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Filed Pursuant to Rule 424(b)(3)
Registration No. 333-25937
DIDAX INC.
24,000 COMMON STOCK UNDERWRITER WARRANTS
55,000 WARRANT UNDERWRITER WARRANTS
55,000 UNDERWRITER UNDERLYING WARRANTS
79,000 SHARES OF COMMON STOCK UNDERLYING
24,000 COMMON STOCK UNDERWRITER WARRANTS AND
55,000 UNDERWRITER UNDERLYING WARRANTS
PROSPECTUS
This prospectus relates to the offering by DIDAX INC. (the "Company") of
24,000 Common Stock Underwriter Warrants (the "Common Stock Underwriter
Warrants"), 55,000 Warrant Underwriter Warrants (the "Warrant Underwriter
Warrants"), 55,000 Underwriter Underlying Warrants ("the Underwriter Underlying
Warrants"), and an aggregate of 79,000 shares (the "Offered Shares") of Common
Stock, $.01 par value per share (the "Common Stock"), issuable upon the exercise
of the Common Stock Underwriter Warrants and the Underwriter Underlying
Warrants. The Common Stock Underwriter Warrants, the Warrant Underwriter
Warrants, and the Underwriter Underlying Warrants are sometimes hereinafter
collectively referred to as the "Warrants." The Common Stock Underwriter
Warrants allow certain persons to purchase through September 24, 2002, up to
24,000 shares of Common Stock of the Company at a purchase price of $8.25 per
share. The Warrant Underwriter Warrants, allow certain persons to purchase
through September 24, 2002, up to 55,000 Underwriter Underlying Warrants at a
purchase price of $.309375 per warrant, each of which Underwriter Underlying
Warrant entitles the holder to purchase one share of Common Stock of the Company
at a purchase price of $8.25 per share. The securities offered hereby are not
exercisable unless, at the time of exercise, the Company has a current
prospectus covering the shares of Common Stock issuable upon their exercise and
such shares have been registered, qualified or deemed to be exempt under the
securities laws of the states of residence of the exercising holders of the
Warrants.
The Company's Common Stock is quoted on the Nasdaq SmallCap Market under
the symbol "AMEN". On May 3, 1999, the closing price of the Common Stock as
quoted on Nasdaq was $16.875 The holders of the Warrants do not have any of the
rights, privileges or liabilities of the Company stockholders prior to warrant
exercise.
THE SECURITIES ARE HIGHLY SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK
AND SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD THE LOSS OF THEIR ENTIRE
INVESTMENT. IN ADDITION, PURCHASERS OF THE SECURITIES WILL SUFFER IMMEDIATE
SUBSTANTIAL DILUTION IN THAT THE BOOK VALUE PER SHARE OF THE COMMON STOCK AFTER
THIS OFFERING WILL BE SUBSTANTIALLY LESS THAN THE PUBLIC OFFERING PRICE OF THE
COMMON STOCK. SEE "RISK FACTORS" AND "DILUTION" AT PAGES [7] AND [18].
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting Discount Proceeds to Company (1)
Offering Price -----------------------
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Underlying Underwriter Warrant $0.309375 $0.0 $0.309375
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Per Share underlying Common Stock $8.25 $0.0 $8.25
Underwriter Warrants and Underlying
Underwriter Warrants
- ------------------------------------------------------------------------------------------------------------------------------
Total $668,765 $0.00 $668,765
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(1) Before deducting expenses payable by the Company estimated at $20,000
(collectively, the "Offering Costs").
THE DATE OF THIS PROSPECTUS IS May 4, 1999
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FORWARD-LOOKING AND CAUTIONARY STATEMENTS
Certain statements made herein that are not historical are
forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. The words "estimate," "project," "intend," "expect," "believe," and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below under "Risk Factors."
For additional information regarding these and other risks and uncertainties
associated with the Company's business, see "Risk Factors" below, as well as the
Company's reports filed from time to time with the Commission.
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Post-Effective Amendment to a Registration Statement on Form
SB-2 (as so amended, the "Registration Statement"), pursuant to the Act, with
respect to the offer, issuance and sale of the Warrants and Offered Shares. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits thereto. The statements contained in this Prospectus
as to the contents of any contract or other document identified as exhibits in
this Prospectus are not necessarily complete, and in each instance, reference is
made to a copy of such contract or document filed as an exhibit to the
Registration Statement, each statement being qualified in any and all respects
by such reference. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
exhibits thereof which may be inspected without charge at the principal office
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC
20549.
On September 24, 1997, the Company became subject to the informational
requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act")
and, in accordance therewith, is required to file reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). The Common Stock is listed on Nasdaq. Accordingly, such reports,
proxy statements and other information can be inspected and copied at the
Commission's principal office, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549; the Northeast Regional Office of the Commission at
7 World Trade Center, Suite 1300, New York, New York 10048; and the Midwest
Regional Office of the Commission, Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661, where copies may be obtained upon payment
of the fees prescribed by the Commission, as well as at the offices of Nasdaq,
1735 K Street, N.W., Washington, D.C. Such documents may also be obtained
through the website maintained by the Commission at http://www.sec.gov.
