Company's progress in developing crosswalk.com is evidenced by
the growth in membership and page views. Membership in crosswalk.com is free and
simply requires filling out an online registration form with one's name, e-mail
address, and limited demographic data. Page views are a measure of total pages
viewed by visitors to crosswalk.com in a month. At December 31, 1998, the
company had 147,405 members as compared to 40,888 members at December 31, 1997,
an annual growth rate of 260%. Average monthly page views tallied in the fourth
quarter of 1998 reached 2,200,000 from less than 217,600 for the comparable
fourth quarter a year earlier. To the extent membership in crosswalk.com
continues to increase and the Company continues to place advertisements and
generate sponsorships on crosswalk.com for which it receives a fee, revenues
from this activity on crosswalk.com should increase. The opportunity for the
Company to begin generating significant advertising and retail revenues is
predicated upon increasing membership and traffic in the form of page views on
crosswalk.com.
During 1998, the Company acquired gofishnet.com, inc. ("gofishnet"), an
Internet retailer of Christian music and videos, relaunched the Company's Web
site, not only improved its services but redirected and refocused itself so as
to be what the Company believes is "the" community portal for Christians on the
Internet. The Company received the "1998 Christian Web Site of the Year" award
by the Best of the Christian Web for the second year in a row. Since the
acquisition of gofishnet in February 1998, the Company launched
crosswalkMusic(TM), a music channel that includes the music store, widely known
Christian talk shows, an online radio station, and the crosswalkEvents(TM)
database. The Company used the acquisition of gofishnet to enter the Christian
music niche and has expanded upon that by adding content, both print and
on-demand audio, as well as services. In addition to crosswalkMusic(TM), the
Company also launched beta versions of crosswalkMoney(TM) and
crosswalkCareers(TM). crosswalkMoney(TM) provides members with information and
opportunities to invest their money based on their values. Components of
crosswalkMoney(TM) include: insurance opportunities provided by M.A.I.N.
Financial Services, Inc.; screening of
<PAGE> 15
investment portfolios provided by the INVESTigator(TM), an online tool which
allows a visitor to discover whether their investments are consistent with their
values; live charts and quotes provided by Quote.com; and mutual fund and
managed account investment opportunities provided by the Timothy Plan, Quantum
American, Inc., and Quantum/Gabelli, LP. crosswalkCareers(TM) provides members
with career counseling services, job postings, and resume posting opportunities.
In addition, the Company improved the Men's & Women's Communities and began
development of the HomeSchool(TM) Channel in December, 1998. The Company also
expanded its services to include free web based e-mail (CCNMail(TM)) and free
Internet filtering and its retail offerings to include the "Prince of Egypt"
merchandise; the NetMarket affinity buying club; toys from online retailer,
eToys; and seasonal products, such as books from Family Christian Stores and
amazon.com. In the latter half of 1998, the Company rebranded its Web site as
crosswalk.com, replacing CCN: Christian Community Network (www.christcom.net).
crosswalk.com was chosen to streamline the Company's branding and thus increase
name recognition among Christians on the Internet. In an effort to accelerate
web content development and customer relationship management, the Company
selected Vignette's StoryServer 4 publishing tool. In addition, the Company also
hired Scott Fehrenbacher, General Manager of the crosswalkMoney(TM) Channel, and
former founder and president of American Values Investing Inc., and Neal Joseph,
Vice President and General Manager responsible for all aspects of entertainment
on crosswalk.com(TM), including, but not limited to, the crosswalkMusic(TM)
Channel. Prior to accepting this position, Mr. Joseph was the founder and
president of Warner Bros. Records' Christian music division Warner Alliance.
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, 1998, the Company had an accumulated deficit of $11,396,207.
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 and
sponsorships of crosswalk.com and very limited sales of products via
crosswalk.com. The Company plans to significantly increase its sales and
marketing efforts and fund greater levels of crosswalk.com operations. 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 YEARS ENDED DECEMBER 31, 1998 AND 1997
NET LOSS
For the year ended December 31, 1998, the Company incurred a net loss of
$3,459,055 as compared to a net loss of $4,271,249 for the same period in 1997.
This reduced loss of $812,194 (19%) was due primarily to an increase in revenues
and other income, the details of which follow, offset to an extent by an
increase in product costs and expenditures. The reduced loss consisted of a
$256,941 (135%) increase in gross margin and a $2,006,934 (112%) increase in
Other Income for the year ended December 31, 1998 as compared to the year ended
December 31, 1997, offset to an extent by a $1,451,681 (54%) increase in
Operating Expenses. Other Income increased as a result of a $125,734 (139%)
increase in interest income and a $1,875,594 (100%) decrease in interest expense
as 1997 included interest expense of $1,700,000 associated with the repayment of
a bridge loan in the fourth quarter of 1997.
<PAGE> 16
REVENUES
The Company generated $660,926 or 156% more revenue in the year ended December
31, 1998 than in the same period in 1997. The $1,083,294 of revenue earned in
1998 consisted of $737,676 from Advertising and Sponsorships, $134,446 from
Retail Sales, $201,830 from Consulting Services, and $9,342 from Internet
Access, while the $422,368 of revenue earned in 1997 consisted of $16,876 from
Advertising and Sponsorships, $66,410 from Retail Sales, $305,140 from
Consulting Services, and $33,942 from Internet Access. The year on year change
in revenue mix is a 4,271% ($720,800) increase in advertising/sponsorship
revenue, a 102% ($68,036) increase in retail revenue, a 34% ($103,310) decrease
in consulting revenue and a 72% ($24,600) decrease in Internet access revenue.
Barter agreements which allowed for equal exchanges of goods and services such
as advertising, marketing, and content services on the Company's and the
customer's Internet websites, amounted to fifty-two percent of the revenue
earned in 1998. Advertising/sponsorship revenues increased because of the
Company's focus on the sponsorship business model during 1998. Retail revenues
increased in 1998 due to increased marketing efforts and product offerings. The
decrease in Consulting Service revenue is due to the Company's transition from
being a web consulting services provider to being a community builder, as
previously described. Internet access revenue decreased because of a one-time
revenue adjustment recorded in the first quarter of 1997 and the discontinuation
of marketing Internet access in the end of 1996. With continued growth in site
traffic, service enhancements, and marketing resources dedicated to retail,
sponsorship, and advertising revenue opportunities, the Company hopes to achieve
continued progress in these revenue streams.
COST OF GOODS AND SERVICES
Cost of goods and services, consisting of costs related to selling advertising
space on and sponsorships of crosswalk.com; retailing Christian interest
products on crosswalk.com; and development, maintenance, and support of customer
websites; was $636,348 and $232,363 for the years ended December 31, 1998 and
1997, respectively. The Company's gross margin for the year ended December 31,
1998 decreased slightly to 41% from 44% for the same period in 1997. This
decrease is due primarily to the increase in barter transactions, which
accounted for fifty-two percent of revenues in 1998.
PRODUCT DEVELOPMENT AND CROSSWALK.COM OPERATIONS
Product development, which consists of labor and material costs associated with
the development of new products and services, decreased by $45,621 (10%)
primarily due to a change in the staffing mix in 1998 as compared to 1997.
Crosswalk.com operational expenses, consisting primarily of costs related to the
Company's maintenance and enhancements for the Company's intractive Web site
crosswalk.com, increased to $1,122,646 for the year ended December 31, 1998, as
compared to $506,979 for the same period in 1997. The cost of Crosswalk.com
operations increased by 121% ($615,667) due to the Company's shift from being a
consulting services company to being a consumer focused community portal. A
smaller portion of salary expense was charged to cost of sales in 1998 due to
the decrease in consulting service revenues. In addition, there was an across
the board wage increase in September 1997 and a larger staff in Crosswalk.com
operations in 1998 as compared to 1997. There were also increases in consulting
services, content, and travel expenses which directly resulted from the
expansion of services provided via crosswalk.com.
SALES AND MARKETING
Sales and marketing expenses increased by 48% ($405,665) to $1,242,836 for the
year ended December 31, 1998, from $837,171 for the year ended December 31,
1997. Sales and marketing expenses for the year ended December 31, 1997 included
a one time non-cash expense item of $200,000 relating to the donation by the
Company of its Common Stock to one of the Company's ministry partners. Without
taking into account this one time non-cash expense item, sales and marketing
expenses increased for the year ended December 31, 1998 by $605,665, or (95%)
over 1997. This increase is a result of the Company's initiation of a
cross-media marketing campaign to promote the re-branded crosswalk.com. This
increased investment consisted of costs mostly related to advertising and
promotion in 150 Christian radio markets, online links from search engines, and
ads in Christian periodicals. In addition, the Company expanded its sales and
marketing staff in the first half of 1998. Finally, there was an across the
board
<PAGE> 17
wage increase in the end of 1997, subsequent to the Company's IPO. The Company
believes that it will continue to incur substantial marketing expenses as it
seeks to increase market awareness of crosswalk.com.
GENERAL AND ADMINISTRATIVE
The Company increased its general & administrative (G&A) costs by 54% or
$475,970 for the year ended December 31, 1998 versus 1997 largely in response to
the requirements of being a publicly held firm including extensive investor
relations activity aimed at increasing trading volume and Company awareness. In
order to address the Company's requirement to improve the operational processes
necessary to support crosswalk.com growth, the Company invested approximately
$76,000 in management consulting services. In addition, the Company utilized the
consulting services of the members of the former board of gofishnet to
facilitate the Company's transition into the Internet music niche. Salary
expenses increased in 1998 due to executive appointments and severance costs and
the discontinuance of salary abatements at the end of 1997. Lastly, the Company
had increases in office operating costs due to increases in headcount, satellite
locations, and bandwidth required to support traffic growth on crosswalk.com.
INTEREST INCOME AND INTEREST EXPENSE
Interest income increased 139% to $215,879 from $90,145 for the years ended
December 31, 1998 and 1997, respectively. This $125,734 increase is due to the
investment of the proceeds from the Company's IPO.
Interest expense was $1,947 and $1,877,541 for the years ended December 31, 1998
and 1997, respectively. The $1,875,594 (99.9%) decrease in interest expense is
due primarily to the recognition of $1,700,000 of interest expense on the
Company's junior subordinated notes in 1997. These notes were repaid with the
proceeds from the Company's IPO during the fourth quarter of 1997.
LIQUIDITY AND CAPITAL RESOURCES
During the years ended December 31, 1998 and 1997, net cash used in operating
activities was $3,177,582 and $2,344,834, respectively. Net cash used in
investment activities was $3,073,455 and $42,108 in the year ended December 31,
1998 and 1997, respectively as the Company began purchasing the technology tools
necessary to support the traffic growth on crosswalk.com. Net cash provided by
financing activities was $2,041,707 and $7,779,597 for the years ended December
31, 1998 and 1997, respectively. In the year ended December 31, 1998, cash
provided by financing activities consists of the receipt of $2,208,141 from the
exercise of 44,000 Common Stock Underwriter Warrants and 313,075 Common Stock
Purchase Warrants. Pursuant to the terms of the Purchase Warrant Agreement, the
Company exercised its right to call the remaining 2,561,925 Common Stock
Purchase Warrants. The terms of the Common Stock Purchase Warrants granted the
Company such a right should the closing bid price as reported on Nasdaq of the
shares of Company's Common Stock average in excess of $10.00 per share for 30
consecutive trading days. This condition was met on January 4, 1999, and the
Company initiated mailing of the Notice of Redemption to warrant holders as of
January 13, 1999. The redemption date was February 12, 1999. The aggregate
result of the call for redemption was that 2,841,526 (or 98.8%) of the purchase
warrants were exercised resulting in $16,338,774 being raised by the Company,
leaving 33,474 purchase warrants left for redemption for which the Company
remitted $8,369.
Cash used in financing activities in 1998 consisted of the repayment of $82,230
of long term debt and the incurrance of $31,370 of syndication costs related to
the Companys' IPO and registering the shares underlying the Company's 1997 Stock
Option Plan.
The Company currently anticipates that its $3,801,259 working capital balance at
December 31, 1998, consisting primarily of the proceeds from the exercise of the
Common Stock Purchase Warrants and the Common Stock Underwriter Warrants, as
previously described, and the 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 twelve
months. However, the Company anticipates that it may seek to raise additional
funds in order to expand its marketing campaign and crosswalk.com Channel
deployment, and to pursue potential leveraged joint marketing opportunities,
<PAGE> 18
or in the event that the Company's estimates of operating losses and capital
requirements change or prove inaccurate or in order that the Company may respond
to increased demand or to take advantage of other unanticipated opportunities.
There can be no assurance that additional financing will be available to the
Company or that such financing will be available on acceptable terms.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's extremely limited operating history and the rapid
technological change experienced in the Internet industry generally, the Company
has no meaningful historical financial data upon which to base future operating
expenses. Accordingly, the Company's expense levels are based in part on its
expectations as to future revenues, of which there can be no assurance. There
can be no assurance that the Company will be able to accurately predict the
levels of future revenues, if any, and the failure to do so would have a
materially adverse effect on the Company's business, results of operations and
financial condition.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by multiple factors. 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, acceptance of its marketing
initiatives, 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.
YEAR 2000 COMPLIANCE STATUS
Many existing computer programs use only two digits to identify a year in the
date field. These programs, which were developed without considering the impact
of the upcoming change in the century, could fail or create erroneous results by
or at the year 2000. The Company has reviewed its internal programs, and has
determined that there are no material year 2000 issues within the Company's
current systems or services. The Company is in the process of soliciting replies
from its material customers, vendors and financial service providers to
determine any risk of year 2000 issues. As of the date herein, no material year
2000 issues have been identified, however, the Company cannot be certain that
its customers, vendors or financial services providers will not have year 2000
issues until evaluation of replies to the Company's year 2000 initiative is
complete. Should such issues arise with any of these parties, it could have a
material adverse effect on the Company's business, operating results and
financial condition.
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.
<PAGE> 19
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, 1998, the Company had an accumulated
deficit of approximately $11,396,000. 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."
DEVELOPING MARKET; VALIDATION OF THE INTERNET AS AN EFFECTIVE COMMERCE MEDIUM
The market for the Company's services and products has recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed services and products for use
on the Internet. As a result, the Company's mix of services and products may
undergo substantial changes as the Company reacts to competitive and other
developments in the overall Internet market. The Company's market is highly
dependent upon the increased use of the Internet for information, interaction,
distribution and commerce. In particular, the Company believes that the Internet
is still an unproven medium for paid services such as the Company's.
Accordingly, the Company's future operating results will depend substantially
upon the increased use of the Internet by individuals and companies for
information, interaction, distribution and commerce, and the emergence of the
Internet as an effective commerce medium. Moreover, critical issues concerning
the commercial use of the Internet (including security, reliability, cost, ease
of use, access, quality of service and acceptance of advertising), remain a
barrier to entry for many individuals and businesses and therefore may impact
the rate of growth of Internet use. If widespread commercial use of the Internet
does not develop, or if the Internet does not develop as an effective commerce
medium, the Company's business, results of operations and financial condition
will be materially adversely affected.
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
<PAGE> 20
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 crosswalk.com, makes it very difficult to project future
levels of the Company's Internet advertising costs.
LIMITED SALES FORCE; EVOLVING DISTRIBUTION CHANNELS The Company has a limited
number of sales and marketing employees and has immature distribution channels
for its services and products. In order to generate advertising and retail
sales, the Company must achieve broad promotion of its services and products to
Internet users, thereby, developing 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, www.crosswalk.com.
Accordingly, the performance of the Company's services and products is critical
to the Company's reputation, its ability to attract customers to crosswalk.com
and market acceptance of these services and products. Any system failure that
causes interruptions in the availability or increases response time of the
Company's services would reduce traffic to the Company's Website and, if
sustained or repeated, would reduce the attractiveness of the Company's services
to advertisers and other future potential customers or Internet users. An
increase in the volume of traffic conducted through the Company's services and
products could strain the capacity of the software or hardware deployed by the
Company, which could lead to slower response time or system failures. In
addition, as the number of websites and Internet users increases, there can be
no assurance that the Company's services and products will be able to compete
with firms who may have greater financial resources than the Company. The
Company is also dependent upon web browsers and Internet and online service
providers for access to its services and consumers may experience difficulties
due to system failures unrelated to the Company's systems, services and
products. To the extent that the capacity restraints described above are not
effectively addressed by the Company, such constraints would have a material
adverse effect on the Company's business, results of operations and financial
condition.
DEPENDENCE ON COMPUTER INFRASTRUCTURE Certain of the Company's communications
hardware and certain of its computer hardware operations are located at the
Company's headquarters and at the Company's hosting facility both of which are
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
<PAGE> 21
computer viruses, physical or electronic break-ins and similar disruptive
problems. Computer viruses, break-ins or other problems caused by third parties
could lead to interruptions, delays or cessations in service to users of the
Company's services and products. The occurrence of any of these risks could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "BUSINESS-Facilities." 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. 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
twelve 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
<PAGE> 22
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 the Company services and products. The following table
provides information pertinent to these relationships:
<TABLE>
<CAPTION>
Name Service Provided Term Consideration
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GTE Interworking Hosting Two year contract Company pays monthly fixed rate
to January 2000
netradio Software, hardware and Exclusive for Company paid one time license fee,
bandwidth infrastructure Christian format shares advertising revenue in 20% to
for Internet radio, audio, through June 1999 50% range based on size of advertising
archiving and simulcast in comparison to netradio cost for
providing spot, other services paid for
on a quotation basis
ichat Chat Technology Annual Renewal Company pays annual license fee
Cybercash Internet secure Month to month Company pays fee per transaction
transaction capability
Net Gravity Internet Statistical Perpetual license Company paid one time license fee
Reporting Software
Vignette Internet Publishing Annual Renewal Company paid one time license fee
Software and annual renewal license fee
N2H2 Filtering Software Indefinite unless Company paid one time license fee
either party and pays monthly usage fees
terminates 3/31/99
</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
<PAGE> 23
significant strain on the Company's managerial, technical, sales and marketing
and administrative personnel as well as the Company's financial resources. To
manage its growth, the Company must implement operational and financial systems
and train and manage its employee base. There can be no assurances that the
Company will be able to successfully implement such systems on a timely basis,
if at all. Further, the Company will be required to manage multiple
relationships with consumers, strategic partners and other third parties. There
can be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's future operations. The Company's future
operating results will also depend on its ability to expand its sales and
marketing organizations, implement and manage new services to penetrate broader
markets and further develop and expand its organization. If the Company is
unable to manage growth effectively, the Company's business, results of
operations and financial condition will be materially adversely affected. There
can be no assurance that the Company will be able to effectively manage such
change.