INVESTORS SHOULD CAREFULLY REVIEW THE FINANCIAL STATEMENTS WHICH ARE AN
INTEGRAL PART OF THIS PROSPECTUS.
The Company's financial information for the fiscal years ended December
31, 1997 and 1998 included in this Prospectus include the operations of
gofishnet.com, inc., an Internet retailer acquired by the company in February
1998.
ATTENTION CALIFORNIA RESIDENTS: Offers and sales of the Securities of the
Company made to California residents pursuant to this Prospectus are restricted
to individuals who meet suitability standards of not less than $250,000 liquid
net worth (net worth exclusive of home, home furnishings and automobiles) plus
$100,000 annual gross income, or $500,000 liquid new worth (net worth exclusive
of home, home furnishings and automobiles).
The Company will provide without charge to each person who receives a
Prospectus, upon written or oral request of such person, a copy of any
information that is incorporated by reference in the Prospectus (not including
exhibits in the information that is incorporated by reference unless the
exhibits themselves are specifically incorporated by reference.) Such requests
may be directed to the Secretary, DIDAX INC., 4206F Technology Court, Chantilly,
VA 20151. Telephone 703-968-4808 Ext. 23.
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TABLE OF CONTENTS
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Page
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Prospectus Summary........................................ 4
Risk Factors.............................................. 7
Use of Proceeds........................................... 15
Capitalization............................................ 16
Dilution.................................................. 17
Management's Discussion and
Analysis or Plan of Operation........................... 18
Business.................................................. 24
Management................................................ 36
Principal Shareholders.................................... 43
Description of Securities................................. 46
Plan of Distribution...................................... 48
Legal Proceedings......................................... 48
Legal Matters............................................. 48
Experts................................................... 48
Financial Statements F-1
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PROSPECTUS SUMMARY
The following is qualified in its entirety by reference to the more
detailed information and financial statements, including the notes thereto,
appearing elsewhere in this Prospectus. Each prospective investor is urged to
read this Prospectus in its entirety.
THE COMPANY
DIDAX INC. 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 e-mail 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. On January 4,
1999, conditions were met for the Company to call for redemption the certain
Purchase Warrants which were part of the IPO. 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 $16.3 million in net
proceeds to the Company. In addition, as of the date of this Prospectus, 166,000
Common Stock Underwriter Warrants, and 195,000 Warrant Underwriter Warrants have
been exercised, resulting in $3,038,578 in net proceeds to the
Company.
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); and 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 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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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 $4,271,249 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's corporate headquarters are located at 4206F Technology
Court, Chantilly, Virginia 20151 and its telephone number is (703)968-4808, its
fax number is (703) 968-4819 and its Internet address is
http://www.crosswalk.com.
THE OFFERING
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Securities offered............................................... 24,000 Common Stock Underwriter Warrants, which
grants certain persons through September 24, 2002,
the right to purchase up to 24,000 shares of Common
Stock of the Company at a purchase price of $8.25
per share, 55,000 Warrant Underwriter Warrants
which grant certain persons through September 24,
2002, the right to purchase, up to 55,000
Underwriter Underlying Warrants at an exercise price
of $.309375 per warrant, each of which Underwriter
Underlying Warrant entitles the holder to purchase
through September 24, 2002, one share of Common
Stock of the Company at a price of $8.25 per share,
an aggregate of 79,000 shares of the Company's
Common Stock, underlying 24,000 Common Stock
Underwriter Warrants, and 55,000 Underwriter
Underlying Warrants. The Warrants offered hereby are
not exercisable, and the shares underlying the
Warrants are not saleable unless, at the time of
exercise, or the time of sale, as the case may be,
the Company has a current prospectus covering the
shares of Common Stock issuable upon exercise of the
Warrants and such shares have been registered,
qualified or deemed to be exempt under the
securities laws of the states of residence of the
exercising holders of the Warrants.
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Prior to this Offering........................................... 6,946,879 shares
Warrants Outstanding
Prior to this Offering......................................... 79,000 warrants
Shares of Common Stock Outstanding if all
Warrants are exercised(1)...................................... 7,025,879 shares
Estimated Net Proceeds if all Warrants are
exercised ....................................................... $668,765
Use of Proceeds.................................................. Administrative expenses, operating costs and working
capital, including product support and development,
capital equipment, marketing and sales. See "Use of
Proceeds."
Nasdaq Symbol.................................................... AMEN
Risk Factors and Dilution........................................ The securities offered hereby (the "Securities"),
involve a high degree of risk including risks
related to the failure of the Company to anticipate
and adapt to a developing market, the rejection of
the Company's services and products by Internet
users, development of equal or superior services or
products by competitors and the failure of the
market to adopt the Internet as a transaction
medium. The Securities should not be purchased by
investors who cannot afford the loss of their entire
investment. Purchasers of the Securities will incur
immediate substantial dilution of their investment.
See "RISK FACTORS," "DILUTION," and "FINANCIAL
STATEMENTS."
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(1) Assumes the purchase of 79,000 shares of Common Stock pursuant to (i) the
exercise of 24,000 Common Stock Underwriter Warrants at a purchase price of
$8.25 per share; and (ii) the acquisition (for an aggregate fee of $17,016), and
exercise of the 55,000 Warrant Underwriter Warrants at a purchase price of
$8.25 per share. Does not include the exercise of any outstanding options
granted pursuant to the Company's 1997 and 1998 Stock Option Plans (options to
acquire an additional 2,328,833 shares (the "Outstanding Stock Options"). See
"MANAGEMENT -1997 and 1998 Stock Option Plans."
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RISK FACTORS
The Securities are speculative, and involve immediate substantial
dilution and a high degree of risk, including, but not necessarily limited to,
the several factors described below. Each prospective investor should consider
carefully the following risk factors inherent in and affecting the business of
the Company and this Offering before making an investment decision.
As described under "Forward-Looking and Cautionary Statements," certain
statements made herein that are not historical are forward-looking within the
meaning of the Private Securities Litigation Reform Act of 1995. These
forward-looking statements involve known and unknown risks and uncertainties.
Many factors could cause the actual results, performance or achievements of the
Company to be materially different from those contemplated by any future
statements, including, among others, those described below.
EXTREMELY LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT AND ANTICIPATION OF
CONTINUED LOSSES
The Company is a development stage company which was founded in May 1993
and commenced offering internal systems development in February 1995.
Accordingly, the Company has an extremely limited operating history upon which
an evaluation of the Company and its business can be based. The Company's
business must be considered in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development,
particularly companies in new and rapidly evolving markets such as the Internet.
Specifically, such risks include the failure of the Company to anticipate and
adapt to a developing market, the rejection of the Company's services and
products by Internet users, development of equal or superior services or
products by competitors, or the failure of the market to adopt the Internet as a
transaction medium.
There can be no assurance that the Company will be successful in addressing such
risks. Since its inception, the Company has incurred costs to develop and
enhance its technology, to create, introduce, and enhance its service and
content offerings, to establish marketing and distribution relationships, to
recruit and train an engineering and marketing group, and to build an
administrative organization. The Company intends to continue these efforts in
order to develop customer participation from the content provided in order to
generate revenue. As of December 31, 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
"MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's extremely limited operating history and the
rapid technological change experienced in the Internet industry generally, the
Company has no meaningful historical financial data upon which to base future
operating expenses. Accordingly, the Company's expense levels are based in part
on its expectations as to future revenues, of which there can be no assurance.
There can be no assurance that the Company will be able to accurately predict
the levels of future revenues, if any, and the failure to do so would have a
materially adverse effect on the Company's business, results of operations and
financial condition.
7
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The Company generates the majority of its revenue from sponsors of
crosswalk.com and expects to experience significant fluctuations in future
quarterly operating results that may be caused by the Company's inability to
retain sponsors and attract new sponsors and other factors as well. Causes of
such significant fluctuations may include, among other factors, demand for the
Company's services, the number, timing and significance of new service
announcements by the Company and its competitors, the ability of the Company to
develop, market and introduce new and enhanced versions of its services on a
timely basis, the level of product and price competition, changes in operating
expenses, changes in service mix, changes in the Company's sales incentive
strategy, and general economic factors.
The Company's operating expense levels are based, in significant part, on
the Company's expectations of future revenue on a quarterly basis. If actual
revenue levels on a quarterly basis are below management's expectations, both
gross margins and results of operations are likely to be adversely affected
because a relatively small amount of the Company's costs and expenses varies
with its revenue in the short term. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION."
BROAD DISCRETION IN APPLICATION OF PROCEEDS
Management of the Company has broad discretion to adjust the application
and allocation of the net proceeds, in order to address changed circumstances
and opportunities. As a result of the foregoing, the success of the Company will
continue to be substantially dependent upon the discretion and judgment of the
management of the Company with respect to the application and allocation of the
net proceeds of the Company to date, and of the Offering contemplated hereby.
Pending use of such proceeds, the net proceeds of this Offering will be invested
by the Company in temporary, short-term interest-bearing obligations. See "USE
OF PROCEEDS."
EXERCISE OF WARRANTS MAY HAVE DILUTIVE EFFECT ON MARKET
The Warrants will provide, during their term, an opportunity for the
holder to profit, upon exercise, from a rise in any market price of the Common
Stock, with resulting dilution in the ownership interest in the Company held by
the then present stockholders. Holders of Warrants most likely would exercise
those Warrants and purchase the underlying Common Stock at a time when the
Company may be able to obtain capital by a new offering of securities on terms
more favorable than those provided by the Securities, in which event the terms
on which the Company may be able to obtain additional capital would be adversely
affected.
DEVELOPING MARKET; VALIDATION OF THE INTERNET AS AN EFFECTIVE COMMERCE MEDIUM
The market for the Company's services and products has recently begun to
develop, is rapidly evolving and is characterized by an increasing number of
market entrants who have introduced or developed services and products for use
on the Internet. As a result, the Company's mix of services and products may
undergo substantial changes as the Company reacts to competitive and other
developments in the overall Internet market. The Company's market is highly
dependent upon the increased use of the Internet for information, interaction,
distribution and commerce. In particular, the Company believes that the Internet
is still an unproven medium for paid services such as the Company's.