COMPETITION There are several other companies, including nonprofit
organizations, some of which have longer operating histories, greater name
recognition and significantly greater financial and other resources than the
Company, attempting or which may attempt to aggregate Christian content on the
Internet. There can be no assurances that the Company will ever be positioned to
compete successfully with its current or future competitors nor can there be any
assurance that competitive pressures faced by the Company will not result in
increased marketing costs, decreased 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 counsel,
the Company believes that its use of religious criteria in employment practices
does not violate federal law relating to equal employment opportunities
("Federal Employment Law") because the Company qualifies as an exempt religious
corporation for purposes of the Federal Employment Law. The Federal Employment
Law has been subject to limited judicial and regulatory interpretation on the
question of what type of religious corporation would be exempt from the reach of
the Federal Employment Law. The Federal Employment Law is enforced, in part, by
a federal regulatory agency that is vested with broad discretion in interpreting
its meaning. The Company's policies and procedures with respect to hiring have
not been examined by federal or state authorities. For these reasons, there can
be no assurances that a review of the Company's hiring practices or the
operation of the Company's business will not result in determinations that
materially adversely affect the Company's business, results of operations and
financial condition or the Company's ability to attain its objectives. SEE ITEM
1 "BUSINESS-Christian Statement of Faith; the Company's Policy."
LIMITATION ON MONETARY LIABILITY OF OFFICERS AND DIRECTORS TO STOCKHOLDERS
Section 145 of the General Corporation Law of the State of Delaware contains
provisions entitling directors and officers of the Company to indemnification
from judgments, fines, amounts paid in settlement and reasonable expenses,
including attorney's fees, as a result of an action or proceeding in which they
may be involved by reason of being or having been a director or officer of the
Company provided said officers or directors acted in good faith. Articles 10 and
11 of the Company's Certificate of Incorporation contain provisions indemnifying
officers and directors of the Company to the fullest extent provided by Delaware
law. As a result, the rights of the Company's shareholders to recover monetary
damages from directors of the Company for breaches of directors' fiduciary
duties may be significantly limited.
NASDAQ ELIGIBILITY AND MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
Under the current rules relating to the continued listing of securities on
NASDAQ SmallCap, a company must maintain (a) at least $2,000,000 in net tangible
assets, or $500,000 in net income in two of the last three years, or a market
capitalization of at least $35,000,000, (b) public float of at least 500,000
shares, (c) market value of public float of at least $1,000,000, and (d) a
minimum bid price of $1.00 per share.
If at any time the Common Stock (the "Listed Security") is 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
<PAGE> 24
Security 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 Security could be
subject to delisting from NASDAQ SmallCap. Trading, if any, in the Listed
Security would thereafter be conducted in the over-the-counter market on an
electronic bulletin board established for securities that do not meet the NASDAQ
SmallCap listing requirements or in what are commonly referred to as the "pink
sheets." As a result, an investor may find it more difficult to dispose of, or
to obtain accurate quotations as to the price of, the Listed Security.
RISK OF LOW-PRICED STOCKS If the Listed Security was delisted from NASDAQ, and
no other exclusion from the definition of a "penny stock" under applicable
Commission regulations were available, the Listed Security may become subject to
the penny stock rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than established
customers and accredited investors (generally defined as investors with net
worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000
together with spouse). For transactions covered by these rules, the
broker-dealer must make a special suitability determination for the purchase and
must have received the purchaser's written consent to the transaction prior to
sale. Consequently, delisting from NASDAQ, if it were to occur, could materially
adversely affect the ability of broker-dealers to sell the securities and the
ability of purchasers in this Offering to sell their securities in the secondary
market.
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 DISCLOCURE
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.
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.
<PAGE> 25
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
10.3A* 1997 Stock Option Plan, as amended April 6, 1998
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
10.12+ Promissory note between the Registrant and John and Holli Meindl dated January 9, 1997
</TABLE>
<PAGE> 26
<TABLE>
<S> <C>
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 Promise Keepers 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
10.19A* Employment Agreement between the Registrant and Dane West dated as of March 23, 1998
10.20+ Employment Agreement between the Registrant and William Bowers dated as of June 6, 1997.
10.20A* Employment Agreement between the Registrant and William Bowers dated as of March 23, 1998
10.21+ Employment Agreement between the Registrant and Gary Struzik dated as of June 6, 1997.
10.21A* Employment Agreement between the Registrant and Gary Struzik dated March 23, 1998
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
</TABLE>
<PAGE> 27
<TABLE>
<S> <C>
10.36* Form of Noncompetition and Proprietary Information Agreement between the Registrant and Messrs.
Bowers, West, Parker, and Struzik dated as of March 23, 1998
10.37* Employment Agreement between Registrant and William M. Parker dated March 23, 1998
10.38* 1998 Stock Option Plan
10.39 Office Building Lease by and between Richard P. Van Curen and Caprice Company and the Registrant
dated August 10, 1998
10.40 Amended office Building Lease Memoranda by and between Richard P. Van Curen and Caprice
Company and the Registrant dated February 5, 1999
10.41 Agreements between the Registrant and Quantum American, Inc. dated November 20, 1998
10.42 Agreement between the Registrant and Vignette Corporation dated June 1, 1998
11 Statement of computation of earnings per share
23.1 Consent of Hoffman, Morrison & Fitzgerald P.C.
27.1 Financial Data Schedule - For Fiscal Year 1998
</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
* Incorporated by reference to the Company's Registration Statement Post
Effective Amendment No. 1 to Form SB-2 declared effective by the Securities and
Exchange Commission on July 2, 1998, SEC File No. 333-25937
# Incorporated by reference to the Company's Registration Statement on Form
10-KSB declared effective by the Securities and Exchange Commission on March 20,
1998, 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, 1998.
<PAGE> 28
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 19, 1999 By: /s/ William M. Parker
---------------------------------------
William M. Parker,
Chief Executive Officer and President and director
March 19, 1999 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 19, 1999 By: /s/ William M. Parker
---------------------------------------
William M. Parker,
Chief Executive Officer and President and director
March 19, 1999 By: /s/ James G. Buick
----------------------------------------
James G. Buick,
Chairman of the Board of Directors
March 19, 1999 By: /s/ Robert C. Varney
----------------------------------------
Robert C. Varney, PhD.
Vice Chairman of the Board of Directors
March 19, 1999 By: /s/ Gary A. Struzik
----------------------------------------
Gary A. Struzik, Chief Financial Officer
and Secretary, Chief Accounting Officer
<PAGE> 29
March 19, 1999 By: /s/ Dane B. West
----------------------------------------
Dane B. West,
Vice President of Sales and Business Development
and director
March 19, 1999 By: /s/ William H. Bowers
----------------------------------------
William H. Bowers,
Chief Technical Officer and director
March 19, 1999 By: /s/ Bruce E. Edgington
----------------------------------------
Bruce E. Edgington, director
March 19, 1999 By: /s/ John J. Meindl
----------------------------------------
John J. Meindl, director
March 19, 1999 By: /s/ Clay T. Whitehead
----------------------------------------
Clay T. Whitehead, director
March 19, 1999 By: /s/ Earl E. Gjelde
----------------------------------------
Earl E. Gjelde, director
March 19, 1999 By: /s/ W.R. `Max' Carey
----------------------------------------
W.R. `Max' Carey, director
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
10.39 Office Building Lease by and between Richard P. Van Curen and Caprice Company and the
Registrant dated August 10, 1998
10.40 Amended office Building Lease Memoranda by and between Richard P. Van Curen and Caprice
Company and the Registrant dated February 5, 1999
10.41 Agreements between the Registrant and Quantum American, Inc. dated November 20, 1998
10.42 Agreement between the Registrant and Vignette Corporation dated June 1, 1998
11 Statement of computation of earnings per share
</TABLE>
<PAGE> 30
<TABLE>
<S> <C>
23.1 Consent of Hoffman, Morrison & Fitzgerald P.C.
27.1 Financial Data Schedule - For Fiscal Year 1998
</TABLE>
<PAGE> 31
DIDAX INC. AND SUBSIDIARY
(Development Stage Companies)
CONSOLIDATED FINANCIAL STATEMENTS
FROM MAY 12, 1993 (DATE OF INCEPTION)
TO DECEMBER 31, 1998
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1998
WITH
INDEPENDENT AUDITORS' REPORT
C O N T E N T S
<TABLE>
<S> <C>
Page
INDEPENDENT AUDITORS' REPORT F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets at December 31, 1997 and 1998 F-3
Statements of operations for the years ended December 31,
1997 and 1998, and cumulative from Inception
(May 12, 1993) to December 31, 1998 F-4
Statements of stockholders' equity (deficit)
from Inception (May 12, 1993) to December 31, 1998 F-5
Statements of cash flows for the years ended December 31, 1997 and 1998,
and cumulative from Inception (May 12, 1993) to
March 31, 1998 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-17
</TABLE>
F-1
<PAGE> 32
[HOFFMAN, MORRISON & FITZGERALD, P.C. LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS
DIDAX INC. AND SUBSIDIARY
Chantilly, Virginia
We have audited the accompanying consolidated balance sheets of DIDAX INC. AND
SUBSIDIARY (development stage companies) as of December 31, 1997 and 1998, and
the related consolidated statements of operations and cash flows for the years
then ended and stockholders' equity (deficit) for the period May 12, 1993 (date
of inception) to December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of DIDAX
INC. AND SUBSIDIARY as of December 31, 1997 and 1998, and the consolidated
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
As discussed in Note A to the financial statements, DIDAX INC. purchased all of
the outstanding shares of gofishnet.com, inc. for 130,292 shares of DIDAX INC's.
common stock. DIDAX INC. accounted for the merger as a pooling-of-interests
based on the provisions set forth in Accounting Principles Board Opinion No. 16,
"Business Combinations." The accompanying consolidated financial statements
presented have been restated to reflect the change in reporting entity.
/s/ HOFFMAN, MORRISON & FITZGERALD, P.C.
McLean, Virginia
February 16, 1999
<PAGE> 33
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,443,781 $ 1,234,451
Short-term investments - 2,743,277
Accounts receivable including unbilled of $38,573 and
$110,381 at December 31, 1997 and 1998, respectively 92,526 352,408
Prepaid expenses 16,865 2,220
Inventory - 7,819
Deferred costs 1,045 44,930
Notes receivable from officers - 93,000
------------ ------------
Total current assets 5,554,217 4,478,105
PROPERTY AND EQUIPMENT, net 138,714 321,794
OTHER ASSETS:
Notes receivable from officers 93,000 -
Deposits 250 56,063
Intangible assets, net 1,052 46,621
------------ ------------
Total other assets 94,302 102,684
------------ ------------
$ 5,787,233 $ 4,902,583
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 82,230 $ -
Accounts payable 47,313 110,675
Accrued liabilities 156,508 541,441
Deferred revenue 16,018 24,730
------------ ------------
Total current liabilities 302,069 676,846
OTHER LIABILITIES:
Accounts payable 25,551 46,243
------------ ------------
Total liabilities 327,620 723,089
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO POSSIBLE RECISSION:
$.01 par value, 574,434 and 0 shares issued and outstanding
at December 31, 1997 and 1998, respectively 1,733,399 -
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000 shares authorized
3,098,447 and 4,034,956 shares issued and outstanding
at December 31, 1997 and 1998, respectively 30,984 40,349
Common stock warrants 666,722 666,722
Additional paid-in capital 10,965,660 14,868,630
Deficit accumulated during development stage (7,937,152) (11,396,207)
------------ ------------
Total stockholders' equity 3,726,214 4,179,494
------------ ------------
$ 5,787,233 $ 4,902,583
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 34
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR CUMULATIVE
ENDED DECEMBER 31, FROM INCEPTION
1997 1998 (MAY 12, 1993) TO
---------- ---------- DECEMBER 31, 1998
-----------------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING REVENUES:
Advertising/Sponsorship sales $ 16,876 $ 737,676 $ 754,552
Retail sales 66,410 134,446 209,910
Consulting services 305,140 201,830 602,943
Internet access 33,942 9,342 119,253
----------- ----------- ------------
Total operating revenues 422,368 1,083,294 1,686,658
OPERATING EXPENSES:
Cost of goods and services 232,363 636,348 1,103,453
Product development 452,640 407,019 1,757,169
Crosswalk operations 506,979 1,122,646 1,880,351
Sales and marketing 837,171 1,242,836 3,315,815
General and administrative 877,718 1,353,688 3,401,309
----------- ----------- ------------
Total operating expenses 2,906,871 4,762,537 11,458,097
----------- ----------- ------------
LOSS FROM OPERATIONS (2,484,503) (3,679,243) (9,771,439)
OTHER INCOME (EXPENSE):
Interest income 90,145 215,879 321,789
Gain on exchange of assets - - 3,091
Miscellaneous income 650 6,256 7,655
Interest expense (1,877,541) (1,947) (1,957,303)
----------- ----------- ------------
Total other income (expense) (1,786,746) 220,188 (1,624,768)
----------- ----------- ------------
NET LOSS $(4,271,249) $(3,459,055) $(11,396,207)
=========== =========== ============
Net loss per common share (basic) ($3.31) ($0.98)
=========== ===========
Weighted average number of common
shares outstanding 1,289,460 3,535,487
=========== ===========
Net loss per common share (diluted) ($3.31) ($0.98)
=========== ===========
Weighted average number of common
shares outstanding 1,289,460 3,535,487
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements. F-4
<PAGE> 35
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FROM MAY 12, 1993 (DATE OF INCEPTION) TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
DEFICIT
COMMON STOCK ACCUMULATED
------------------------ ADDITIONAL COMMON DURING TOTAL
(ROUNDED TO WHOLE SHARE) PAID-IN STOCK DEVELOPMENT EQUITY
SHARES AMOUNT CAPITAL WARRANTS STAGE (DEFICIT)
--------- ------- ----------- -------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders
on May 12, 1993 180,000 $ 1,800 $ - $ - $ - $ 1,800
Issuance of common stock to founders in May
1993 in consideration of costs paid on behalf
of DIDAX, INC. 17,000 170 22,520 - - 22,690
Issuance of common stock throughout 1993 81,000 810 134,190 - - 135,000
Net loss - - - - (104,002) (104,002)
--------- ------- ----------- -------- ------------- ----------
BALANCE, DECEMBER 31, 1993 278,000 2,780 156,710 - (104,002) 55,488
Issuance of common stock to founders in December
1994 in consideration of costs paid on behalf 13,200 132 21,826 - - 21,958
of DIDAX, INC.
Issuance of common stock throughout 1994 41,993 420 69,579 - - 69,999
Net loss - - - - (224,759) (224,759)
--------- ------- ----------- -------- ------------- ----------
BALANCE, DECEMBER 31, 1994 333,193 3,332 248,115 - (328,761) (77,314)
Issuance of common stock throughout 1995 213,500 2,135 424,865 - - 427,000
Net loss - - - - (706,564) (706,564)
--------- ------- ----------- -------- ------------- ----------
BALANCE, DECEMBER 31, 1995 546,693 5,467 672,980 - (1,035,325) (356,878)
Issuance of common stock throughout 1996,
net of offering costs of $19,591 128,305 1,283 216,896 - - 218,179
Issuance of common stock warrants 111,187 - 111,187
Net loss - - - - (2,630,578) (2,630,578)
--------- ------- ----------- -------- ------------- ----------
BALANCE, DECEMBER 31, 1996 674,998 6,750 889,876 111,187 (3,665,903) (2,658,090)
Issuance of common stock throughout 1997,
net of offering costs of $1,899,805 2,423,449 24,234 10,075,784 - - 10,100,018
Issuance of common stock warrants 555,535 - 555,535
Net loss - - - - (4,271,249) (4,271,249)
--------- ------- ----------- -------- ------------- ----------
BALANCE, DECEMBER 31, 1997 3,098,447 30,984 10,965,660 666,722 (7,937,152) 3,726,214
Issuance of common stock throughout 1998
net of offering costs of $29,245 579,434 5,794 1,743,359 - - 1,749,153
Common Stock issued pursuant to exercise of
Underwriter warrants 44,000 440 362,560 - - 363,000
Common Stock issued pursuant to warrants exercise 313,075 3,131 1,797,051 - - 1,800,181
Net loss - - - - (3,459,055) (3,459,055)
--------- ------- ----------- -------- ------------- ----------
BALANCE, DECEMBER 31, 1998 4,034,956 $40,349 $14,868,630 $666,722 $(11,396,207) $4,179,494
========= ======= =========== ======== ============= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements. F-5
<PAGE> 36
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEAR CUMULATIVE
ENDED DECEMBER 31, FROM INCEPTION
1997 1998 (MAY 12, 1993) TO
------------ ------------ DECEMBER 31, 1998
-----------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FOR OPERATING ACTIVITIES:
Net loss $(4,271,249) $(3,459,055) $(11,396,207)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 223,067 134,518 443,307
Amortization of debt discount charged to interest expense 86,270 - 127,660
Common stock issued in lieu of cash for professional services 11,062 - 161,062
Common stock donated 200,000 - 200,000
Common stock issued in lieu of cash for
interest on repayment of long term debt 1,733,750 - 1,733,750
Disposal of fixed assets - 12,010 12,010
Changes in assets and liabilities affecting operations:
Accounts receivable (46,076) (259,882) (352,408)
Prepaid expenses (6,065) 14,645 (2,220)
Notes receivable from officer (83,000) - (93,000)
Inventory - (7,819) (7,819)
Deposits 9,553 (55,813) (56,063)
Deferred costs - (33,885) (34,930)
Accounts payable (186,033) 84,054 156,918
Accrued liabilities (28,006) 384,933 541,441
Deferred revenue 11,893 8,712 24,730
----------- ----------- ------------
Net cash used in operating activities (2,344,834) (3,177,582) (8,541,769)
----------- ----------- ------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Purchases of property and equipment (42,108) (325,178) (637,965)
Purchases of intangible assets - (5,000) (5,000)
Sales and maturities of short-term investments - 5,021,027 5,021,027
Purchase of short-term investments - (7,764,304) (7,764,304)
----------- ----------- ------------
Net cash used in investing activities (42,108) (3,073,455) (3,386,242)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from short-term debt 1,564,241 - 1,564,241
Proceeds from notes payable 82,230 - 82,230
Repayment of notes payable - (82,230) (82,230)
Proceeds from short-term debt, officer and director 250,000 - 873,000
Proceeds from advances due to officer and director - - 242,000
Repayment of short-term debt (1,700,000) - (1,700,000)
Repayment of advances due to officer and director (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 8,639,258 2,133,937 13,308,221
Deferred costs 28,868 (10,000) (10,000)
----------- ----------- ------------
Net cash provided by financing activities 7,779,597 2,041,707 13,162,462
----------- ----------- ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 5,392,655 (4,209,330) 1,234,451
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 51,126 5,443,781 -
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,443,781 $ 1,234,451 $ 1,234,451
=========== =========== ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS
INFORMATION:
Interest paid $ 80,312 $ 3,508 $ 88,100
=========== =========== ===========
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.
Common Stock in the amount of $45,000 was issued in 1998 in exchange for an intangible asset.
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements. F-6
<PAGE> 37
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
A. ORGANIZATION
DIDAX INC.'s ("DIDAX") initial public offering (IPO) of securities listed on the
Nasdaq Small Cap Market 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 interest bearing money market accounts and in short-term investments
and will be used for continued product development and marketing, working
capital, and to facilitate the expansion of DIDAX's business.
On February 23, 1998, DIDAX purchased all of the outstanding shares of
gofishnet.com, inc. ("gofishnet") for 130,292 shares of DIDAX's common stock.
gofishnet, an Internet retailer of Christian music and videos, operates as a
wholly owned subsidiary of DIDAX. DIDAX accounted for the merger as a pooling of
interests based on the guidelines described in Accounting Principles Board No.
16, "Business Combinations". Accordingly, the financial statements presented for
the years ended December 31, 1997 and 1998, respectively are presented on a
consolidated basis. For the year ended December 31, 1997, gofishnet earned
revenue of $77,413 and incurred a net loss of $146,539. For the period from
January 1, 1998 to the date of combination, gofishnet earned revenues of $17,052
and incurred a net loss of $20,413.
DIDAX's and gofishnet's (collectively "the Company") business includes the
development of computer communications and information services; advertising,
sponsorship and royalty sales; and the resale of products specifically designed
to meet the needs of Christian users of the Internet and World Wide Web. 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 market awareness and
acceptance of its product, the website www.crosswalk.com(TM) ("crosswalk.com"),
through marketing and sales initiatives planned by the Company.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The financial statements for the years ended December
31, 1997 and 1998 reflect the acquisition of gofishnet, effective February 23,
1998, and are thus stated on a consolidated basis. Intercompany transactions and
balances have been eliminated in combination for all periods. Certain items in
the accompanying 1997 financial statements have been reclassified to conform
with the 1998 presentation.
Basis of accounting - To date the Company has not earned significant revenues
and has been principally involved in planning and organization, initiating
product development projects, conducting market research and securing adequate
financing for the development of its products and marketing to potential
customers. Accordingly, the Company's financial statements are presented as
those of a development stage enterprise, as prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 7, "Accounting and Reporting by Development
Stage Enterprises."
Use of estimates - Management uses estimates and assumptions in preparing
financial statements in accordance with generally accepted accounting
principles. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could vary from the estimates
that were used.
Cash equivalents - Cash and cash equivalents include cash and investments with
maturities of three months or less.
Short-term investments - Short-term investments are principally comprised of
investments with oringinal maturities in excess of three months but less than
one year from the date of acquisition. The investments consist of U.S.
government bonds and treasury notes and corporate bonds and are presented
according to the provisions of SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities." SFAS 115 requires that such investments be
stated at fair value and the disclosure of any unrealized and realized gains and
losses, as well as the original cost of the securities.
F-7
<PAGE> 38
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. Intangible assets are amortized over useful
lives of five years using the straight-line method. Consistent with Financial
Accounting Standards Board ("FASB") Interpretation No. 6, "Applicability of FASB
Statement No. 2 to Computer Software" and SFAS No. 86, "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed", along with FASB
Statement of Concepts 6, purchased software with alternative uses of future
benefit to the Company, directly associated with revenue producing activities
has been capitalized when the software is acquired and accounted for in
accordance with its use. Additionally, per the American Institute of Certified
Public Accountants' Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use," the costs of
obtaining and/or developing internal use software are capitalized and amortized
over a period of three years using the straight-line method.
Revenue recognition - The Company's revenues are derived from the sale of banner
advertising and sponsorship contracts; various client based Internet services
contracts, including consulting, Internet access subscriptions, referral fees,
and electronic commerce transactions, primarily consisting of Christian music
sales. Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, provided that no significant Company obligations
remain and collection of the resulting receivable is probable. Company
obligations typically include guarantees of minimum number of "impressions," or
times that an advertisement appears in pages viewed by users of crosswalk.com
("crosswalk"), the Company's website, which was formerly known as the CCN:
Christian Community Network(TM). To the extent that minimum guaranteed
impressions are not met, the Company defers recognition of the corresponding
revenues until the remaining guaranteed impression levels are achieved. On
sponsorship contracts for prime website exposure where impressions are not
guaranteed and revenue sharing follows from the sale of the sponsors' products,
initial sponsorship fees are recorded as revenue upon completion of work scope
related to the contract and the revenue share portion is recorded as reported
to the Company by the sponsor. Internet and consulting services revenue is
recognized as earned on a percentage of completion method in accordance with
the provisions of the individual customer contracts. Retail revenue is based on
the sales price of products offered before application of sales tax, if
applicable. In October 1998, the Company changed its policy to recognize
revenue only upon product shipment instead of its prior practice of recognizing
revenue at the time that customer credit card information was received. Due to
the immaterial impact of this change in revenue recognition, prior period
earnings were not restated. Referral fees are recognized upon recognition of
earned value in accordance with the terms of contracts on which they are
earned. Internet access revenues are recognized in the period earned based on
the number of active users and the contractual rate remitted by the Internet
provider.
Barter transactions, amounting to approximately fifty-two percent of revenues
for the year ended December 31, 1998, are recorded at the lower of estimated
fair value of the goods or services received or the estimated fair value of the
services given. Barter transactions consist of providing hosting services in
return for product price discounts, web development services in return for
advertising space in the customer's magazine, and website presence on
crosswalk.com in exchange for advertising space on the customer's website, other
web related services, magazine advertisements, promotions at conferences or
other related marketing services. The revenues and equivalent cost of sales from
these barter transactions are recorded in the month in which the services are
provided and/or received and are recorded in the revenue category commensurate
with the product or service rendered. In the event that the services to be
received by the Company are not provided in the same month in which the barter
revenue is earned, then the value of those services are recorded as a
receivable. When the related services are received, the receivable is reduced
and the cost is recorded.
Net loss per common share - The Company reports basic and diluted earnings per
share ("EPS") according to the provisions of SFAS No. 128, "Earnings Per Share."
SFAS No. 128 requires the presentation of basic EPS and, for companies with
complex capital structures, diluted EPS. 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.
F-8
<PAGE> 39
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capital Structure - SFAS No. 129, "Disclosure of Information about Capital
Structure," requires a summary presentation of the pertinent rights and
privileges of the various securities outstanding. 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 313,075 shares of
common stock upon the exercise of 313,075 Redeemable Common Stock Purchase
Warrants, 44,000 shares of common stock upon the exercise of 44,000 Common Stock
Underwriter Warrants, and 5,000 shares of common stock for the purchase of an
intangible asset. In addition, in 1998, the Company granted 410,915 options to
purchase common stock to employees, directors and consultants in accordance with
the Company's 1997 Stock Option Plan. See Note L.
Comprehensive Income - SFAS No. 130, "Reporting Comprehensive Income,"
establishes standards for the reporting and display of comprehensive income and
its components in the financial statements. Comprehensive income includes all
non-owner related changes in a company's equity including, among other things,
unrealized gains and losses on marketable securities classified as
available-for-sale. For the years ended December 31, 1997 and 1998, SFAS 130
does not have a material impact on the Company's financial statements or
footnotes.
Segment Information - Effective for financial statements for periods beginning
after December 15, 1997, the FASB issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." This pronouncement requires
public enterprises to report certain information about operating segments,
including products and services, geographic areas of operation, and major
customers. Per SFAS 131, if, due to changes in the structure of the enterprise's
internal organization, there are changes in the composition of the enterprise's
reportable segments and the segment information for earlier periods is not
restated to reflect the change, the enterprise shall disclose both the new basis
of segmentation and the old, unless it is impracticable to do so. As this is the
situation for the years ended December 31, 1997 and 1998, the Company has not
reported segment information for the periods presented herein.
Stock-based compensation - In October 1995, the FASB issued SFAS No. 123,
"Accounting for Stock-Based Compensation", which encourages companies to
recognize expense for stock-based awards based on their estimated value on the
date of grant. SFAS No. 123 is effective beginning with the year ending December
31, 1996. SFAS No. 123 permits companies to account for stock based compensation
based on provisions prescribed in SFAS No. 123, or based on the authoritative
guidance in Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting
for Stock Issued to Employees." The Company has elected to continue to account
for its stock based compensation in accordance with APB 25 which uses the
intrinsic value method, however, as required by SFAS No. 123, the Company has
disclosed the pro forma impact on the financial statements assuming the
measurement provisions of SFAS No. 123 had been adopted. See Note L. The Company
accounts for all other issuances of equity instruments in accordance with SFAS
No. 123.
Deferred Costs - Deferred costs at December 31, 1997 consisted of commission
costs attributable to advertising revenues deferred as of that date. These costs
were charged to the cost of sales when the revenues were 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.
Deferred costs at December 31, 1998 consisted of content fees, conference fees,
and legal fees. The content and conference fees will be charged to expense once
the services associated with these fees have been delivered to the company. This
is expected to occur within the first three months of 1999. The legal fees will
either be charged to expense or netted against the proceeds from any potential
equity offering for which they were incurred. The completion or termination of
an offering, if any, will determine the final disposition.
Income Taxes - DIDAX, a C-corporation, accounts for income taxes under SFAS No.
109, "Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on differences between the financial reporting
and tax basis of assets and liabilities and are measured using the enacted tax
rates and laws that will be in effect when the differences are expected to
reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amount expected to be realized. The principal items relate
primarily to differences between the net operating loss carryforwards, deferred
interest, marketing expenses and accumulated depreciation. Prior to February 23,
1998, gofishnet was a qualified S-Corporation under Section 1361 of the Internal
Revenue Code. Thus gofishnet was not subject to Federal and State income taxes,
rather items of income, deduction, expense and
F-9
<PAGE> 40
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
credits passed through pro-rata directly to the stockholders to be reported on
their individual income tax returns. Effective February 23, 1998, gofishnet
became a C-Corporation and began accounting for income taxes based on SFAS No.
109.
Fair value of financial instruments - The carrying value of cash and cash
equivalents, accounts receivable and notes payable approximate fair value
because of the relatively short maturity of these instruments.
Product Development Costs - SFAS No. 86, "Accounting for the Costs of Computer
Software to be Sold, Leased or Otherwise Marketed," requires capitalization of
certain software development costs subsequent to the establishment of
technological feasibility. Costs incurred by the Company between the completion
of technological feasibility and the point at which the product is ready for
general release have been insignificant and all product development costs have
been expensed to date.
Pensions - In February 1998, the FASB issued SFAS No. 132, "Employers Disclosure
about Pensions and Other Postretirement Benefits." SFAS No. 132 is required to
be adopted by the Company for fiscal year 1999. It revises employers'
disclosures about pension and other postretirement benefit plans. It does not
change the measurement or recognition of those plans.
Derivative Instruments and Hedging Activities - In June 1998, the FASB issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 is required to be adopted by the Company in the first quarter of
fiscal year 2000. It establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet and measure
those instruments at fair value. Management believes that the adoption of this
standard will not have a material effect on the Company's financial position or
results of operations.
C. SHORT-TERM INVESTMENTS
The aggregate market value, cost basis, and unrealized gains and losses of
securities available for sale, by major security type, as of December 31, 1997
and 1998 are as follows:
<TABLE>
<CAPTION>
Gross Unrealized Gross Unrealized
Market Value Cost Basis Gains Losses
------------ ---------- ----- ------
<S> <C> <C> <C> <C>
Total at December 31, 1997 $ -- $ --- $ --- $ ---
=========== =========== ======= ========
U.S. Govt. Debt Securities $ 2,407,143 $ 2,406,333 $ 2,744 $ (1,934)
Corporate Debt Securities 336,134 338,935 --- (2,801)
----------- ----------- ------- ---------
Total at December 31, 1998 $ 2,743,277 $ 2,745,269 $ 2,744 $ (4,735)
=========== =========== ======= =========
</TABLE>
Securities available for sale in the accompanying balance sheet at December 31,
1997 and 1998 include $0 and $2,441,196, respectively, with contractual
maturities of one year or less, $0 and $302,081, respectively, with contractual
maturities of one through five years. Expected maturities may differ from
contractual maturities as a result of the Company's intent to sell these
securities prior to maturity. The Company earned net realized gains and losses
of $0 and $11,051 for the years ended December 31, 1997 and 1998, respectively,
which are included in interest income along with the unrealized gains and
losses.
F-10
<PAGE> 41
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
D. PROPERTY AND EQUIPMENT
Property and equipment, at cost, consisted of the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Computer equipment $ 249,409 $ 365,601
Office furniture 28,007 47,593
Leasehold improvements 2,300 10,611
Office equipment 8,300 29,801
Software --- 143,653
--------- ---------
288,016 597,259
Less: accumulated depreciation and
amortization (149,302) (275,465)
--------- ---------
$ 138,714 $ 321,794
========= =========
</TABLE>
Depreciation and amortization expense for the years ended December 31, 1997 and
1998 were $78,963 and $139,794, respectively.
E. 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 for the
year ended December 31, 1997 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. NOTES PAYABLE
On January 9, 1997, the Company closed on the minimum portion of a private
placement offering dated December 3, 1996, placed by the underwriter of the
Company's IPO, for units consisting of junior convertible subordinated notes
with total gross proceeds to the Company from this offering of $750,000. The
maximum portion of the offering for an additional $750,000 was oversubscribed
and the Company closed this offering on February 21, 1997, with $950,000 in
additional gross proceeds. In accordance with this offering, 340,000
unregistered shares were issued at no additional cost to the note holders at the
time of the IPO by dividing the principal of each holder's note by the IPO price
of $5 per share. The issuance of these shares was recognized as $1,700,000 of
interest expense, or the fair value of the shares issued, representing an
effective rate of interest of approximately 150%. Additionally, the note holders
were repaid the principal of $1,700,000 on the closing of the IPO. The Company
incurred total offering costs of $135,759 relating to this debt placement. These
costs were captured as deferred costs until the offering closed, at which point
they were amortized using the straight line method over the life of the notes.
Once the notes were repaid, the remaining balance in deferred costs was charged
to expense. See Note B.
In the first quarter of 1997, gofishnet borrowed $37,230 at an interest rate of
7% from a former principal. gofishnet borrowed an additional $45,000 at an
interest rate of 10% from the same source during the third and fourth quarters
of 1997. gofishnet recognized $37,060 and $1,752 interest expense for the years
ended December 31, 1997 and 1998, respectively in connection with these notes.
The $37,060 of interest expense includes $33,750 for the equivalent of 8,237
shares of the Company's stock issued to the note holder in lieu of interest.
Both notes were due and repaid in full on April 1, 1998.
F-11
<PAGE> 42
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
G. INCOME TAXES
The benefit for income tax for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <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 for the years ended December 31,:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Computed at the expected statutory rate $(1,402,000) $(1,170,000)
State income tax - net of Federal tax benefit (164,000) (138,000)
Decrease related to pre-merger net loss on
merger accounted for as a pooling of
interests 273,200 6,500
Less valuation allowance 1,292,800 1,301,500
----------- ----------
Balance at year end $ - $ -
=========== ==========
</TABLE>
Deferred tax assets and liabilities at December 31, 1997 and 1998 were as
follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward 591,000 1,859,300
Interest expense 646,000 646,000
Consulting fees 4,200 -
Amortization - 73,000
Depreciation 51,600 16,000
---------- ----------
Gross deferred tax assets 1,292,800 2,594,300
Deferred tax liability - -
---------- ----------
Valuation allowance (1,292,800) (2,594,300)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
</TABLE>
The Company has net operating loss carryforwards totaling approximately
$1,556,000 and $4,890,000 for the tax years 1997 and 1998, respectively for
federal and state income tax purposes expiring in 2012 and 2018.
H. 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 worth of products and services to
this organization, at no charge, for the year ending December 31, 1997. 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's Common Stock 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. In 1998, the contract with this organization was amended to indicate
that the Company would not be donating the remaining 10,000 shares. No services
were provided without charge in the year ending December 31, 1998.
I. RELATED PARTY TRANSACTIONS
At December 31, 1997 and 1998, the Company had notes receivable due from
officers of the Company totaling $93,000. 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.
F-12
<PAGE> 43
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
I. RELATED PARTY TRANSACTIONS (CONTINUED)
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 E.
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 F.
In the first quarter of 1997, gofishnet borrowed $37,230 at an interest rate of
7% from a former majority shareholder. gofishnet borrowed an additional $45,000
at an interest rate of 10% from the same individual during the third and fourth
quarters of 1997. Both notes were due and repaid in full on April 1, 1998. See
Note F.
In August and September of 1997, an officer and three directors advanced
$250,000 to the Company. This was repaid with the proceeds from the Company's
IPO. See Note E.
To enhance process and achieve product efficiencies, the Company hired Corporate
Resource Development, Inc. ("CRD") in February 1998, for consulting services for
the period March 1, 1998 through May 31, 1998. Max Carey, a member of DIDAX's
board of directors, is CRD's Chairman and CEO. The Company paid out a total of
$62,500, plus out of pocket expenses and granted options to purchase a total of
17,145 shares of the Company's Common Stock at $2.185 per share, which was the
market price at the time of the grant.
In 1998, gofishnet rented office space and equipment from a company whose
principals are also former principals of gofishnet and current shareholders of
DIDAX. The Company believes that the cost incurred for the use of this office
space and equipment was at fair market value.
J. COMMITMENTS AND CONTINGENCIES
OPERATING LEASE OBLIGATIONS
The Company leases office space in Chantilly, Virginia; Costa Mesa, California;
and as of November 1998, Franklin, Tennessee; and certain equipment under
non-cancelable operating leases. The California office lease provides for a one
year term. The Tennesse office lease provides for a two-year term, an annual
increase in base rent based on the first year's CPI index, and additional rent
representing the Company's pro-rata share of operating expenses as defined in
the lease agreement. The Tennessee office lease expires on October 31, 2000. In
October 1998, the Company moved its headquarters office to a 6,100 square foot
facility in Chantilly, Virginia. The lease provides for a five-year renewable
term, with an annual escalator 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 Chantilly office lease expires on September 30, 2003.
The new facility increases by 20% the floor space available for Company
expansion. 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> <C>
1999 $109,204
2000 102,420
2001 92,889
2002 95,675
2003 71,223
---------
$ 471,411
=========
</TABLE>
Rent expense for the years ended December 31, 1997 and 1998 was $69,944 and
$77,212 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
F-13
<PAGE> 44
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
J. COMMITMENTS AND CONTINGENCIES
SECURITIES (CONTINUED)
to any and/or all such rescission actions, if initiated. The potential of
inadvertent exemption violations was communicated to the investors concerned in
August of 1996.
Furthermore, in late December of 1996, each stockholder and member who might
have rescission rights was sent a written request to waive such rights (if any)
to rescission and other remedies in connection with any past omissions or
violations of federal or state securities laws or regulations, and also to agree
not to pursue any litigation against the Company or its directors on the basis
of such rights. Approximately 80% of the members responded with waivers,
representing approximately 89% of the outstanding shares. 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 was the total amount of common stock subject to
rescission if all the waivers were deemed invalid. As of December 31, 1998 all
related shares 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. None of the
shareholders pursued exercise of any potential rescission rights.