Accordingly, the Company's future operating results will depend substantially
upon the increased use of the Internet by individuals and companies for
information, interaction, distribution and commerce, and the emergence of the
Internet as an effective commerce medium. Moreover, critical issues concerning
the commercial use of the Internet (including security, reliability, cost, ease
of use, access, quality of service and acceptance of advertising), remain a
barrier to entry for many individuals and businesses and therefore may impact
the rate of growth of Internet use. If widespread commercial use of the Internet
does not develop, or if the Internet does not develop as an effective commerce
medium, the Company's business, results of operations and financial condition
will be materially adversely affected.
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TECHNOLOGICAL CHANGE; DEPENDENCE ON RECENTLY INTRODUCED AND NEW PRODUCTS AND
RISK OF PRODUCT DELAYS
The market in which the Company competes is characterized by rapidly
changing technology, evolving industry standards, frequent new service and
product announcements, introductions and enhancements and changing customer
demands. These market characteristics are exacerbated by the emerging nature of
the Internet and the apparent need of companies from a multitude of industries
to offer Internet-based products and services. Accordingly, the Company's future
success will depend in significant part on its ability to adapt to rapidly
changing technologies, the ability to adapt its services and products to
evolving industry standards, and to continually improve the performance,
features and reliability of its services and products in response to both
evolving demands of the marketplace and competitive service and product
offerings. The failure of the Company to adapt to such changes and evolution
would have a materially adverse effect on the Company's business, results of
operations and financial condition.
Since advertising and retail sales are based entirely upon the use of the
Company's marketed services and products by Internet consumers, broad acceptance
of the Company's services and products offerings by Internet consumers is
critical to the Company's future success. Failure of the Company to successfully
design, develop, test and introduce new services and products to achieve market
acceptance could prevent the Company from developing its desired family of
services and products. Furthermore, there can be no assurance that the Company
will not experience difficulties that could delay or prevent the successful
development, introduction or marketing of these services and products, or that
its new or recently introduced services and products and enhancements thereon
will adequately meet the requirements of the marketplace and achieve any degree
of significant market acceptance. If the Company is unable, for technological or
other reasons, to develop and introduce new services, products or enhancements
of services and products in a timely manner in accordance with its business
model or in response to changing market conditions or customer requirements, or
if the services provided do not achieve a significant degree of market
acceptance, the Company's business, results of operations and financial
condition would be materially adversely affected.
UNCERTAINTY OF PRICING OF ADVERTISING
The intense competition faced by the Company in the sale of Internet
advertising from online service providers and search engine companies, including
competition from other firms focused on Christian content, has resulted and will
continue to result in a wide range of rates quoted by different vendors for a
variety of advertising services. This, combined with a limitation on the type
and content of advertising acceptable to the Company for use on 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 a
recognition of its services, products and technology. There can be no assurance
that the Company will be able to establish additional content relationships,
retain existing relationships or broadly promote its services and products and
generate demand for its services and products, and the inability to do so would
have a material adverse effect on the Company's business, results of operations
and financial condition. See "BUSINESS."
DEPENDENCE ON THE INTERNET
Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace. The Internet has experienced, and is expected to
continue to experience growth in the number of users and amount of traffic.
There can be no assurance that the Internet infrastructure will continue to be
able to support the demands placed on it by this continued growth. In addition,
the Internet could lose its viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of Internet
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<PAGE> 10
activity, or due to increased governmental regulation. There can be no assurance
that the infrastructure or complementary services necessary to make the Internet
a viable commercial marketplace will be developed, or, if developed, that the
Internet will become a viable commercial marketplace for services and products
such as those offered by the Company. If the necessary infrastructure or
complementary services or facilities are not developed, or if the Internet does
not become a viable marketplace, the Company's business, results of operations
and financial condition will be materially adversely affected. See "BUSINESS."
RISK OF CAPACITY CONSTRAINTS
A key element of the Company's strategy is to generate a high volume of
traffic to its Website, 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 located
in Chantilly, Virginia. There can be no assurance that a system failure at these
locations would not adversely affect the performance of the Company's services.
These locations are vulnerable to damage from fire, floods, earthquakes, power
loss, telecommunications failures, break-ins and similar events. Although the
Company carries property insurance, its coverage may not be adequate to
compensate the Company for all losses that may occur. Despite the implementation
of network security measures by the Company, its servers are also vulnerable to
computer viruses, physical or electronic break-ins and similar disruptive
problems. Computer viruses, break-ins or other problems caused by third parties
could lead to interruptions, delays or cessations in service to users of the
Company's services and products. The occurrence of any of these risks could have
a material adverse effect on the Company's business, results of operations and
financial condition. See "BUSINESS-Facilities."
GOVERNMENT REGULATION AND REGULATORY UNCERTAINTIES
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing popularity and use
of the Internet, it is possible that a number of laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy,
pricing, characteristics and quality of products and services. The
Telecommunications Reform Act of 1996 imposes criminal penalties on anyone who
distributes obscene, indecent or patently offensive communications on the
Internet (although certain provisions of that law have been stayed, in part, by
a United States District Court.) The adoption of any additional laws or
regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's services and products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company's business, results of operations and financial condition. Moreover, the
applicability to the Internet of existing laws in various jurisdictions
governing issues such as property ownership, libel and personal privacy is
uncertain. Any such new legislation or regulation could have a material adverse
effect on the Company's business, results of operations and financial condition.