In addition, 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.
K. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents and short-term
investments. The Company maintains its cash accounts in commercial banks located
in Virginia and California. Cash balances are insured by the Federal Deposit
Insurance Corporation ("FDIC") up to $100,000 per financial institution. At
December 31, 1997 and 1998, there were no uninsured cash balances.
Cash equivalents are maintained in money market funds. These cash equivalents
are not insured by the FDIC, but are collateralized by the underlying assets of
the federal government or corporate entities issuing debt obligations. In
addition, the brokerage firms may or may not carry insurance from the Securities
Investment Protection Corporation (SIPC). The SIPC insures a minimum balance of
$500,000 (including $100,000 for cash), however all brokerage firms are not
required to offer this coverage to their clients. Therefore, the Company had
uninsured investments of $0 and $136,762 at December 31, 1997 and 1998,
respectively.
During 1997 and 1998, revenue was generated from major customers in amounts
exceeding 10% of total revenue as follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1998
--------------------------------- --------------------------------
Accounts Accounts
Receivable Receivable
Revenue % Balance Revenue % Balance
--------------------------------- --------------------------------
<S> <C> <C> <C> <C> <C> <C>
Customer #1 $ - - % $ - $260,000 24% $38,900
Customer #2 $148,623 44% $31,074 $ 73,678 7% $18,763
Customer #3 $ 64,109 19% $ 4,063 $ 50,217 5% $25,927
Customer #4 $ - - % $ - $109,650 10% $ -
</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.
L. 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. The 1998 Stock Option Plan ("1998 Plan") was approved by the Board of
Directors in April, 1998. The 1998 Plan gives the company the authority to issue
400,000 options to purchase DIDAX common stock. As is the case with the 1997
Plan, if any stock options granted under the 1998 Plan shall terminate, expire
or be canceled as to any shares, new stock options may thereafter be granted
covering such shares. In addition, any shares purchased under this 1998 Plan
subsequently repurchased by the Company pursuant to the terms hereof may again
be granted under the 1998 Plan. The shares issued upon exercise of stock options
F-14
<PAGE> 45
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
L. STOCK OPTION PLAN (CONTINUED)
under the 1998 Plan may, in whole or in part, be either authorized but unissued
shares or issued shares reacquired by the Company. As of December 31, 1998, none
of these options have been granted.
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 ("1997
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. In December 1998, the Company
filed a form S-8 Registration Statement for the purpose of registering the
shares underlying the 1997 Plan.
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
ministry partners, to purchase shares of DIDAX. By encouraging stock ownership,
DIDAX seeks to attract, retain and motivate key employees, consultants, and
ministry partners. Both the 1997 Plan and the 1998 Plan will be administered by
the Compensation Committee of the Board of Directors or by the Board of
Directors as a whole.
At December 31, 1997 and 1998, the Company had outstanding options to sell
1,164,456 and 1,334,456 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 1998, options for 284,956 and
588,626 shares are vested, respectively. All but 20,000 options, scheduled to
vest during 1999, will only vest based on performance criteria. The options
expire ten years from the date granted, except 185,000 options granted to
directors in 1997, which expire five years from the date exercisable.
At December 31, 1997 and 1998, the Company had outstanding options to sell
80,500 and 129,985 shares of common stock, respectively, to various outside
consultants and a ministry partner at exercise prices ranging from $1.66 to
$5.00 per share. As of December 31, 1997 and 1998, options for 50,500 and 82,985
were vested, respectively. 57,485 options expire five years from the date
granted. All other options expire ten years from the date granted.
At December 31, 1997 and 1998, the Company granted to employees options for
360,676 and 410,915 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 1998, options for 240,704 and 307,024 shares are vested, respectively.
The options expire through 2008.
A summary of activity for the period ended December 31, 1998, is as follows:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
Number of Per Unit
Shares Exercise Price
--------- --------------
<S> <C> <C>
OUTSTANDING, JANUARY 1, 1995 72,500 $1.50 - $1.66
Options granted 246,203 $2.00
Options exercised - -
Options expired - -
----------- -------------
OUTSTANDING, DECEMBER 31, 1995 318,703 $1.50 - $2.00
Options granted 941,759 $3.00 - $5.00
Options exercised - -
Options expired 40,400 $2.00 - $5.00
----------- -------------
OUTSTANDING, DECEMBER 31, 1996 1,220,062 $1.50 - $5.00
Options granted 439,920 $3.89 - $5.00
Options exercised - -
Options expired 54,350 $2.00 - $5.00
----------- -------------
OUTSTANDING, DECEMBER 31, 1997 1,605,632 $1.50 - $5.00
Options granted 410,915 $2.00 - $4.00
Options exercised - -
Options expired 141,180 $2.19 - $5.00
----------- -------------
OUTSTANDING, DECEMBER 31, 1998 1,875,367 $1.50 - $5.00
=========== =============
</TABLE>
F-15
<PAGE> 46
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
L. STOCK OPTION PLAN (CONTINUED)
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.
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>
1997 1998
-------------------------------------
<S> <C> <C>
Net loss
As reported $(4,271,249) $(3,459,055)
Proforma $(4,368,892) $(4,012,375)
Net loss per common share
Basic
As reported $(3.31) $(0.98)
Proforma $(3.39) $(1.13)
Diluted
As reported $(3.31) $(0.98)
Proforma $(3.39) $(1.13)
</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 year ended December 31, 1997: dividend yield of 0%, risk-free
interest rate based on the 10-year bond Treasury yield at the date of grant, and
expected term of 10 years. For grants made prior to the IPO, the Company used a
volatility of 0%. 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%. For the year
ended December 31, 1998, the following assumptions were used: dividend yield of
0%; risk-free interest rates based on the Treasury bond yield at the date of
grant for three to five year bonds, depending on the expected term; volatility
ranging from 27.6% to 124.0%, depending on the grant date; and an expected term
of two-and-a-half to 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 E.
Since the only participants in this offering were an officer and a director of
the Company, the warrants earned pursuant to this offering have been adopted in
the 1997 Stock Option Plan, as approved by the Board of Directors of DIDAX, and
therefore are referred to as options by the Company. However, these securities
are not included in the summary of activity table.
In April 1998, the Board of Directors resolved to amend the 1997 Plan. The
substance of this change was to amend the actual administration of the plan by
making all options subject to the approval of the Board of Directors, and in the
case of a merger or a similar reorganization that the Company does not survive,
to cause only non vested stock options to be subject to termination should the
surviving entity not assume the obligation of all granted options. This term was
carried forward and is included in the 1998 Plan approved by the stockholders.
M. EMPLOYEE BENEFIT PLANS
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 was 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 50% and the maximum
contribution allowed is 15% or $10,000, whichever is lower. The Company is not
required to contribute to the 401K Plan and has made no contributions since its
inception.
On June 1, 1998, the Company implemented an Internal Revenue Code Section 125
"Premium Only Plan", which allows participating employees of the Company to
contribute toward the cost of medical and newly established dental plan expenses
with pretax dollars.
F-16
<PAGE> 47
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
M. EMPLOYEE BENEFIT PLANS (CONTINUED)
Through this plan, set on a calendar year, employees contribute toward paying
20% and 93% of the medical and dental plans, respectively.
N. NET LOSS PER COMMON SHARE
As required by SFAS No. 128, the following is a reconciliation of the basic and
diluted EPS calculations for the periods presented:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Net loss (numerator) $(4,271,249) $(3,459,055)
Weighted average shares (denominator) 1,289,460 3,535,487
Basic net loss per share $ (3.31) $ (0.98)
----------- ----------
Dilutive shares (denominator) 1,289,460 3,535,487
Diluted net loss per share $ (3.31) $ (0.98)
---------- -----------
</TABLE>
As required by Securities and Exchange Commission (SEC) Staff Accounting
Bulletin No. 98, the above calculation of EPS is based on SFAS No. 128 "Earnings
Per Share." Thus, 55,414 stock options and purchase warrants granted at below
market prices outstanding in the years ended December 31, 1997 and 1998, are not
included in the calculation of diluted EPS as their inclusion would be
anti-dilutive.
O. SUBSEQUENT EVENTS
PURCHASE WARRANTS CALLED FOR REDEMPTION
Pursuant to the terms of the Purchase Warrant Agreement, the Company exercised
its right to call the 2,875,000 Redeemable Common Stock Purchase Warrants
("Purchase Warrants") sold in the Company's IPO and traded on Nasdaq SmallCap
(Symbol "AMENW"). The terms of the Purchase Warrants granted the Company such a
right should the closing bid price as reported on Nasdaq of the shares of
Company's Common Stock average in excess of $10.00 per share for 30 consecutive
trading days. This condition was met on January 4, 1999, and the Company
initiated mailing of the Notice of Redemption to warrant holders as of January
13, 1999. The redemption date was February 12, 1999. The aggregate result of the
call for redemption was that 2,841,526 (or 98.8%) of the purchase warrants were
exercised resulting in $16,338,774 being raised by the Company, leaving 33,474
purchase warrants left for redemption for which the Company remitted $8,369.
Primarily due to this action, outstanding shares of Common Stock increased to
6,567,606 shares as of the redemption date.
F-17
<PAGE> 1
EXHIBIT 10.39
AGREEMENT OF LEASE
THIS LEASE MADE this 10th day of August, 1998 by and between Richard P. Van
Curen and Caprice Company, an Ohio Partnership hereinafter called "Landlord",
and DIDAX Incorporated, a Virginia Corporation, hereinafter called "Tenant".
WITNESSETH, that for and in consideration of the mutual benefits to be
derived hereby, Landlord and Tenant hereinafter covenant and agree as follows:
SECTION 1 - PREMISES: Landlord does hereby lease and demise to Tenant,
and Tenant hereby leases from Landlord, that real property known or described as
4206 "F" Technology Court, Chantilly, Virginia, consisting of 5,987 square feet
hereinafter called the "Premises". The Premises is a portion of that certain
building ("Building") located at 4206 Technology Court, Chantilly, Virginia and
is outlined on Exhibit "A" attached hereto. Promptly after the commencement of
the Lease Term, Landlord and Tenant shall confirm the actual square footage of
the Premises by the measuring from the outside of the outside walls to the
center line of the demising walls, and Base Rent will be adjusted accordingly.
Tenant shall have the right, for itself and its agents, employees,
licensees and invitees, to use the parking areas and driveways for the Building
in common with Landlord and Landlord's other tenants and their agents,
employees, licensees, and invitees; provided, however, that Tenant shall not
cause or permit any of its agents, employees, invitees or licensees to obstruct
any of the driveways or entrances to said Building other than the entrances of
the demised Premises.
SECTION 2 - TERM: The term of this Lease shall begin on the 1st day of
October, 1998 or on the date of occupancy whichever is later, and end on the
30th day of September, 2003. Tenant shall be permitted access to the Premises
during the period from September 15, 1998 through September 30, 1998 at no cost
to Tenant, for purposes of pulling cables and initial preparation of the
Premises.
SECTION 3 - RENT:
3.01 - Tenant agrees to pay the Landlord, as Base Rent during the term
hereof, based upon the following schedule (subject to adjustment per Section 1
and 4.07 hereto):
First Year - October 1, 1998 through September 30, 1999
Sixty-Six Thousand Nine Hundred Thirty Four and 66/100 Dollars
($66,934.66) per annum, or Five Thousand Five Hundred Seventy-
Seven and 89/100 Dollars ($5,577.89) per month.
Second Year - October 1, 1999 through September 30, 2000
Sixty-Eight Thousand Nine Hundred Forty-Two and 70/100 Dollars
($68,942.70) per annum, or Five Thousand Seven Hundred Forty-Five
and 22/100 Dollars ($5,745.22) per month.
1
<PAGE> 2
Third Year - October 1, 2000 through September 30, 2001
Seventy-One Thousand Ten and 98/100 Dollars ($71,010.98) per
annum, or Five Thousand Nine Hundred Seventeen and 58/100 Dollars
($5,917.58) per month.
Fourth Year - October 1, 2001 through September 30, 2002
Seventy-Three Thousand One Hundred Forty-One and 31/100 Dollars
($73,141.31) per annum, or Six Thousand Ninety-Five and 11/100
Dollars ($6,095.11) per month.
Fifth Year - October 1, 2002 through September 30, 2003
Seventy-Five Thousand Three Hundred Thirty Five and 55/100 Dollars
($75,335.55) per annum, or Six Thousand Two Hundred Seventy-Seven
and 96/100 Dollars ($6,277.96) per month.
All such Base Rents to be payable without deduction, set-off or demand, in equal
monthly installments each, in advance, on the first day of each calendar month
during such term. Any installment of rent which is not paid within ten (10) days
after the due date shall be subject, at Landlord's option, to a late charge
equal to five percent (5%) of the amount due, which shall be payable as
Additional Rent.
3.02 - Landlord acknowledges receipt from Tenant of the sum of Twenty-
Two Thousand Three Hundred Eleven and 55/100 Dollars ($22,311.55) which sum
shall be applied as follows:
$5,577.89 as Tenant's initial Base Rent payment.
$16,733.66 as a Security Deposit.
The amount of Base Rent and Security Deposit are subject to adjustment of Base
Rent pursuant to Sections 1 or 4.7. The adjusted Base Rent will be communicated
via a Letter of Occupancy which will be included as an attachment to this lease.
If not applied to any of the following remedies and if all rents are paid by the
Tenant on time, within the nine day grace period, and no major or substantial
occurrence of default existed within the time period specified, then at the
completion of the Second Year and the Fourth Year, respectively, the Landlord
will return to the Tenant one third of the Security Deposit. Following these two
payments, the remainder of the Security Deposit will be retained by the Landlord
for the duration of the Lease.
Tenant's security deposit shall be retained by Landlord as security for the
faithful performance of all Tenant's covenants, conditions and agreements of
this Lease, but in no event shall Landlord be obligated to apply the same to
rents or other charges in arrears or to damages for Tenant's failure to perform
the said covenants, conditions and agreements. Landlord may so apply the
Security Deposit, at its option, and Landlord's right to the possession of the
Premises for non-payment of rent or for any other reason shall not in any event
be affected by reason of the fact that Landlord holds this Security Deposit. The
Security Deposit, if not applied toward the payment of rent in arrears, or
toward damages suffered by Landlord by reason of Tenant's breach of the
covenants, conditions and agreements of this Lease, or toward restoration,
repair and maintenance required of Tenant upon its vacation of the Premises, or
for any other reason sanctioned by this Lease, is to be returned to Tenant,
without interest, within 15 days after this Lease is terminated, and in no event
is
2
<PAGE> 3
the Security Deposit to be returned until Tenant has vacated the Premises and
delivered possession to Landlord. In the event that Landlord repossesses the
Premises because of Tenant's default or because of Tenant's failure to carry out
the covenants, conditions and agreements of this Lease, Landlord may apply the
Security Deposit against damages suffered to the date of repossession and/or may
retain the Security Deposit to apply such damages as may be suffered or which
accrue thereafter by reason of Tenant's default or breach. In the event Landlord
is entitled under the provisions of this 3.02 paragraph to apply any of Tenant's
Security Deposit, Tenant shall promptly thereafter pay to Landlord the amount so
applied by Landlord, so that, Tenant's Security Deposit shall not be less than
that provided for above. Landlord is to provide 5 days written notice prior to
using any portion of the Security Deposit.
3.03 - If the term shall commence on a day other than the first day of
a calendar month, rent shall be paid in advance on a prorata basis, at the rate
above specified for the remaining portion of the month in which the term
commenced. Tenant will also pay on the first day of the month in which the term
of this Lease shall expire, rent for the portion of the calendar month remaining
in the term, at the rate specified above.
3.04 - Said payments of rent shall be made to Richard P. Van Curen, PO
Box 1558, Middleburg, Virginia 20118, unless and until Landlord shall otherwise
notify Tenant, in writing, after which Tenant will make said payments of rent to
such person or corporation and at such place as Landlord may, from time to time,
designate.
SECTION 4 - AGREEMENTS AND COVENANTS OF LANDLORD:
Landlord hereby covenants and agrees as follows:
4.01 - To deliver possession to Tenant at the commencement of the Term
and to permit Tenant quiet enjoyment of possession of the Premises during the
term of this Lease, or for so long as Tenant shall pay the rent and carry out
all other obligations herein made binding upon Tenant.
4.02 - To furnish only such services and facilities as may be
specifically set forth in this Lease and no other.
4.03 - To warrant that the heating, plumbing, electrical, air
conditioning and sprinkler systems and elevators, if any, in the Premises are in
good working order and condition at the beginning of the term of this Lease, or
will promptly, and at Landlord's expense, be put in good working order and
condition if, but only if, within thirty (30) days after the commencement of the
term of this Lease, or within thirty (30) days after the commencement of the
initial season during which the heating or air conditioning systems would
normally be used, Tenant shall notify Landlord of any defect in any such system
which shall not have been caused by the fault or neglect of Tenant, its
employees, agents, licensees, invitees or anyone claiming the right to be in the
Premises under Tenant. (See Paragraph 5.08 as to Tenant's continuing obligation
in regard to these systems.)
4.04 - To maintain in good condition and repair, the paving,
foundation, roof and exterior structural walls (but no plate glass windows,
window glass, doors or the interior surfaces of any walls) of the Premises, the
Building and the common areas, as well as exterior pipes and conduits during the
term hereof and for so long as Tenant remains current with respect to the
service contract obligations pursuant to Section 5.08,
3
<PAGE> 4
Landlord agrees to pay the amount in excess of $750 per occurrence of any
repairs to the heating, plumbing, electrical, air conditioning and sprinkler
system during the term hereof; provided, however, that Landlord shall not be
required to make any repairs necessitated by reason of any act or omission of
Tenant, or its employees, agents, licensees, invitees, or anyone claiming the
right to be in the Premises under Tenant, or caused by any alteration, addition
or improvement made by Tenant or anyone claiming the right to be in the Premises
under Tenant, and that if Landlord does make any such repairs, Tenant shall
promptly upon demand reimburse Landlord for the cost thereof.
4.05 - To pay, subject to Paragraph 5.06 hereof, all real estate taxes,
both general and special, becoming due upon the Premises during the term of this
Lease, and all premiums upon such fire and extended coverage insurance as
Landlord may deem appropriate to place upon the Premises.
4.06 - Landlord shall provide pre-occupancy Tenant Improvements
(estimated for this rental rate at $2.68 per square foot for a $65,000 expense)
as shown in Exhibit "B" and provided through H.C. Handy Company. The Tenant will
coordinate all said improvements with H.C. Handy Company and provide value
engineering to reduce improvement costs as much as reasonable. The cost of all
such Tenant Improvements paid by the Landlord shall be part of the Base Rent in
an amount each month that permits the amortization of such costs at an interest
rate of nine percent (9%), over the five (5) year firm term of the Lease.
Landlord and Tenant will cooperate in the planning, execution and completion of
the Tenant Improvements, making reasonable efforts to have said improvements
completed prior to September 30, 1998.
4.07 - The Base Rent is predicated on the cost of Tenant Improvements
in Section 4.06, including permits and architectural fees, being at $65,000 to
the Landlord. For every $1,000 that the improvement cost to the Landlord varies
from $65,000, the first year Base Rent will be reduced or increased accordingly
by $20.65 per month ($247.20 per annum). In the event improvement costs to the
Landlord exceed $75,000, Tenant shall increase its Security Deposit by the
amount equal to the amount by which the improvement costs exceed $75,000. with
such increase to be held by the Landlord as provided in Section 3.08.
4.08 - Landlord shall, at Landlord's cost and expense, subject to
reimbursement per Section 5.06, obtain and carry during term of lease, insurance
for fire, extended coverage and liability insurance for Building, inclusive of
common areas. Copies of such policies or other satisfactory evidence of such
coverage shall be provided Tenant upon request. All rights to subrogation
against Tenant, its agents and employees are hereby waived unless such waiver
shall make void or voidable any insurance Landlord is required to carry
hereunder. The proceeds of all insurance herein required shall be applied first
to the repair or replacement of the items so insured, unless this Lease is
terminated under the provisions of paragraph 6.03 hereof.
4.09 - Landlord shall, at Landlord's cost and expense, complete the
demising wall, and associated costs, necessary to separate the leased premises
from the rest of the building. If any governmental regulation necessitates the
installation of a new ADA access ramp to leased premises, half of the cost of
such ramp will be direct responsibility of Landlord and the other half will be a
part of Tenant Improvements, as disclosed in sections 4.06 and 4.07.
4
<PAGE> 5
SECTION 5 - AGREEMENTS AND COVENANTS OF TENANT:
Tenant hereby covenants and agrees as follows:
5.01 - Not to use the Premises for any disorderly or unlawful purpose,
nor in any manner disturbing to the neighborhood, but only for conducting
therein computer engineering and general offices related uses.
5.02 - To obtain, at Tenant's expenses, any and all permits, licenses
and the like, required to permit Tenant to occupy the Premises for the purpose
herein stated. These expenses may be applied to the Tenant's Improvement
expenses. Tenant will obtain any required business license, and Landlord or its
contractors, will obtain building occupancy permits.
5.03 - To keep the Premises and approaches thereto clean and free from
rubbish, and to keep any show windows and signs neat, clean and in good order;
and not to store any material or trash of any nature whatever on the exterior of
the Premises except in a dumpster, nor to erect any screen or fence.
5.04 - To pay charges for all utilities, including but not limited to
electricity, gas, fuel, water, sewer charges, trash removal, and telephone
services used on the Premises, as they become due and payable and to transfer
all separately metered utility accounts to Tenant's name at the outset of the
term of this Lease. Tenant will reimburse Landlord as Additional Rent for its
proportional share based on area, (see section 5.06) for any utilities which are
not directly charged to Tenant.
5.05 - (a) To refrain from keeping gasoline or other inflammable
material, or any explosive, in the Premises, or from doing any act or thing
which may make void or voidable Landlord's insurance against fire and explosion,
and to conform to all rules and regulations from time to time established by the
appropriate insurance rating organization.
(b) Neither Landlord nor Tenant shall generate, use, store or dispose
of any Hazardous Materials in or about the Building or Premises (except in de
minimus amounts as are ordinarily and customarily used for general office
purpose). Hazardous Materials shall mean: (a) "hazardous wastes," as defined by
the Resource Conservation and Recovery Act of 1976, as amended from time to
time, (b) "hazardous substances," as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended from time to time,
(c) "toxic substances," as defined by Toxic Substances Control Act, as amended
from time to time, (d) "hazardous materials," as defined by the Hazardous
Materials Transportation Act, as amended from time to time, (e) oil or other
petroleum products, and (f) any substance whose presence could be detrimental
to the Building or hazardous to health or the environment. For purposes of this
Section, the mere presence of a forklift in the Premises shall not constitute a
violation hereof if the forklift equipment is property cared for, maintained
and operated, (g) The parties acknowledge that there are certain Federal, State
and Local laws, regulations and guidelines now in effect, and that additional
laws, regulations and guidelines may hereafter be enacted, relating to or
affecting the Leased Premises concerning the impact on the environment of
construction, land use, the maintenance and operations of structures and the
conduct of business, including, but not limited to, air and water pollution
control and prevention laws, and waste disposal laws, regulations and
ordinances. The parties will not knowingly cause, or permit to be caused, and
act or practice, by negligence, omission, or otherwise, that would do anything
or permit anything to be done that would
5
<PAGE> 6
violate any of said laws, regulations or guidelines. (h) Tenant shall be
responsible for all costs of clean-up, correction and/or remediation of any and
all violations of any such laws, regulations and/or guidelines caused by any
act, omission, or practice of Tenant; and shall indemnify and hold Landlord
harmless from and against any and all liability of Landlord resulting from any
such acts or practices of Tenant. Tenant's obligations of indemnifications of
Landlord hereunder shall survive for a period of ten (10) years after the later
of the expiration or termination of the Lease. Any violation of the covenants of
this section of the Lease shall be an event of default under this Lease.
Landlord shall have no claim against Tenant by reason of any changes Tenant may
make in or to the Leased Premises pursuant to any such laws, regulations and/or
guidelines. I) Landlord shall be responsible for all cost of clean-up correction
and/or remediation of any and all violations of any such laws, regulations
and/or guidelines caused by any act, omission, or practice of Landlord or its
other tenants, or which are the result of an environmental condition existing
before or caused after the Leased Premises are vacated by the Tenant resulting
from any acts or practices of Landlord or environmental condition of the Leased
Premises or Building for which Landlord is responsible. Landlord's obligations
of indemnification of Tenant hereunder shall survive for a period of ten (10)
years after the earlier of the expiration or termination of this Lease. Tenant
shall have no claim against Landlord by reason of any changes Landlord may be
required to make in or to the Leased Premises pursuant to any such laws,
regulation and/or guidelines.
5.06 - (a) To reimburse Landlord, monthly, as "Additional Rent" for its
proportional share of common area expenses. Landlord and Tenant agree that the
Premises represent 20.8% (5,987 s.f./28,777 s.f.) of the total rentable area of
the Building and that 20.8% is Tenants proportional share of the common area
expenses. Common Area Expenses are defined to include, but are not limited to:
real estate taxes, and reasonable expenses for building insurance (fire,
extended coverage, and liability); lawn maintenance; drive and parking lot
cleaning and repair; snow removal; utilities which are not metered separately to
Tenants; Building repairs or maintenance excluding capital improvements or
improvements for specific Tenants; and building management which is limited to
4.0% of base rent. Landlord will determine a budget for common area expenses for
each calendar year and Tenant will reimburse Landlord on a monthly basis as
additional rent payable with the base rent. Landlord, prior to February 28 each
year shall advise Tenant of the actual prior year common area expenses and of
the current year budget. If the actual expense is greater than the budget for
the prior year, Tenant may pay its share in a lump sum or spread its share over
the next 12 months. If the actual expense is less than the budget for the prior
year, the budget monthly reimbursement for the current year will be reduced
accordingly. Landlord and Tenant agree that Tenant's additional rent for common
area expenses shall be budgeted at $1.25 per square foot or $623.65 per month
for the balance of calendar year 1998.
(b) To pay Landlord, promptly upon demand, in addition to other sums
herein provided for, the following sums, which for purposes hereof, shall be
deemed "Additional Rent".
1) Any increase in the cost of fire and extended coverage
insurance, as Landlord elects to carry, to the extent that such increase shall
be due to the nature of Tenant's use of the Premises.
2) The reasonable cost of any repairs to the exterior walls,
foundation or roof or any other structural portions of the Premises or any
6
<PAGE> 7
exterior pipes or conduits or paving, if and to the extent such repairs were
made necessary by the act or neglect of Tenant or of its agents, employees,
licensees, invitees or anyone claiming the right to be in the Premises under
Tenant.
3) The reasonable cost of any other repairs or acts of
maintenance paid by Landlord which Tenant has herein undertaken to make or do.
4) All court costs, reasonable legal fees and other expenses
incurred by Landlord in effecting the collection of the rents from Tenant, the
curing of any default on the part of Tenant in performance of any of its
obligations hereunder and/or obtaining possession of the Premises.
(c) Tenant has right to audit at its own expense, the derivation and
content of Additional Rent, but cannot withhold payment of Additional Rent
pending such audit. Adjustments pursuant to this audit will be rendered within
30 days of finding. If adjustments exceed 10% of Additional Rent, Landlord will
reimburse Tenant for the cost of the audit.
5.07 - To make, at Tenant's expense, (a) such alterations,
modifications and improvements to the Premises as may be required by applicable
regulations in the jurisdiction in which the Premises are located, or by
Landlord's insurance carrier to avoid cancellation as a result of Tenant's
intended use of the Premises of Landlord's insurance, or to secure or maintain
adequate insurance coverage, and (b) such alterations, modifications or
improvements to the Premises as may be required for the safety and health of
Tenant's employees pursuant to the Williams-Steiger Occupational Safety and
Health Act of 1970 (OSHA), as the same may be amended or implemented from time
to time; but no such alterations, modifications or improvements nor any other
alteration, modification, addition, installation or improvement Tenant may wish
to make, shall be made unless Landlord shall first have given written approval
of the plans and specifications therefore, and shall have been protected, to
Landlord's satisfaction, against any cost or damage incident thereto, and unless
Tenant shall first have secured all necessary building and other permits; and
all thereof, when made, shall, unless Landlord elects otherwise as provided in
Paragraph 5.12 hereof, become the property of Landlord and shall remain upon and
be surrendered with the Premises as a part thereof at the end of the term of
this Lease. Landlord agrees that it will not unreasonably withhold its consent
to any such alterations, modifications, additions, installations or
improvements. If Tenant should make any thereof without Landlord's consent,
Tenant hereby agrees to indemnify Landlord from any liability which may devolve
upon Landlord as a consequence thereof.
5.08 - To make, at Tenant's expense after completion of the initial
Tenant Improvements, all repairs and to do all acts of maintenance becoming
necessary in or upon the Premises during the term of this Lease, including
specifically without limitation, the doors and door jambs, both inside and
outside, loading docks, windows and window casings and sills, both inside and
outside, gutters and down spouts, and to make, at Tenant's expense, all repairs
and to do all acts of maintenance becoming necessary during the term of this
Lease, and, except as set forth in Section 4.04, to replace all worn out and
broken parts of the heating, plumbing and electrical systems and related
equipment, as well as the air conditioning system and related equipment, if any,
and to enter into service contracts for the maintenance of the heating system,
as well as the air conditioning system, if any. If any such service contract
should not be obtainable, Tenant
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agrees to have the system or equipment not so covered inspected periodically,
but not less than once each year. It is understood and agreed by the parties
hereto that Bishopp Realty, Inc., as the leasing agent of the Premises, shall
not be responsible to see to the Tenant's performance of these obligations.
5.09 - To obtain and pay premiums upon suitable plate glass insurance
and appropriate liability insurance protecting both Landlord and Tenant with
limits of at least $1,000,000/$2,000,000 for personal injuries, and at least
$100,000 for property damage, and to furnish Landlord with evidence thereof.
5.10 - To execute such reasonable instruments as may be necessary to
subordinate this Lease to any bona fide mortgage or deed of trust encumbrances
now or at any time hereafter placed upon the Premises.
5.11 - To remove from the Premises, at the expiration or other
termination of this Lease, all personal property not belonging to Landlord, and
to surrender possession of the Premises and all fixtures and furnishings
connected therewith in good repair, order and condition in all respects,
reasonable wear and use thereof and damage by accidental fire or other
unavoidable casualty only excepted; and if Tenant shall have made any
alterations, additions, installations or modifications in or to the Premises,
whether consented to by Landlord or not, Tenant shall, if requested to do so by
Landlord, in writing, prior to the expiration of the term of this Lease, remove
the same or such thereof as may be specified in such notice, and repair any
damage caused by such removal, all at Tenant's expense. If Tenant shall fail to
perform any of the foregoing obligations, Landlord is authorized to do so in
Tenant's behalf and to sell any property left on the Premises as may be
saleable. The proceeds of any such sale shall be applied toward the expenses
thus incurred, and Tenant agrees to pay any balance promptly. Tenant shall
receive any excess proceeds of such a sale.
5.12 - Not to operate any machinery in the Premises which may cause
excessive vibration or damage to the Premises; nor to use a loud speaker which
can be heard outside the Premises; nor create any nuisance.
5.13 - Not to place any exterior advertising signs or awnings upon the
Premises, nor to place any advertising signs or posters on the interior of any
windows; nor to change the color of the exterior, without the written approval
of Landlord, which will not be unreasonably withheld. Landlord grants to Tenant
signage area above its front personnel entry door for standard building signage
plus Tenant logo of appropriate size.
5.14 - To inspect all portions of the Premises, both interior and
exterior, and all machinery and equipment therein, so it may promptly detect the
need for repairs to any thereof; to make such repairs as it is herein obligated
to make, and to notify Landlord in writing of the need for any repairs Landlord
is herein obligated to make under the provisions of Paragraph 4.04.
5.15 - To permit Landlord to show the Premises to prospective
purchasers at all reasonable times and to prospective tenants at all reasonable
times within ninety (90) days prior to the expiration of the term of this Lease,
and to exhibit notices for lease or sale within sixty (60) days prior to the
expiration of the term of this lease.
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5.16 - Tenant shall, at Tenant's cost and expense, unless such
requirement is specifically waived by Landlord or if such coverage is not
reasonably available in the jurisdiction, obtain and at all times during the
term hereof maintain in effect, standard fire and extended coverage insurance,
malicious mischief and vandalism endorsements, covering Tenant's fixtures,
furnishings and equipment installed in or about the Premises; all partitions,
mechanical, electrical, plumbing, floor covering or similar installations made
by Tenant under the authority and provisions of this Lease, if any; and all
alterations, additions and changes to the Premises made by Tenant or for
Tenant's account as permitted hereunder, providing protection to the extent of
not less than 80% of the insurable value (i.e. replacement value without regard
to depreciation) of all said items. Copies of such policies or other
satisfactory evidence of such coverage shall be provided Landlord, upon request.
All rights to subrogation against Landlord, its agents and employees are hereby
waived unless such waiver shall make void or voidable any insurance Tenant is
required to carry hereunder. The proceeds of all insurance herein required shall
be applied first to the repair or replacement of the items so insured, unless
this Lease is terminated under the provisions of paragraph 6.03 hereof.
SECTION 6 - GENERAL PROVISIONS:
6.01 - Liability of parties: Except if and to the extent that such
party is released from liability to the other party hereto pursuant to the
provision of subsection 5.16:
(a) The Landlord and Tenant (i) shall be responsible for, and shall
indemnify and hold harmless each other against and from any and all liability
arising out of, any injury to or death of any person or damage to any property,
occurring anywhere upon the Building, Premises or Common Area, if, only and to
the extent that such injury, death, or damage is proximately caused by the
grossly negligent or intentionally tortious act or omission of the other or its
agents, officers or employees, but (ii) shall not be responsible for or be
obligated to indemnify or hold harmless the Tenant against or from any liability
for any such injury, death or damage occurring anywhere upon the Premises (aa)
by reason of the Tenant's occupancy or use of the Premises, Building or Common
Area, or (bb) because of fire, windstorm, act of God or other cause unless
solely caused by such gross negligence or intentionally tortiuous act or
omission of the Landlord, as aforesaid; and
(b) Subject to the operation and effect of the foregoing provisions of
this subsection unless damage caused by gross negligence or willful misconduct
of Landlord, the Tenant shall be responsible for, and shall defend, indemnify
and hold harmless the Landlord against and from, any and all liability or claim
or liability arising out of any injury to or death of any person or damage to
the Building, Premises or Common Area.
6.02 - Condemnation: In the event that the demised Premises shall no
longer be suitable for Tenant's purposes due to a taking under the power of
eminent domain or condemnation, Tenant shall have the right for sixty (60) days
following written notice from Landlord to Tenant of such eminent domain or
condemnation proceeding, to notify Landlord in writing of its intention to
terminate the Lease. Landlord shall promptly notify Tenant as soon as Landlord
has notice of such eminent domain or condemnation proceeding.
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It is a condition precedent to Tenants right to terminate this Lease
for such eminent domain or condemnation proceedings that Tenant give written
notice to Landlord of Tenants intention to terminate within such sixty (60) day
period. Upon timely written notice of Tenants intention to terminate the Lease
and in the event that the Premises are no longer suitable for Tenant's purposes
or access to the Premises is jeopardized due to such taking under the power of
eminent domain or condemnation, this Lease shall terminate on the earlier of (a)
the day possession of the Premises shall be taken by such public authority, or
(b) 30 days after written notice of surrender of possession by Landlord or
Tenant given to the other subsequent to the entry of the final court order
authorizing such taking or condemnation. Rent shall be paid or prorated, as the
case may be, to the date of termination of this Lease.
All compensation and damages awarded for any taking of real estate
under the power of eminent domain or condemnation, whether for the whole or part
of the demised Premises, shall be the sole property of the Landlord and Tenant
hereby assigns to Landlord all Tenant's rights, title, and interest, in and to
all such compensation and damages; provided, however, that Landlord shall not be
entitled to any award made directly to Tenant, including any award for loss of
business, depreciation of and cost of removal of fixtures or moving expenses.
6.03 - Tenant Holding Over: If Tenant shall not immediately surrender
possession of the Premises at the termination of this Lease, Tenant shall become
a tenant from month to month, provided rent shall be paid to and accepted by
Landlord, in advance, at 150% of the Base Rent payable hereunder just prior to
the termination of this Lease; but unless and until Landlord shall accept such
rental from Tenant, Landlord shall continue to be entitled to re-take possession
of the Premises without any prior notice whatsoever to Tenant. If Tenant shall
fail to surrender possession of the Premises immediately upon the expiration of
the term hereof, Tenant hereby agrees that all of the obligations of Tenant, and
all rights of Landlord applicable during the term of this Lease, shall be
equally applicable during such period of subsequent occupancy, whether or not a
month to month tenancy shall have been created as aforesaid.