10
<PAGE> 11
PROPRIETARY TECHNOLOGY; LICENSES AND INTELLECTUAL PROPERTY
The Company regards its technology as proprietary and attempts to protect
it with copyrights, trademarks, trade secret laws, restrictions on disclosure
and transferring title and other methods. The Company also generally enters into
confidentiality or license agreements with its consultants and business
partners, and generally controls access to and distribution of its documentation
and other proprietary information. Despite these precautions, it may be possible
for a third party to copy or otherwise obtain and use the Company's products or
technology without authorization, or to develop similar technology
independently. Policing unauthorized use of the Company's technology is
difficult. There can be no assurance that the steps taken by the Company will
prevent misappropriation or infringement of its technology. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights, to protect the Company's trade secrets or to determine the
validity and scope of the proprietary rights of others. Such litigation could
result in substantial costs and diversion of resources and could have a material
adverse effect on the Company's business, results of operations and financial
condition.
The Company currently owns and licenses from third parties several
technologies, as it continues to introduce new services and products and to
incorporate new technologies. There can be no assurance that these third party
technology licenses will be available to the Company on commercially reasonable
terms, if at all. The inability of the Company to obtain any of these technology
licenses could result in delays or reductions in the introduction of new
services or product shipments or could materially and adversely affect the
performance of its services until equivalent technology could be identified,
licensed and integrated. Any such delays or reductions in the introduction of
services or product shipments or adverse impact on service quality could
materially adversely affect the Company's business, results of operations and
financial condition.
FUTURE CAPITAL NEEDS, UNCERTAINTY OF ADDITIONAL FINANCING
It is anticipated that the Company has available funds sufficient to meet
its anticipated needs for working capital, capital expenditures and business
expansion for approximately 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 or enhance services or products or respond to competitive
pressures. Such inability could have a material adverse effect on the Company's
business, results of operations and financial condition. See "USE OF PROCEEDS"
and "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS AND INVESTMENTS
The Company's current strategy is to broaden the number, scope and
content of its Internet sites through the acquisition of existing sites and
businesses specializing in Internet-related technologies and content, as well as
through internally developed Internet sites and services. Any such investments
would involve many of the same risks posed by acquisitions, particularly risks
related to the diversion of resources, the inability to generate revenues, the
impairment of relationships with third parties and potential additional
expenses. There can be no assurance that the Company would be successful in
overcoming these risks or any other problems encountered in connection with such
acquisitions or new investments. See "BUSINESS."
11
<PAGE> 12
DEPENDENCE ON STRATEGIC RELATIONSHIPS
The Company has entered into certain material agreements with numerous
businesses which provide the Company services and products. The following table
provides information pertinent to these relationships:
<TABLE>
<CAPTION>
Name Service Provided Term Consideration
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
GTE Interworking Hosting Two year contract Company pays monthly fixed rate
to January 2000
netradio Software, hardware and Exclusive for Company paid one time license fee,
bandwidth infrastructure Christian format shares advertising revenue in 20% to
for Internet radio, audio, through June 1999 50% range based on size of advertising
archiving and simulcast in comparison to netradio cost for
providing spot, other services paid for
on a quotation basis
ichat Chat Technology Annual Renewal Company pays annual license fee
Cybercash Internet secure Month to month Company pays fee per transaction
transaction capability
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 Month to month Company paid one time license fee
and pays monthly usage fees
Oracle Database Management Annual Renewal Company pays one time license fee
Software and annual maintenance fee
RealNetworks Streaming Media Annual Renewal Company pays fees for services
Services rendered
</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 could be materially and adversely affected.
See "Business."
INABILITY TO MANAGE GROWTH
The rapid execution necessary for the Company to establish itself as a
leader in the developmental market for Internet-based sales of Christian related
products and advertising requires an effective planning and management process.
The Company's development has placed, and is expected to continue to place, a
significant strain on the Company's managerial, technical, sales and marketing
and administrative personnel as well as the Company's financial resources. To
manage its growth, the Company must implement operational and financial systems
and train and manage its employee base. There can be no assurances that the
Company will be able to successfully implement such systems on a timely basis,
if at all. Further, the Company will be required to manage multiple
relationships with consumers, strategic partners and other third parties. There
can be no assurance that the Company's systems, procedures or controls will be
adequate to support the Company's future operations. The Company's future
operating results will also depend on its ability to expand its sales and
marketing organizations, implement and manage new services to penetrate broader
markets and further develop and expand its organization. If the Company is
unable to manage growth effectively, the Company's business, results of
operations and financial condition will be materially adversely affected. There
can be no assurance that the Company will be able to effectively manage such
change.
12
<PAGE> 13
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 "BUSINESS-Competition."