6.04 - Fire Clause: This Lease is made on condition that, if the
Premises, or any part thereof, or the approaches thereto, be destroyed or
damaged by fire or other unavoidable casualty covered by standard fire and
extended coverage insurance policy, so as to render the Premises and/or
approaches unfit for use and occupancy, a just and proportionate part of the
rent, according to the nature and extent of the injury to the Premises and/or
approaches, shall be suspended and abated until the Premises and approaches
shall have been put in as good condition for use and occupancy as at the time of
such damage or destruction, or until this Lease shall be canceled and terminated
as next hereinafter provided, as the case may be. It shall be the duty of
Landlord to determine and to notify Tenant in writing, within sixty (60) days
after such damage or destruction, the date by which the Premises can be fully
restored, with reasonable diligence. If that date by which such restoration can
be completed, as stated in Landlord's notice, shall be later than six (6)
months after such damage or destruction, then either party hereto shall have
the right, to be exercised within thirty (30) days after receipt of such notice
from Landlord, to cancel and terminate this Lease, by giving to the other party
a written notice of its desire so to cancel and terminate; but if this Lease
shall not be so canceled, it shall remain in full force and effect and Tenant
shall reoccupy the Premises when fully restored. However, if the date by which
such restoration can be completed, as stated in Landlord's notice,
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shall be earlier than six (6) months after such damage or destruction, this
Lease shall remain in full force and effect, and Tenant shall reoccupy the
Premises when fully restored, provided, however, that if, at the expiration of
a period of six (6) months following such damage or destruction, the Premises
shall not have been fully restored as a result of some cause beyond the
Landlord's control, the Landlord shall have the right to complete such
restoration, provided it shall use reasonable diligence in doing so, without
thereby affording to Tenant the right to cancel this Lease; but if the Premises
shall not have been fully restored within said six (6) months period because of
the lack of reasonable diligence on the part of Landlord, Tenant may, by
written notice to Landlord, delivered within thirty (30) days after the
expiration of such six (6) month period, but prior to the complete restoration
of the Premises, cancel and terminate this Lease. Despite the foregoing
provisions, the parties hereto may make such other agreements as they wish in
the event of the damage or destruction of the Premises. All rights of
subrogation against the Tenant are hereby waived unless such waiver shall make
void or voidable any insurance Landlord may have upon the Premises. In case of
damage to or destruction of the Premises by an uninsured casualty, and if the
estimated cost of repair or restoration shall exceed 35% of the then estimated
replacement cost of the Premises, Landlord, at its option, may cancel and
terminate this Lease as of the date of such damage or destruction by giving the
Tenant a written notice to this effect within sixty (60) days of such damage or
destruction; but, if Landlord shall not so elect to terminate, all of the
provisions hereinbefore contained respecting an insured casualty shall be
equally applicable to such non-insured casualty.
6.05 - Tenant's Default - Landlord's Remedies:
(a) It is mutually covenanted and agreed that if Tenant shall fail to
keep and perform all of the covenants, conditions and agreements herein made
binding upon Tenant, and if such failure continues for 10 days (with respect to
any monetary default), or 30 days (with respect to any non-monetary default),
after written notice to Tenant identifying such failure, if Tenant shall vacate
or abandon the Premises, or if the estate hereby created shall be taken on
execution or other process of law, or if Tenant shall petition to be declared or
shall be declared bankrupt or insolvent according to law, or if a receiver or
similar officer shall be appointed to take charge of all or any part of the
property of Tenant, or if any assignment shall be made of Tenant's property for
the benefit of creditors, then and in each such case, at the sole option of
Landlord, Tenant's right of possession shall thereupon cease and determine and
Landlord shall be entitled to possession of the Premises and to re-enter the
same without further demand of rent or demand of possession of the Premises, and
may, forthwith recover possession thereof by whatever process of law may be
available in the jurisdiction in which the Premises may be located, any notice
to quit or of intention to re-enter being hereby expressly waived by Tenant, or
Landlord may retake possession without process of law and remove all persons and
property therefrom without becoming liable in damages, unless resulting from the
willful acts of Landlord or its agents. In the event of such re-entry or
re-taking, Tenant shall nevertheless remain liable and answerable for the full
rental to the date of such re-taking or re-entry, and for damages for the
deficiency or loss of rent which Landlord may thereby sustain in respect of the
balance of the term; and in such case, Landlord shall use reasonable efforts to
let the Premises for the benefit of and as the agent for Tenant, in liquidation
and discharge, in whole or in part, as the case may be, of the liability of
Tenant hereunder; and such damages, at the option of Landlord, may be recovered
at the time of the re-taking or re-entry, or in separate actions
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from time to time as Tenant's obligation to pay rent would have been accrued if
the term had continued, or from time to time as said damages shall have been
made more easily ascertainable by reletting, or such actions, at the option of
Landlord, may be deferred until the expiration of the term hereof, in which
latter event, the cause of action shall not be deemed to have accrued until the
expiration of said term, Landlord, however, may refrain from terminating
Tenant's right of possession, and in such case, may enforce against Tenant the
provisions of this Lease for the entire term.
(b) If any person other than Tenant shall initiate the action which
shall entitle Landlord to terminate this Lease as aforesaid, it is understood
and agreed that Landlord will defer terminating this Lease until the expiration
of a period of fifteen (15) days after written notice from Landlord to Tenant
that such action shall have been taken.
(c) No waiver by Landlord of any breach of any covenant or condition
herein contained shall operate as a waiver of the covenant or condition itself
or of any subsequent breach thereof; nor shall any such waiver be implied should
a compromise between the parties be effected after Landlord shall have initiated
any action in regard thereto.
6.06 - Agent's Commission: The parties to this Lease recognize Bishopp
Realty, Inc. as the agent representing the Landlord and the Irving Group as the
agent representing the Tenant in this transaction. Brokers will be paid a
commission by the Landlord according to a separate agreement.
6.07 - It is expressly understood and agreed that no liability shall be
imposed upon Landlord because of any injury or damage to person or property, or
because of any interference with any services and facilities called for under
this Lease, if any, caused by accidents, repairs, riots, strikes, or any reason
beyond the control of Landlord, and that Landlord shall be under no duty to
restore any of such services and facilities or to make any of the repairs for
which Landlord is obligated under this Lease, except after receipt of written
notice from Tenant of a need therefore. If Landlord fails to start or attempt to
cure any such defect within 30 days after Tenant's notice, the percentage of
rent in proportion to the amount of the Premises rendered unusable by the Tenant
shall abate from the 31st day after such notice until Landlord cures such
defect. Neither Landlord, nor Bishopp Realty, Inc., shall be under any duty to
inspect the Premises during Tenant's occupancy thereof unless and until Tenant
has notified Landlord in writing of the need of repairs for which Landlord is
responsible; however, Landlord and its agent may enter the Premises at any
reasonable time for the purpose of inspecting the same or performance of any
repairs under the provisions of Paragraph 4.04.
6.08 - Force Majeure: Each party shall be excused from performing any
obligation or undertakings provided for in this Lease (other than the
obligations of Tenant to pay any and all items of rent as the same become due
under the applicable provisions of this Lease) for so long as such performance
is prevented or delayed, retarded or hindered by act of God, fire, earthquake,
flood, explosion, action of the elements, war, invasion, insurrection, riot, mob
violence, sabotage, inability to procure or general shortage of labor,
equipment, facilities, materials or supplies in the open market, failure of
transportation, strike, lockout, action of labor unions, condemnation,
requisition, laws, orders of government or civil or military or naval
authorities, or any other cause, whether similar or dissimilar to the foregoing,
not within the reasonable control of the party prevented,
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retarded, or hindered thereby, including reasonable delays for adjustments of
insurance.
6.09 - Miscellaneous:
(a) All notices required or permitted to be given hereunder shall be by
registered or certified mail, return receipt requested. Those directed to
Landlord shall be sent to Richard P. Van Curen, PO Box 1558, Middleburg,
Virginia 20118, unless and until Tenant should be notified otherwise, in
writing; and those directed to Tenant shall be addressed to the Premises, unless
and until Landlord should be notified otherwise in writing.
(b) Tenant waives all right to trial by jury in any proceeding which
may be instituted by Landlord against Tenant arising under or by virtue of this
Lease.
(c) Upon the request of either party hereto, Landlord and Tenant agree
to execute and deliver a memorandum of lease or short-form lease suitable for
recording. The cost of preparation and recording of such memorandum or short
form lease shall be borne by the party requesting same.
(d) This Lease constitutes the entire agreement of the parties in
respect of the Premises, and there are no oral agreements between the parties.
6.10 - Assignment and Subletting.
(a) The Tenant here by acknowledges that the Landlord has entered into
this Lease because of the Tenant's financial strength, goodwill, ability and
expertise and that, accordingly, this Lease is one which is personal to the
Tenant, and agrees for itself and its successors and assigns in interest
hereunder that it will not (a) assign any of its rights under this Lease, or (b)
make or permit any total or partial sale, lease, sublease, assignment,
conveyance, license, mortgage, pledge, encumbrance or other transfer of any or
all of the premises or the occupancy or use thereof (each of which is
hereinafter referred to as a ("Transfer"), without first obtaining the
Landlord's written consent not unreasonably withheld or delayed thereto which
decision shall be provided by Landlord within thirty (30) days of written notice
by Tenant, (which consent if given, shall not constitute a consent to any
subsequent such Transfer, whether by the person hereinabove named as the Tenant
or by any such transferee). Any person to whom any Transfer is attempted without
such notice and consent shall have no right or remedy whatsoever hereunder
against the Landlord, and the Landlord shall have no duty to recognize any
person claiming under or through the same. No such action taken with or without
the Landlord's consent shall in any way relieve or release the Tenant from
liability for the timely performance of all of the Tenant's obligations
hereunder.
b) In the event of any Transfer, Landlord may, at it's sole option,
have the right to fifty percent (50%) of any profits associated with any
subletting or assignment. Neither Tenant nor any party claiming an interest
under or through Tenant shall interfere with Landlord's exercise of its rights
hereunder. Tenant hereby indemnifies and holds Landlord harmless from and
against any and all liabilities, costs, losses, or damages, including reasonable
attorneys fees and court costs, arising from any breach of the provisions of
this section by Tenant.
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6.11 Rules and Regulations: The Landlord shall have the right to
prescribe, at its sole discretion, reasonable rules and regulations (hereinafter
referred to as the "Rules and Regulations") having uniform applicability to all
tenants of the Building (subject to the provisions of their respective leases)
and governing their use and enjoyment of the Building and the remainder of the
Property; provided that the Rules and Regulations shall not materially interfere
with the Tenant's use and enjoyment of the Premises, in accordance with the
provisions of this Lease. The Tenant shall adhere to the Rules and Regulations
and shall cause its agents, employees, invitees, visitors and guests to do so.
6.12 Subordination, Attornment and Non-Disturbance.
(a) Subordination. This Lease and Tenant's interest hereunder shall be
subject and subordinate to the lien operation and effect of each and every
mortgage, to all renewals, modifications, replacements and extensions thereof,
now or hereafter executed by Landlord or its successors, assigns, or purchaser
at foreclosure, and to any and all advances made thereunder and interest
thereon, provided that the mortgagee or holder of the indebtedness provides
Tenant with a non-disturbance agreement which shall provide that so long as
Tenant shall not be in default under the Lease, no mortgagee, successor in
interest, purchaser at foreclosure, ground lessor or other party, shall disturb
Tenant's possession pursuant to the terms of this Lease, and so long as Tenant
complies with all of the terms and conditions of the Lease, Tenant may continue
to occupy the Leased Premises and enjoy all of its rights under this Lease. It
is understood and agreed to by Tenant that within ten (10) business days after
receipt of written request from Landlord, it will from time to time execute and
deliver any reasonable instrument or other document required by mortgagee or
purchaser at foreclosure to subordinate this Lease and its interest in the
Leased Premises to the lien of any such mortgagee, in form and substance
required by such mortgagee, which shall provide interalia that the mortgagee is
not (i) bound by any payment of Base Rent or Additional Rent made by Tenant more
than one (1) month in advance to any prior landlord (including Landlord), other
than the Security Deposit previously provided for, (ii) liable for any damages
or subject to any offset or defense by Tenant to the payment of Base Rent or
Additional Rent by reason of any act or omission of Landlord prior to the date
that mortgagee succeeds to the interest of Landlord; and (iii) bound by any
termination, amendment, modification or surrender of this Lease made without
mortgagee's written consent. Tenant will also, upon request, submit current
financial statements and financial statements covering the three (3) immediately
preceding years (but the mortgagee's obligations under this section shall not be
conditioned upon the Mortgagee's approval of the same), and Tenant will, upon
request, allow Landlord's mortgagee to record on behalf of Tenant this Lease or
a short form thereof, at mortgagee's expense, if required by Landlord's
mortgagee or other lending institution. Tenant hereby irrevocably constitutes
and appoints Landlord as Tenant's attorney-in-fact to execute, acknowledge and
deliver any and all such instruments for and on behalf of tenant, should Tenant
fail to do so within ten (10) business days after receipt of written notice.
(b) Attornment and non disturbance. The Tenant shall, promptly at the
request of the Landlord or the holder of any Mortgage, execute, enseal,
acknowledge and deliver such further instrument or instruments, reasonable in
form: 1) evidencing such subordination as the Landlord or such Mortgagee deems
necessary or desirable, and 2) At Mortgagee's request attorning to such
Mortgagee. Landlord will use its best efforts to obtain an agreement from the
Mortgagee that such Mortgagee will, in the event of a foreclosure
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of any such mortgage or deed of trust take no action to interfere with the
Tenant's right to quiet enjoyment made under the terms of the Lease except in
the event of default by the Tenant.
c) Anything contained in the provisions of this Section to the contrary
notwithstanding, any mortgagee may at any time subordinate the lien of its
Mortgage to the operation and effect of this Lease without obtaining the
Tenant's consent thereto, by giving the Tenant written notice thereof, in which
event this Lease shall be deemed to be senior to such Mortgage without regard to
their respective dates of execution, delivery and/or recordation among the Land
Records of said County, and thereafter such mortgagee shall have the same rights
as to this Lease as it would have had, were this Lease executed and delivered
before the execution of such Mortgage.
SECTION 7 - SPECIAL PROVISIONS:
7.1 OPTION TO RENEW: Provided Tenant is not in default under any of the
terms of the Lease to which this Extension relates, at the time of the exercise
of the option hereinafter granted, or at the time of the commencement of such
option term, Tenant is hereby granted the option to renew and extend the
original term of the Lease on the same terms and conditions except rent, for one
(1), Three (3) year period, as follows:
Tenant agrees to give Landlord written notice of its election to
extend the lease at least 120 days prior to the commencement of such additional
term and,
The Base Rent at the commencement of the option term shall be Sixteen
and 00/100 Dollars ($16.00) per square foot of demised space in the Premises.
At each anniversary of the option period the Base Rent will increase by
three percent (3%) over the previous year's Base Rent.
In the event the Tenant does not exercise the above listed option and
the Landlord has agreed to market or lease said Premises at less than
eighty-five percent (85%) of the $16.00/ square foot Base Rental rate, then the
Tenant shall have an additional right of first offering to lease the Premises.
After written notice from the Landlord to the Tenant of the effective rental
rate and terms of the lease, the Tenant shall have ten (10) business days to
respond in writing to the Landlord of its acceptance of such terms to lease the
Premises, otherwise this right of offering will become null and void.
7.2 RIGHT OF FIRST OPPORTUNITY - Subject to Tenant not being in default
under the terms of this lease, Tenant shall have the right of first opportunity
on that adjacent space within the building that also includes the premises,
which space is identified as the "option area" on attached Exhibit "A". Tenant
shall have fifteen (15) calendar days to exercise this right from date of
Landlord's notice to Tenant of the pending availability of such space, or any
leasable portion thereof, as Landlord may describe and the terms upon which
Landlord is willing to lease such space. In the event that Tenant shall fail,
within such fifteen (15) calendar day period to notify Landlord in writing of
Tenant's exercise of its right of first opportunity as to the space covered by
Landlords' written notice, on the terms set forth in Landlord's written notice,
then Tenant's rights with
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regard to such space shall terminate and Landlord shall be permitted to lease
such space to others on such terms as Landlord may then negotiate.
In the event the Tenant does not exercise the above listed Right of
First Opportunity, and the Landlord has agreed to market or lease said option
area to a third party, at less than eighty-five percent (85%) of the per square
foot Base Rental rate presented to the Tenant under the Right of First
Opportunity, then the Tenant shall have an additional right of first offering to
lease the option area. After written notice from the Landlord to the Tenant of
the revised effective Base Rental rate and terms of the lease for the option
area, the Tenant shall have ten (10) business days to respond in writing to the
Landlord of its acceptance of the terms to lease the option area, otherwise this
right of offering will become null and void.
IN WITNESS WHEREOF, the parties hereto have hereunto subscribed their
names and affixed their seals, as the day and year first hereinbefore mentioned.
(In case either party is a corporation, its name has been hereunto subscribed
and its seal hereunto affixed and attested by its duly authorized officers.)
WITNESS or ATTEST: Landlord - Richard P. Van Curen and Caprice Company
/s/ MARLENE D. ISEMAN /s/ RICHARD P. VAN CUREN
- ---------------------------- -------------------------
Name: Richard P. Van Curen
/s/ MARLENE D. ISEMAN /s/ RICHARD P. VAN CUREN
- ---------------------------- -------------------------
Name: Richard P. Van Curen
General Partner
Caprice Company
WITNESS or ATTEST: Tenant - DIDAX Incorporated
/s/ GARY STRUZIK /s/ WILLIAM M. PARKER
- ---------------------------- -------------------------
Gary Struzik William M. Parker
Chief Executive Officer & President
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EXHIBIT 10.40
RICHARD P. VAN CUREN
P.O. BOX 1558
MIDDLEBURG, VA 20118
(703)-378-7263 OR (540)687-6060
February 5, 1999
Mr. Gary A Struzik, Chief Financial Officer
Didax, Inc.
4206 Technology Court
Suite F
Chantilly, VA 20151
RE: Letter of Occupancy
Didax Lease
Dear Mr. Struzik:
This letter is to confirm our recent verbal understanding and
agreement on the several open issues regarding your lease on Suite F at 4206
Technology Court, Chantilly, Virginia, as follows:
1) Your occupancy on the front part of the premises (about 53.6%)
was as of October 1, 1999, as specified in the lease dated
August 10, 1998, and was the beginning of the lease term.
2) Your occupancy of the remainder of the space was effective as
of October 19, 1998.
3) The actual area of the demised premises is 6,115 square feet
(or 21.2% of the total building area), an increase of 128
square feet. The corrected area will be used in section 5.06 of
the lease and also calls for an adjustment (section 1 of the
lease) of the base rent, which for the first lease year is :
128 S.F. @ $8.50 = $90.67/month
4) The total construction cost at the time, excluding painting of
the original office space, cleaning the carpet and repairing
the exit lights, was:
H.C. Handy - $ 95,662.75
Barkley Pierce- $ 15,697.60
-----------
Total $111,360.35
5) We agreed that for purposes of adjusting the base rent per
section 4.7 of the lease that we would use a rounded
construction cost of $111,000, which produced an adjustment
of:
<PAGE> 2
Rounded Cost $111,000
Less Base in Lease $ 65,000
--------
$ 46,000
46 X $20.65/1,000 = $949.90/month increase
6) Accordingly the adjusted original monthly rent is:
Original base rent in lease $5,577.89/month
Upward adjustment for size $ 90.67
Upward adjustment for cost $ 949.90
---------
Adjusted base rent $6,618.46
Plus 1998 share of common area
expenses (Section 5.06 of Lease) $ 623.65
---------
Total $7,242.11/month
Subsequent to our agreement above, two more invoices for $961.05
came from Barkley Pierce. However, I have not seen the necessity of revising
the base rent as shown above.
7) The security deposit at the lease signing was $16,733.66,
subject to an increase of the amount the construction cost
exceeded $75,000. The security deposit was subsequently
increased by $36,762.85 to $53,496.51. This was done before
$402.50 was deducted from construction cost for carpet cleaning
and the additional bills for $961.05 came from Barkley Pierce.
The net adjustment would have been a $558.55 increase, which I
have not requested.
I am pleased that the space is working out well for you and I hope
for your continued and increasing success.
If you have heating or air conditioning problems, I suggest calling
Terry or Ray at Air Control Services, Inc. 703-631-6690. They have done good
work for me at competitive prices, sometimes much lower than the competition.
Sincerely,
/s/ RICHARD P. VAN CUREN
Richard P. Van Curen
<PAGE> 1
EXHIBIT 10.41
AGREEMENT BETWEEN
DIDAX INC. AND QUANTUM AMERICAN, INC. AND QUANTUM FUNDS, LP
CROSSWALK AMERICAN VALUES EQUITY MUTUAL FUNDS
This is an Agreement between DIDAX INC. (hereinafter referred to as DIDAX), a
Delaware corporation with its principal office at 4206F Technology Court,
Chantilly, Virginia 20151 and Quantum American, Inc. and Quantum Funds LP,
(hereinafter referred to as COMPANY), a Louisiana corporation domiciled in
Orleans Parish, Louisiana. DIDAX and COMPANY may herein also be referred to as
the "parties". This Agreement shall be governed by and construed in accordance
with the laws of the State of Louisiana.
WHEREAS DIDAX and COMPANY are entering into this Agreement where DIDAX will
provide to COMPANY the Crosswalk Market Initiation package on DIDAX's Web site,
www.crosswalk.com and its personal finance channel, CrosswalkMoney, (hereinafter
together referred to as "crosswalk") and DIDAX will also be retained by the
COMPANY for the purpose of selling and promoting the services of the COMPANY as
well as the services of the partnership known as Quantum/Gabelli, LP, of which
COMPANY is a General Partner and fifty-one percent (51%) owner thereof; and
WHERAS DIDAX desired to perform those services for COMPANY, as set forth more
particularly herein and for the compensation described herein; therefor it is
agreed and understood that:
1.0. SCOPE OF WORK
1.1 CROSSWALK MARKET INITIATION
DIDAX shall provide to COMPANY, the Crosswalk Market Initiation package valued
at $130,000. This provides to COMPANY (a) full access to the proprietary
values-based investing screening services developed by the Institute for
American Values Investing for purposes of portfolio selection (b) the exclusive
right to preferential marketing initiatives to enable COMPANY to market their
services and products defined as the Crosswalk American Values Equities Mutual
Funds, the Crosswalk Debit Card and the Crosswalk Money Market Fund; (c) the
first right of refusal to participate in any future crosswalk created content
and/or advertising that relates to services or products the COMPANY deems
similar in nature. (d) integration with crosswalk content to give crosswalk
visitors access to COMPANY's services and products; (e) announcements and
surveys to crosswalk members which communicate availability of COMPANY products
and services on crosswalk, and (f) the exclusive use of the word crosswalk
and/or American Values Investing for use on the product name of any other family
or mutual funds.
1.2 DIDAX SALES AND PROMOTION OF COMPANY SERVICES
DIDAX, using every commercially reasonable effort at its disposal, shall cause
its employee, Scott Fehrenbacher, and/or a substitute, only after confirmation
by the COMPANY, to sell and promote the Crosswalk American Values Equities
Mutual Funds, Crosswalk Debit Card and
<PAGE> 2
Crosswalk Money Market Fund products and services of Quantum American, Inc. and
Quantum/Gabelli, LP in full accordance with the Investment Advisors Act of
1940,15 U.S.C. Section 80b-1, ET seq.
1.2 DIDAX SALES AND PROMOTION OF COMPANY SERVICES (CONTINUED)
DIDAX shall communicate and/or transmit to clients and/or prospective clients
only such sales material, data compilations and/or other information as is
furnished by and/or approved by the COMPANY.
While DIDAX shall be allowed to offer its Investigator screening services ,
DIDAX agrees not to promote or create any family of funds using the Investigator
or American Values name and methodology other than the one with Quantum American
Inc.
DIDAX, nor its employees shall have authority to bind, nor make an appearance to
any client or prospective client that he/she had the authority to bind or
otherwise obligate Quantum American, Inc. nor Quantum/Gabelli, LP to any
contract or agreement without the prior written consent and authorization of the
COMPANY.
1.3 COMPANY CREATION AND PROMOTION OF CROSSWALK AMERICAN VALUES EQUITY MUTUAL
FUND FAMILY
The COMPANY will create, register and market the Crosswalk American Values
Equity Mutual Fund family, committing a minimum of $130,000 in fund
registration, development, and promotion through either direct mail, investor
communiques and/or Funds launch events during the first year of this Agreement.
2.0 COMMERCIAL TERMS
2.1 TERM OF AGREEMENT
This Agreement will remain in tact until midnight November 30, 2019. After
November 30, 2019, either party may terminate the agreement, provided that the
terminating party provide to the other party, a sixty day written notice of
intent to terminate this Agreement.
If DIDAX terminates the Agreement, all fees as described in Section 2.2 shall
continue to be paid to DIDAX by the COMPANY, on all approved and completed sales
from referrals provided by DIDAX, prior to the date of termination, for the
services of Quantum American, Inc. or Quantum Gabelli, LP.
If the COMPANY terminates this Agreement, it shall continue to pay DIDAX all
fees as described in Section 2.2, received by the COMPANY on all approved and
completed referrals provided by DIDAX, prior to the date of termination, for the
services of Quantum American, Inc. and/or Quantum Gabelli, LP, for as long as
the referred purchasers remain clients of the COMPANY.
<PAGE> 3
2.11 TERMINATION FOR NON-PERFORMANCE
This agreement shall be terminated for reason of non-performance of Quantum
American, Inc. if the following conditions are no longer met: the mutual fund
family must be registered and operational; Quantum American Inc. is active and
in good business and ethical standing; and Quantum American Inc. is actively
marketing and promoting the fund family.
2.2 COMPENSATION
Crosswalk American Values Equities Mutual Funds
The COMPANY agrees to pay DIDAX INC. a licensing fee of 0.50% of all assets
under management in the Crosswalk American Values Equity Mutual Funds family and
for each class of mutual fund created. In "wholesale" relationships, DIDAX will
have full discretion in determining the portion of these fees to share with any
affinity organizations that choose to promote the fund family to their
memberships.
Payment Terms
The COMPANY agrees to pay DIDAX the amounts indicated above in this Section 2.2,
quarterly in arrears, no more than 45 days beyond the close of the quarter.
2.3 DISPUTE RESOLUTION
Should any dispute netween the COMPANY and DIDAX, or its employees, arise
regarding any aspect of this Agreement, it is herein agreed by both COMPANY and
DIDAX that the matter, or matters, will be resolved only by binding arbitration
and that the arbitrator of such dispute, or disputes, shall be a person or firm
of recognized good standing in the securities industry, mutually agreed upon by
both parties.
2.4 PUBLICITY, CONFIDENTIALITY AND NONDISCLOSURE
Neither party shall publish or make known to others any confidential information
which is proprietary to the other party which is obtained in connection with or
as a result of its work hereunder and which is not in the public domain.
"Confidential Information" shall mean any information relating to or disclosed
in the course of this Agreement that is or should reasonably be understood to be
confidential or proprietary to the Disclosing Party, including but not limited
to the material terms of this Agreement; technical processes and formulas;
source code; product designs; sales, cost and other financial information;
product and business plans; projections; and marketing data. "Confidential
Information" shall not include information (1) already lawfully known to or
independently developed by the receiving Party; (2) disclosed in published
materials; (3) generally known to the public; (4) lawfully obtained from any
third party (provided that such third party also lawfully obtained such
information); or (5) required to be disclosed by law.
The Receiving Party acknowledges the confidential and proprietary nature of the
Disclosing Party's Confidential Information and agrees that it shall not
discuss, reveal or disclose the
<PAGE> 4
Disclosing Party's Confidential Information for any purpose other than as
contemplated hereby, in each case, without the prior written consent of the
Disclosing Party. The Receiving Party agrees to take reasonable precautions to
prevent unauthorized or inadvertent disclosure of Confidential Information of
the Disclosure Party.
The Receiving Party will, at the request of the Disclosing Party, during the
term of this Agreement, promptly return all Confidential Information held or
used by the Receiving Party in whatever form, or at the discretion of the
Disclosing Party, promptly destroy all such Confidential Information, including
all copies thereof, and those portions of all documents that incorporate such
Confidential Information.
The provisions of this section of the Agreement related to Confidential
Information shall survive the termination of this Agreement for a period of
three years.
3.5 INDEMNIFICATION:
Either party will defend, indemnify, save, and hold harmless the other party and
the officers, directors, agents, affiliates, distributors, franchisees, and
employees of the other party from any and all third party claims, demands,
liabilities, costs or expenses, including reasonable attorneys' fees, resulting
from the indemnifying party's breach of any duty, representation, or warranty of
this Agreement, except where such liabilities result from the gross negligence
or knowing and willful misconduct of the other party. Without limiting the
generality of the foregoing, COMPANY will defend, indemnify, save and hold
harmless DIDAX against any liabilities arising out of 1) any injury to person or
property caused by any data provided to DIDAX by COMPANY (including but not
limited to any item sold or advertised in connection with COMPANY's data), 2)
any defamatory, libelous or illegal or allegedly defamatory, libelous or illegal
data provided to DIDAX by COMPANY, and 3) any data infringing or allegedly
infringing the proprietary rights (including but not limited to any intellectual
property rights) of a third party, 4) any claim that any item(s) sold or
advertised in connection with COMPANY's data does not perform or was not priced
as advertised and/or does not comply with all local, state, federal and
international Securities law requirements and all other relevant treaties,
regulations, ordinances and the like. Prompt notice of any claim is a condition
of the obligation of indemnity.
3.6 LIMITATION OF LIABILITY
DIDAX will make reasonable efforts to ensure the accuracy and reliability of
data presented on crosswalk, however, COMPANY acknowledges that DIDAX, its
officers, directors, employees and third party content providers will not be
held liable for any damages suffered or incurred by COMPANY or any third party
arising out of any faults, interruptions or delays in broadcast or any
inaccuracies, errors or omissions on crosswalk, however such faults,
interruptions, delays, inaccuracies, errors or omissions arise.
Neither Party shall be liable or deemed to be in default for any delay or
failure in performance under this Agreement or interruption of service resulting
directly or indirectly from acts of God;
<PAGE> 5
civil or military authority; acts of public enemy; war; riots; civil
disturbances; insurrections; acts of government; accidents; fire or other
casualty; explosions; earthquakes; floods; the elements; strikes; labor
disputes; failure of telecommunications; shortages of essential parts,
materials, labor, or transportation; or any material cause beyond the reasonable
control of such Party.
Under no circumstances will either party, its officers, directors, employees and
third party content providers be liable for any indirect, incidental, special or
consequential damages with respect to data provided on crosswalk, including lost
profits regardless of whether such damages could have been foreseen or prevented
by either party.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH
PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF
DEALING OR COURSE OF PERFORMANCE.
3.7 NOTICE
Notices under this Agreement shall be sufficient if in writing and if personally
delivered, delivered by a major commercial overnight delivery courier service,
sent by facsimile, or mailed by U.S. mail, to a Party at its address set forth
below or as amended by notice pursuant to this Section. Unless actually received
earlier, notices shall be deemed received five (5) days after deposit in the
U.S. mail or one (1) day after being transmitted by overnight delivery courier
service or by facsimile.
If to Quantum American, Inc.: Quantum American, Inc.
938 Lafayette Street
New Orleans, LA 70113
Fax No.: 504-525-7868
If to Quantum Funds LP Quantum Funds LP
938 Lafayette Street
New Orleans, LA 70113
Fax No.: 504-525-7868
If to DIDAX INC.: DIDAX INC.
4206F Technology Court
Chantilly, VA 20151
Attention: Scott Fehrenbacher
Fax No.: 703-968-4819
3.8 ASSIGNMENT AND SEVERABILITY
This Agreement is not assignable by either Party without the written consent of
the other. This Agreement shall be binding upon and shall inure to the benefits
of the parties and their respective successors. If any provision of this
Agreement is determined by a court of competent jurisdiction to be invalid or
unenforceable, such determination shall not affect the validity, or
enforceability of any other part or provision of this Agreement.
<PAGE> 6
3.9 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties with respect
to the subject matter hereof and cancels, supersedes and inures all and any
previous Agreements between Quantum American, Inc., DIDAX INC., and the
Institute for American Values Investing as indicated by consent below of William
Parker, President of DIDAX INC., and Scott Fehrenbacher, Money Channel Manager
for DIDAX and President of the Institute for American Values Investing or other
previous proposals, both oral and written, negotiations, representations,
commitments, writings, and all other communications between the parties. This
Agreement may not be changed or modified except by an instrument in writing
signed and accepted by both parties, and no change, termination, or attempted
waiver of any of the provisions hereof shall be binding unless in writing and
signed by the parties against whom the same is sought to be enforced.
THUS DONE AND SIGNED, at New Orleans, Louisiana this 20th day of November, 1998,
in the presence of the undersigned competent witnesses.
DIDAX INC. QUANTUM AMERICAN, INC.
Signature [SIG] Signature [SIG]
---------------------- ---------------------
Title CEO / PRESIDENT Title PRESIDENT
---------------------- ---------------------
WITNESSES QUANTUM FUNDS LP
[SIG] Signature [SIG]
- -------------------------------- ---------------------
Title GENERAL PARTNER
---------------------
CONSENT:
INSTITUTE FOR AMERICAN VALUES INVESTING DIDAX INC.
Signature [SIG] Signature [SIG]
---------------------- ---------------------
Title PRESIDENT Title CEO / PRESIDENT
---------------------- ---------------------
WITNESSES WITNESSES
[SIG] [SIG]
- -------------------------------- -------------------------------
<PAGE> 7
AGREEMENT BETWEEN
DIDAX INC. AND QUANTUM AMERICAN, INC.
CROSSWALK AMERICAN VALUES MANAGED ACCOUNTS
This is an Agreement between DIDAX INC. (hereinafter referred to as DIDAX), a
Delaware corporation with its principal office at 4206F Technology Court,
Chantilly, Virginia 20151 and Quantum American, Inc., (hereinafter referred to
as COMPANY), a Louisiana corporation domiciled in Orleans Parish, Louisiana.
DIDAX and COMPANY may herein also be referred to as the "parties". This
Agreement shall be governed by and construed in accordance with the laws of the
State of Louisiana.
WHEREAS DIDAX and COMPANY are entering into this Agreement where DIDAX will
provide to COMPANY the Crosswalk Market Initiation package on DIDAX's Web site,
www.crosswalk.com and its personal finance channel, Crosswalk Money,
(hereinafter together referred to as "crosswalk") and DIDAX will also be
retained by the COMPANY for the purpose of selling and promoting the services
of the COMPANY as well as the services of the partnership known as
Quantum/Gabelli, LP, of which COMPANY is a General Partner and fifty-one
percent (51%) owner thereof; and
WHERAS DIDAX desired to perform those services for COMPANY, as set forth more
particularly herein and for the compensation described herein; therefor it is
agreed and understood that:
1.0. SCOPE OF WORK
1.1 CROSSWALK MARKET INITIATION
DIDAX shall provide to COMPANY, the Crosswalk Market Initiation package valued
at $130,000. This provides to COMPANY (a) full access to the proprietary
values-based investing screening services developed by the Institute for
American Values Investing for purposes of portfolio selection; (b) the exclusive
right to preferential marketing initiatives to enable COMPANY to market their
services and products defined as the Crosswalk American Values Managed Accounts
(separately managed accounts); (c) the first right of refusal to participate in
any future crosswalk created content and/or advertising that relates to services
or products the COMPANY deems similar in nature. (d) integration with crosswalk
content to give crosswalk visitors access to COMPANY's services and products;
(e) announcements and surveys to crosswalk; and (f) the exclusive use of the
word crosswalk and/or American Values Investing for use on the product name of
any managed stock account program.
1.2 DIDAX SALES AND PROMOTION OF COMPANY SERVICES
DIDAX, using every commercially reasonable effort at its disposal, shall cause
its employee, Scott Fehrenbacher, and/or a substitute, only after confirmation
by the COMPANY, to sell and promote the Crosswalk American Values Managed
Account products and services of Quantum
<PAGE> 8
American, Inc. and Quantum/Gabelli, LP in full accordance with the Investment
Advisors Act of 1940, 15 U.S.C. Section 80b-1, ET seq.
1.2 DIDAX SALES AND PROMOTION OF COMPANY SERVICES (CONTINUED)
DIDAX shall communicate and/or transmit to clients and/or prospective clients
only such sales material, data compilations and/or other information as is
furnished by and/or approved by the COMPANY.
DIDAX agrees not to create any professionally managed separate account products
with the name American Values and the Institute for American Values Investing
other than the one with Quantum American Inc. during the term of this agreement.
DIDAX, nor its employees shall have authority to bind, nor make an appearance to
any client or prospective client that he/she had the authority to bind or
otherwise obligate Quantum American, Inc. nor Quantum/Gabelli, LP to any
contract or agreement without the prior written consent and authorization of the
COMPANY.
1.3 COMPANY CREATION AND PROMOTION OF CROSSWALK AMERICAN VALUES MANAGED
ACCOUNTS:
The COMPANY will create, register and market the Crosswalk American Values
Managed Accounts, committing a minimum of $130,000 in planning, registration,
development, and promotion through either direct mail, investor communiques
and/or product launch events during the first year of this Agreement.
2.0 COMMERCIAL TERMS
2.1 TERM OF AGREEMENT
This Agreement will remain in tact until midnight November 30, 1999. Unless
either party provides to the other party, a sixty day written notice of intent
to terminate this Agreement on November 30, 1999, the Agreement will
automatically renew for a one year period from November 30, 1999. After November
30, 1999, either party may terminate the agreement, provided that the
terminating party provide to the other party, a sixty day written notice of
intent to terminate this Agreement.