CLASSIFICATION AS A "RELIGIOUS CORPORATION"
Article XIII of the Company's Bylaws provides that the Company is a
"religious corporation." To this end, the Company's policy is generally, to
include among its officers and directors unconditionally, and employees, where a
bona-fide occupational qualification exists, only persons who, upon request,
subscribe to the Company's Christian statement of faith. The Company deems this
as necessary in order to best identify with and service its selected Christian
market niche and to generate its Internet product which is heavily content
laden. Based on advice of counsel, the Company believes that its use of
religious criteria in employment practices does not violate federal law relating
to equal employment opportunities ("Federal Employment Law") because the Company
qualifies as an exempt religious corporation for purposes of the Federal
Employment Law. The Federal Employment Law has been subject to limited judicial
and regulatory interpretation on the question of what type of religious
corporation would be exempt from the reach of the Federal Employment Law. The
Federal Employment Law is enforced, in part, by a federal regulatory agency that
is vested with broad discretion in interpreting its meaning. The Company's
policies and procedures with respect to hiring have not been examined by federal
or state authorities. For these reasons, there can be no assurances that a
review of the Company's hiring practices or the operation of the Company's
business will not result in determinations that materially adversely affect the
Company's business, results of operations and financial condition or the
Company's ability to attain its objectives. SEE "BUSINESS.-Christian Statement
of Faith; the Company's Policy."
SHARES ELIGIBLE FOR FUTURE SALE
Of the 9,275,712 shares of Common Stock issued and outstanding before
giving effect to this Offering (which amount, for this purpose, includes
2,328,833 shares issuable upon the exercise of the Outstanding Stock Options),
3,910,963 shares are "restricted securities," as that term is defined under Rule
144 ("Rule 144"), promulgated under the Securities Act, and may only be sold
pursuant to a registration statement under the Securities Act or in compliance
with Rule 144. Furthermore, holders of 470,292 shares of the restricted
securities have agreed not to sell, transfer or otherwise dispose of any shares
of Common Stock until June 30, 1999 (130,292 shares) and September 24, 1999
(340,000 shares), or any longer period required by the laws of any state. The
Company is unable to predict the effect that any subsequent sales of the
Company's securities by its existing shareholders, under Rule 144 or otherwise,
may have on the then-prevailing market price of the Common Stock, although such
sales could have depressive effect on such market price. Nevertheless, the
possibility that substantial amounts of Common Stock may be sold in the public
market may adversely affect prevailing market prices of the Common stock and
could impair the Company's ability to raise capital through the sale of its
equity securities. See "DESCRIPTION OF SECURITIES-Shares Eligible for Future
Sale."
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.
13
<PAGE> 14
DIVIDEND POLICY
The Company has not paid any dividends on its capital stock to date and
does not currently intend to pay dividends in the foreseeable future. The
payment of dividends, if any, will be contingent upon the Company's revenues and
earnings, if any, capital requirements and general financial condition
subsequent to the Closing of this Offering. The payment of any dividends
subsequent to the Closing of this Offering will be within the discretion of the
Company's Board of Directors. It is the current intention of the Board of
Directors to retain all earnings, if any, for use in the Company's business
operations and, accordingly, the Board does not anticipate paying any cash
dividends in the foreseeable future. See "DESCRIPTION OF SECURITIES-Dividends."
NASDAQ ELIGIBILITY AND MAINTENANCE; POSSIBLE DELISTING OF SECURITIES FROM NASDAQ
Under the current rules relating to the continued listing of securities
on Nasdaq SmallCap, a company must maintain (a) at least $2,000,000 in net
tangible assets, or $500,000 in net income in two of the last three years, or a
market capitalization of at least $35,000,000, (b) public float of at least
500,000 shares, (c) market value of public float of at least $1,000,000, and (d)
a minimum bid price of $1.00 per share.
If at any time the Common Stock (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 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.
See "DESCRIPTION OF SECURITIES."
14
<PAGE> 15
USE OF PROCEEDS
The Company intends to use the net proceeds of approximately $668,000
(the "Net Proceeds") from the exercise of the Warrants to fund the sales and
marketing of crosswalk.com; for development of new crosswalk.com products and
services; and for other working capital and general corporate purposes. The
Company may also use a portion of the Net Proceeds for the acquisition of
businesses, products and technologies that are complementary to those of the
Company. As of the date of this Prospectus, the Company has no definitive
agreements with respect to any such acquisitions for which these funds would be
utilized, and no portion of the Net Proceeds has been allocated for any specific
acquisition.
The Company currently anticipates that the Net Proceeds, together with
available funds will be sufficient to meet its anticipated needs for working
capital, capital expenditures and business expansion for at least eighteen
months. Thereafter, the Company may need to raise additional funds. The Company
may need to raise additional funds sooner in order to fund more rapid expansion,
to develop new or enhanced services or products, to respond to competitive
pressures or to acquire complementary products, businesses or technologies. If
additional funds are raised through the issuance of equity or debt securities,
the percentage ownership of the shareholders of the Company will be reduced,
shareholders may experience additional dilution and such securities may have
rights, preferences or privileges senior to those of the shareholders of the
Company. There can be no assurance that additional financing will be available
on terms favorable to the Company, or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be able
to fund its expansion, take advantage of acquisition opportunities, develop or
enhance services or products or respond to competitive pressures. Such inability
could have a material adverse effect on the Company's business, results of
operations and financial condition. See "RISK FACTORS" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION."
The Company reserves the right to allocate the Net Proceeds as management
may perceive its needs from time to time in response to these and related
contingencies. Pending such uses, the Net Proceeds will be invested in
short-term, interest bearing investment grade securities and money market
instruments; provided, however, that the Company will attempt not to invest the
Net Proceeds in a manner which may result in the Company being deemed to be an
investment company under the Investment Company Act of 1940.
15
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1998 and as adjusted to give effect of the exercise of the
Warrants. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION", and
"FINANCIAL STATEMENTS"
<TABLE>
<CAPTION>
Historical at
December 31, 1998 As Adjusted
----------------- -----------
<S> <C> <C>
Stockholders Equity
(Net Capital Deficiency):
Common Stock, $.01 par value, 20,000,000 shares authorized,
4,034,956 shares issued and outstanding, 4,113,956 shares
issued and outstanding as adjusted (1)....................... 40,349 41,139
Additional paid-in capital (1)............................... 14,868,630 15,536,605
Common Stock Warrants (2).................................... 666,722 666,722
Accumulated Deficit..................................... (11,396,207) (11,396,207)
------------ ------------
Total shareholders' equity $ 4,179,494 $ 4,848,259
============ ============
</TABLE>
- -----------------
(1) Excludes the effect of (i) the exercise of 2,528,451 Purchase Warrants
through the February 12, 1999 date of redemption, which resulted in net proceeds
of $14,538,593, (ii) the exercise of 122,000 Common Stock Underwriter Warrants
for the period January 1, 1999 through April 30, 1999, which resulted in net
proceeds of $1,006,500, (iii) the exercise of 195,000 Warrant Underwriter
Warrants for the period January 1, 1999 through April 30, 1999, which resulted
in net proceeds of $1,669,077, and (iv) 2,328,833 shares of Common Stock
issuable upon exercise of Outstanding Stock Options, of which options to
purchase 1,343,357 shares are currently exercisable. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION," and "DESCRIPTION OF SECURITIES."
(2) $127,659 of the balance in Common Stock Warrants relates to an aggregate of
172,639 warrants outstanding to purchase Common Stock of the Company at $4.00,
issued to Bruce Edgington and Robert C. Varney, directors of the Company. These
warrants were issued in lieu of interest per the terms of $623,000 in notes
payable which were repaid from the proceeds of the IPO.
16
<PAGE> 17
DILUTION
The difference between the price per share of Common Stock issued
pursuant to exercise of the Warrants and the pro forma net tangible book value
per share of Common Stock of the Company after this Offering constitutes the
dilution to investors in this Offering. Net tangible book value per share is
determined by dividing the net tangible book value of the Company (total
tangible assets less total liabilities) by the number of outstanding shares of
Common Stock.
At December 31, 1998, the net tangible book value of the Company was
$4,179,494 or approximately $1.04 per share of Common Stock of the Company
(based upon 4,034,956 shares then outstanding). After giving effect to the
exercise of the Warrants and the issuance of the Offered Shares pursuant
thereto, the pro forma net tangible book value of the Company at December 31,
1998 would have been $4,848,259 or approximately $1.18 per share, representing
an immediate increase in net tangible book value of $668,765 or $.14 per share
to existing shareholders and an immediate dilution of $7.28 per share to new
investors (which represents 86.0% of the weighted average of the Offered
Shares). As of the date hereof, there are currently no plans, proposals,
arrangements, understandings or obligations with respect to the sale of
additional securities to any persons as of the prospectus date, other than the
Company's issuance of shares of Common Stock upon the exercise of the
Outstanding Stock Options. See "PROSPECTUS SUMMARY--The Offering," "PRINCIPAL
SHAREHOLDERS," "MANAGEMENT - 1997 and 1998 Stock Option Plans," and "FINANCIAL
STATEMENTS."
The following table illustrates the foregoing information with respect to
dilution to new investors on a per Share basis after this Offering:
<TABLE>
<S> <C> <C>
Weighted average offering price of Offered Shares................ $8.46
Net tangible book value per
share of Common Stock, before this Offering...................... $1.04
Increase per share of Common Stock attributable to
payment by new investors......................................... .14
-----
Pro forma adjusted net tangible book value
per share of Common Stock after this Offering.................... 1.18
----
Net tangible book value dilution to new investors
per Share of Common Stock........................................ $7.28
-----
</TABLE>
The following table sets forth as of the date of this Prospectus, with respect
to existing shareholders and new investors, on a pro forma basis, a comparison
of the number of shares of Common Stock acquired from the Company, their
percentage ownership of such shares, the total consideration paid, and the
percentage of total consideration paid No assurance can be given as to the
timing of the exercise of the Warrants or whether any or all of the Warrants
will be exercised:
<TABLE>
<CAPTION>
Securities Purchased(1) Total Consideration
----------------------- -------------------
Amount Percentage Amount(3) Percentage
------ ---------- --------- ----------
<S> <C> <C> <C> <C>
Existing Shareholders (2) 6,946,879 100.0% $32,331,851 98.0%
Investors in this Offering 79,000 100.0% $ 668,765 2.0%
---------- ----
$33,000,616 100.0%
=========== ======
</TABLE>
17
<PAGE> 18
- --------------
(1) The above table assumes no exercise of the Outstanding Stock Options. If
the Outstanding Stock Options currently exercisable had been exercised at
December 31, 1998, the net tangible book value would be increased to
$9,166,757 and the percentage of outstanding Common Stock owned by
investors in this offering would decrease to 1.8%. See "PROSPECTUS
SUMMARY--The Offering," "PRINCIPAL SHAREHOLDERS," and "MANAGEMENT - 1997
and 1998 Stock Option Plans."