If DIDAX terminates the Agreement, all fees as described in Section 2.2 shall
continue to be paid to DIDAX by the COMPANY, on all approved and completed sales
from referrals provided by DIDAX, prior to the date of termination, for the
services of Quantum American, Inc. or Quantum Gabelli, LP.
If the COMPANY terminates this Agreement, it shall continue to pay DIDAX all
fees as described in Section 2.2, received by the COMPANY on all approved and
completed referrals provided by DIDAX, prior to the date of termination, for the
services of Quantum American, Inc.
<PAGE> 9
and/or Quantum Gabelli, LP, for as long as the referred purchasers remain
clients of the COMPANY.
2.2 COMPENSATION
Crosswalk American Values Managed Accounts:
DIDAX will receive 40% of COMPANY's net management fees (after paying Haugen's
license fee, or Gabelli Fixed Income 49% of fixed income fees). Haugen license
fees are .1% on the first $100 million; .05% on the next $100 million; and .03%
on all over $200 million.
Payment Terms
The COMPANY agrees to pay DIDAX the amounts indicated above in this Section 2.2,
quarterly in arrears, no more than 45 days beyond the close of the quarter.
2.3 DISPUTE RESOLUTION
Should any dispute between the COMPANY and DIDAX, or its employees, arise
regarding any aspect of this Agreement, it is herein agreed by both COMPANY and
DIDAX that the matter, or matters, will be resolved only by binding arbitration
and that the arbitrator of such dispute, or disputes, shall be a person or firm
of recognized good standing in the securities industry, mutually agreed upon by
both parties.
2.4 PUBLICITY, CONFIDENTIALITY AND NONDISCLOSURE
Neither party shall publish or make known to others any confidential information
which is proprietary to the other party which is obtained in connection with or
as a result of its work hereunder and which is not in the public domain.
"Confidential Information" shall mean any information relating to or disclosed
in the course of this Agreement that is or should reasonably be understood to be
confidential or proprietary to the Disclosing Party, including but not limited
to the material terms of this Agreement; technical processes and formulas;
source code; product designs; sales, cost and other financial information;
product and business plans; projections; and marketing data. "Confidential
Information" shall not include information (1) already lawfully known to or
independently developed by the receiving Party; (2) disclosed in published
materials; (3) generally known to the public; (4) lawfully obtained from any
third party (provided that such third party also lawfully obtained such
information); or (5) required to be disclosed by law.
The Receiving Party acknowledges the confidential and proprietary nature of the
Disclosing Party's Confidential Information and agrees that it shall not
discuss, reveal or disclose the Disclosing Party's Confidential Information for
any purpose other than as contemplated hereby, in each case, without the prior
written consent of the Disclosing Party. The Receiving Party agrees to take
reasonable precautions to prevent unauthorized or inadvertent disclosure of
Confidential Information of the Disclosure Party.
<PAGE> 10
The Receiving Party will, at the request of the Disclosing Party, during the
term of this Agreement, promptly return all Confidential Information held or
used by the Receiving Party in whatever form, or at the discretion of the
Disclosing Party, promptly destroy all such Confidential Information, including
all copies thereof, and those portions of all documents that incorporate such
Confidential Information.
The provisions of this section of the Agreement related to Confidential
Information shall survive the termination of this Agreement for a period of
three years.
3.5 INDEMNIFICATION:
Either party will defend, indemnify, save, and hold harmless the other party and
the officers, directors, agents, affiliates, distributors, franchisees, and
employees of the other party from any and all third party claims, demands,
liabilities, costs or expenses, including reasonable attorneys' fees, resulting
from the indemnifying party's breach of any duty, representation, or warranty of
this Agreement, except where such liabilities result from the gross negligence
or knowing and willful misconduct of the other party. Without limiting the
generality of the foregoing, COMPANY will defend, indemnify, save and hold
harmless DIDAX against any liabilities arising out of 1) any injury to person or
property caused by any data provided to DIDAX by COMPANY (including but not
limited to any item sold or advertised in connection with COMPANY's data), 2)
any defamatory, libelous or illegal or allegedly defamatory, libelous or illegal
data provided to DIDAX by COMPANY, and 3) any data infringing or allegedly
infringing the proprietary rights (including but not limited to any intellectual
property rights) of a third party, 4) any claim that any item(s) sold or
advertised in connection with COMPANY's data does not perform or was not priced
as advertised and/or does not comply with all local, state, federal and
international Securities law requirements and all other relevant treaties,
regulations, ordinances and the like. Prompt notice of any claim is a condition
of the obligation of indemnity.
3.6 LIMITATION OF LIABILITY
DIDAX will make reasonable efforts to ensure the accuracy and reliability of
data presented on crosswalk, however, COMPANY acknowledges that DIDAX, its
officers, directors, employees and third party content providers will not be
held liable for any damages suffered or incurred by COMPANY or any third party
arising out of any faults, interruptions or delays in broadcast or any
inaccuracies, errors or omissions on crosswalk, however such faults,
interruptions, delays, inaccuracies, errors or omissions arise.
Neither Party shall be liable or deemed to be in default for any delay or
failure in performance under this Agreement or interruption of service resulting
directly or indirectly from acts of God; civil or military authority; acts of
public enemy; war; riots; civil disturbances; insurrections; acts of government;
accidents; fire or other casualty; explosions; earthquakes; floods; the
elements; strikes; labor disputes; failure of telecommunications; shortages of
essential parts, materials, labor, or transportation; or any material cause
beyond the reasonable control of such Party.
<PAGE> 11
Under no circumstances will either party, its officers, directors, employees and
third party content providers be liable for any indirect, incidental, special or
consequential damages with respect to data provided on crosswalk, including lost
profits regardless of whether such damages could have been foreseen or prevented
by either party.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, NEITHER PARTY MAKES, AND EACH
PARTY HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATIONS OR WARRANTIES, EXPRESS
OR IMPLIED, INCLUDING BUT NOT LIMITED TO ANY WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE AND IMPLIED WARRANTIES ARISING FROM COURSE OF
DEALING OR COURSE OF PERFORMANCE.
3.7 NOTICE
Notices under this Agreement shall be sufficient if in writing and if personally
delivered, delivered by a major commercial overnight delivery courier service,
sent by facsimile, or mailed by U.S. mail, to a Party at its address set forth
below or as amended by notice pursuant to this Section. Unless actually received
earlier, notices shall be deemed received five (5) days after deposit in the
U.S. mail or one (1) day after being transmitted by overnight delivery courier
service or by facsimile.
If to Quantum American, Inc.: Quantum American, Inc.
938 Lafayette Street
New Orleans, LA 70113
Fax No.: 504-525-7868
If to DIDAX INC.: DIDAX INC.
4206F Technology Court
Chantilly, VA 20151
Attention: Scott Fehrenbacher
Fax No.: 703-968-4819
3.8 ASSIGNMENT AND SEVERABILITY
This Agreement is not assignable by either Party without the written consent of
the other. This Agreement shall be binding upon and shall inure to the benefits
of the parties and their respective successors. If any provision of this
Agreement is determined by a court of competent jurisdiction to be invalid or
unenforceable, such determination shall not affect the validity, or
enforceability of any other part or provision of this Agreement.
3.9 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the parties with respect
to the subject matter hereof and cancels, supersedes and inures all and any
previous Agreements between Quantum American, Inc., DIDAX INC., and the
Institute for American Values Investing as indicated by consent below of William
Parker, President of DIDAX INC., and Scott Fehrenbacher, Money Channel Manager
for DIDAX and President of the Institute for American Values Investing or other
previous proposals, both oral and written, negotiations, representations,
commitments, writings, and all other communications between the parties. This
Agreement may
<PAGE> 12
not be changed or modified except by an instrument in writing signed and
accepted by both parties, and no change, termination, or attempted waiver of any
of the provisions hereof shall be binding unless in writing and signed by the
parties against whom the same is sought to be enforced.
THUS DONE AND SIGNED, at New Orleans, Louisiana this 20th day of November, 1998,
in the presence of the undersigned competent witnesses.
DIDAX INC. QUANTUM AMERICAN, INC.
Signature [SIG] Signature [SIG]
--------------------- ----------------------
Title CEO / PRESIDENT Title PRESIDENT
--------------------- ----------------------
WITNESSES
[SIG]
- -------------------------------
CONSENT: CONSENT:
INSTITUTE FOR AMERICAN VALUES INVESTING DIDAX INC.
Signature [SIG] Signature [SIG]
--------------------- ----------------------
Title PRESIDENT Title CEO / PRESIDENT
--------------------- ----------------------
WITNESSES WITNESSES
[SIG]
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 10.42
END USER LICENSE AGREEMENT FOR VIGNETTE SOFTWARE
- -------------------------------------------------------------------------------
IMPORTANT---READ CAREFULLY: This is a legal agreement between you (either an
individual or an entity, also the "Client") and Vignette Corporation
("Vignette") for the Vignette software product enclosed or identified above,
which includes the Vignette StoryServer software and associated media and
printed materials, and may include "online" or electronic documentation
("SOFTWARE PRODUCT" or "SOFTWARE"). By opening the sealed software packages,
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promptly return the unused SOFTWARE PRODUCT to the place from which you obtained
it for a full refund.
- --------------------------------------------------------------------------------
The SOFTWARE PRODUCT is protected by copyright laws and international treaties,
as well as other intellectual property laws and treaties. The SOFTWARE PRODUCT
is licensed, not sold.
1. GRANT OF LICENSE. Subject to the terms and conditions of this agreement,
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and/or web sites to end-users.
c. DEVELOPER LICENSE. If you purchased a Developer License, you may
utilize the SOFTWARE up to the maximum number of named users
specified on the applicable license schedule.
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the SOFTWARE up to the maximum number of concurrent users specified
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incidental damages, the above limitation may not apply to you.
7. NOTICE. Should you have any questions concerning this Agreement, or if you
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8. TERMINATION. This Agreement shall remain effective until terminated by either
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by destroying all copies of the SOFTWARE. Termination of this Agreement shall
not relieve you of any obligation not to disclose the SOFTWARE.
<PAGE> 2
9. GOVERNING LAW. This Agreement is governed by the laws of Texas without
application of the principles of conflicts of law. Should any provision of this
Agreement be held by a court of law to be illegal, invalid or unenforceable, the
legality, validity, and enforceability of the remaining provisions of this
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obtaining the prior written consent of Vignette and all applicable export
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13. US GOVERNMENT RESTRICTED RIGHTS. If the SOFTWARE is acquired under the terms
of a proposal or agreement with the United States Government or any contractor
thereof, the SOFTWARE is subject to the following: (a) For acquisition by or on
behalf of civilian agencies, as necessary to obtain protection as "commercial
computer software" and related documentation in accordance with the terms of
this Commercial Software Agreement as specified in 48 C.F.R. 12.212 of the
Federal Acquisition Regulations and its successors; (b) For acquisition by or on
behalf of units of the Department of Defense ("DOD") as necessary to obtain
protection as "commercial computer software" and related documentation in
accordance with the terms of this commercial computer software license as
specified in 48 C.F.R. 227-7202-2 of the DOD F.A.R. Supplement and its
successors.
<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
Shares Price Proceeds IPO Price Treas. Stk.
------ ----- -------- --------- -----------
<S> <C> <C> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period
Rescission reduced on 8/1/97 by 6,000 shares
Rescission reduced on 8/4/97 by 6,000 shares
Rescission reduced on 9/5/97 by 15,000 shares
Rescission reduced on 12/16/97 by 6,000 shares
Stock sold during the year:
PK
Lasmanis
IPO
Junior Notes
gofishnet stock:
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period
Detachable Warrants 22,260 4.00 89,040 5.00 17,808
End of period 12/31/97
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE: YEAR ENDED DECEMBER 31, 1997
Net Shares Shares subject Total Grant/Purch.
Added to Recission Shares Date
----- ------------ ------ ----
<S> <C> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 1,160,376 607,434 552,942 01/01/97
Rescission reduced on 8/1/97 by 6,000 shares 1,160,376 601,434 558,942 08/01/97
Rescission reduced on 8/4/97 by 6,000 shares 1,160,376 595,434 564,942 08/04/97
Rescission reduced on 9/5/97 by 15,000 shares 1,160,376 580,434 579,942 09/05/97
Rescission reduced on 12/16/97 by 6,000 shares 1,160,376 574,434 585,942 12/16/97
Stock sold during the year:
PK 40,000 0 40,000 04/21/97
Lasmanis 2,212 0 2,212 04/23/97
IPO 2,000,000 0 2,000,000 10/03/97
Junior Notes 340,000 0 340,000 10/06/97
gofishnet stock:
122,055 0 122,055 01/01/97
130,292 0 130,292 12/01/97
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 50,962 0 50,962 01/01/97
Detachable Warrants 4,452 0 4,452 07/10/97
End of period
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS PER SHARE: YEAR ENDED DECEMBER 31, 1997
Diluted Basic
01/01/98 WithGofish WithGofish
Days Weighted Weighted
Outstanding Shares Shares
----------- ------ ------
<S> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 212 117,223,704 117,223,704
Rescission reduced on 8/1/97 by 6,000 shares 3 1,676,826 1,676,826
Rescission reduced on 8/4/97 by 6,000 shares 32 18,078,144 18,078,144
Rescission reduced on 9/5/97 by 15,000 shares 102 59,154,084 59,154,084
Rescission reduced on 12/16/97 by 6,000 shares 16 9,375,072 9,375,072
------------------------------------------------------
365 205,507,830 205,507,830
Stock sold during the year:
PK 255 10,200,000 10,200,000
Lasmanis 253 559,636 559,636
IPO 90 180,000,000 180,000,000
Junior Notes 87 29,580,000 29,580,000
gofishnet stock:
334 40,766,370 40,766,370
31 4,039,052 4,039,052
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 365 18,601,130
Detachable Warrants 175 779,100
---------------------------------------
490,033,118 470,652,888
365 365
---------------------------------------
End of period Weighted average share outstanding 1,342,556 1,289,460
Net loss -4,271,249 -4,271,249
---------------------------------------
Net loss per share -3.18 -3.31
</TABLE>
<PAGE> 2
DIDAX INC.
COMPUTATION OF EARNINGS PER SHARE
31-DEC-98
<TABLE>
<CAPTION>
BASIC EARNINGS PERS HARE: FOR THE YEAR ENDED DECEMBER 31, 1998
Common Exercise Assumed Assumed
Shares Price Proceeds IPO Price Treas. Stk.
------ ----- -------- --------- -----------
<S> <C>
Common Stock
Assumed issued and outstanding - beginning of period
Rescission reduced on 3/20/98 by 553,184 shares
and on 12/31/98 by remaining 21,250 shares
Stock sold during the year:
gofishnet stock:
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period
AVI Asset Purchase
Underwriter Warrants Exercised:
Purchase Warrants Exercised:
End of period 12/31/98
</TABLE>
<TABLE>
<CAPTION>
BASIC EARNINGS PERS HARE: FOR THE YEAR ENDED DECEMBER 31, 1998
Net Shares Shares subject Total Grant/Purch.
Added to Recission Shares Date
----- ------------ ------ ----
<S> <C> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 3,542,588 574,434 2,968,154 01/01/98
Rescission reduced on 3/20/98 by 553,184 shares 3,542,588 21,250 3,521,338 03/20/98
and on 12/31/98 by remaining 21,250 shares 3,542,588 0 3,542,588 12/31/98
Stock sold during the year:
gofishnet stock: 130,292 0 130,292 01/01/98
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 55,414 0 55,414 01/01/98
AVI Asset Purchase 5,000 0 5,000 08/07/98
Underwriter Warrants Exercised: 29,500 0 29,500 11/30/98
9,500 0 9,500 12/01/98
4,500 0 4,500 12/08/98
500 0 500 12/24/98
Purchase Warrants Exercised: 1,000 0 1,000 12/01/98
15,500 0 15,500 12/02/98
500 0 500 12/04/98
19,625 0 19,625 12/07/98
18,300 0 18,300 12/08/98
50 0 50 12/10/98
20,000 0 20,000 12/11/98
100 0 100 12/17/98
10,000 0 10,000 12/18/98
27,000 0 27,000 12/21/98
85,000 0 85,000 12/22/98
102,000 0 102,000 12/23/98
14,000 0 14,000 12/24/98
End of period
</TABLE>
<TABLE>
<CAPTION>
01/01/99 Fully Diluted Basic
Days Weighted Weighted
Outstanding Shares Shares
----------- ------ ------
<S> <C> <C> <C>
Common Stock
Assumed issued and outstanding - beginning of period 78 231,516,012 231,516,012
Rescission reduced on 3/20/98 by 553,184 shares 286 1,007,102,668 1,007,102,668
and on 12/31/98 by remaining 21,250 shares 1 3,542,588 3,542,588
------------------------------- ------------------------
365 1,242,161,268 1,242,161,268
------------------------------- ------------------------
Stock sold during the year:
gofishnet stock: 365 47,556,580 47,556,580
Grant/Exercise of warrants:
Assumed issued and outstanding - beginning of period 365 20,226,110 -
AVI Asset Purchase 147 735,000 735,000
Underwriter Warrants Exercised: 32 944,000 944,000
31 294,500 294,500
24 108,000 108,000
8 4,000 4,000
Purchase Warrants Exercised: 31 31,000 31,000
30 465,000 465,000
28 14,000 14,000
25 490,625 490,625
24 439,200 439,200
22 1,100 1,100
21 420,000 420,000
15 1,500 1,500
14 140,000 140,000
11 297,000 297,000
10 850,000 850,000
9 918,000 918,000
8 112,000 112,000
------------------------ ------------------------
1,316,208,883 1,290,452,848
365 365
------------------------ ------------------------
End of period Weighted average share outstanding 3,606,052 3,535,487
Net loss (3,459,055) (3,459,055)
------------------------ ------------------------
Net loss per share (0.96) (0.98)
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS'
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (File No. 33-69423); and the Registration Statement on Form SB-2 (File
No. 333-25937), and the Post Effective Amendment No. 1 of Form SB-2 (File No.
333-25937) of our report dated February 16, 1999, with respect to the
consolidated financial statements of DIDAX INC, included in the Annual Report on
Form 10-KSB for the year ended December 31, 1998.
Hoffman, Morrison & Fitzgerald, P.C.
McLean, Virginia
February 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,234,451
<SECURITIES> 2,743,277
<RECEIVABLES> 352,408
<ALLOWANCES> 0
<INVENTORY> 7,819
<CURRENT-ASSETS> 4,478,105
<PP&E> 597,260
<DEPRECIATION> 275,466
<TOTAL-ASSETS> 4,902,583
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 14,908,979
<OTHER-SE> 666,722
<TOTAL-LIABILITY-AND-EQUITY> 4,902,583
<SALES> 0
<TOTAL-REVENUES> 1,083,294
<CGS> 636,348
<TOTAL-COSTS> 4,126,189
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,947
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,459,055)
<EPS-PRIMARY> (0.98)
<EPS-DILUTED> (0.98)
</TABLE>