(2) Of the shares, 838,735 shares were purchased by officers, directors,
promoters and affiliated persons of the Company for an aggregate
consideration of $1,501,242.
(3) Before deduction of estimated expenses of the Offering.
MARKET PRICES OF COMMON STOCK
The Company's Common Stock has been quoted in the Nasdaq Smallcap Market
under the symbols AMEN since September 24, 1997. The following table sets forth
the high and low closing sales price for the Common Stock and as reported by the
Nasdaq Smallcap Market for the periods indicated.
<TABLE>
<CAPTION>
Common Stock
------------
Period High Low
------ ------- -----
<S> <C> <C>
September 24 - December 31, 1997 $ 5.500 $ 2.0000
January 1 - March 31, 1998 $ 3.500 $ 1.8750
April 1, 1998 - June 30, 1998 $ 6.500 $ 3.2500
July 1, 1998 - September 30, 1998 $ 5.125 $ 1.8750
October 1, 1998 - December 31, 1998 $40.000 $ 2.0000
January 1, 1999 - March 31, 1999 $13.875 $ 7.6875
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the Financial
Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
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
18
<PAGE> 19
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
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.
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<PAGE> 20
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.
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.
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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 wage increase in the end of 1997, subsequent to the Company's initial
public offering ("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.
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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 years 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, 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.
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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.
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BUSINESS
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 e-mail 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. On January 4,
1999, conditions were met for the Company to call for redemption the certain
Purchase Warrants which were part of the IPO. 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 $16.3 million in net
proceeds to the Company. In addition, as of the date of this prospectus, 52,000
Common Stock Underwriter Warrants, 25,000 Warrant Underwriter Warrants have been
purchased, resulting in approximately $643,000 in net proceeds to the Company.
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); and 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 $4,271,249 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
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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.
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.
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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.
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 40 full time employees and 7
part time employees as of the date of the prospectus. Of these full time
employees, three are engaged in engineering, ten are engaged in marketing and
sales, twenty-two 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."
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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 e-mail 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 March 31, 1999, crosswalk.com had 187,500 members as compared to
74,287 members at March 31, 1998, an annual growth rate of 252%. Average monthly
page views tallied in the first quarter of 1999 reached over 4,150,000 from
601,300 a year earlier, representing approximately a sevenfold increase. In
order to enhance traffic flow to crosswalk.com, the Company is extending its
Webcast events features which in the first quarter of 1999, included the
exclusive Webcast of the 30th Annual Dove Awards. The Company has also
integrated crosswalk.com into AOL through the keyword "crosswalk" providing a
direct link to crosswalk.com from the AOL network.
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, 1998 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 to
SOMA Communications, 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 business includes music, which Jupiter
Communications, an 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 approximately $200,000 in 1998 from
approximately $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 that 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
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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 approximately $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. Approximately $44,000 of revenue was generated from
sponsorships related to crosswalk.com Career Channel in 1998.
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 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 about the consumer to sponsors and
advertisers on crosswalk.com. Site wide advertising and sponsorship revenue on
crosswalk.com amounted to approximately $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 approximately $26,000.
Web site Development and Technology Consulting Services
The Company has been engaged in providing 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
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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 approximately $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
e-mail; 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.
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
life cycle approach to customer relationship management by targeting life cycle
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 24/7 monitoring of operations and direct connections to the
Internet backbone.
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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 a proposal 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, 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 distinction 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 distinction 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 growth in its position as a 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
anticipates that it will generate additional revenue.
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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
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.
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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. With this in mind, the Company is
currently implementing the migration of database systems from Windows NT and SQL
Server to an Oracle8 Enterprise UNIX based environment served by SUN
Microsystems hardware technology.
The Company's primary servers are located offsite and maintained by GTE
InterNetworking. 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. Furthermore, weaknesses in the
Internet may compromise the security of confidential electronic information
exchanged across the Internet. This includes, but is not limited to, the
security of the physical network and security of the physical machines used for
the information transfer. Any such flaws in the Internet or the end-user
environment, or weaknesses or vulnerabilities in the Company's services or the
licensed technology incorporated in such service, would jeopardize the
confidential nature of information transmitted over the Internet and could
require the Company to expend significant financial and human resources to
protect against future breaches, if any, in order to alleviate or mitigate
problems caused by such security breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, particularly as a means of conducting commercial
transactions. To the extent that activities of the Company, or third party
contractors, involve the storage and transmission of proprietary information
(such as personal financial information or credit card numbers), security
breaches could expose the Company to a risk of financial loss or litigation or
other liabilities. Any such occurrence could reduce consumer satisfaction in the
Company's services and could have a material adverse effect on the Company's
business, results of operations or financial condition.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company's success and ability to compete is dependent in part upon
its proprietary systems and technology. While the Company relies on trademark,
trade secret and copyright laws to protect its proprietary rights, the Company
believes that the technical and creative skills of its personnel, continued
development of its proprietary systems and technology, brand name recognition
and reliable 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.
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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.
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.
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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."
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.
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PROPERTY AND FACILITIES
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. In
addition, the Company leases office space from two separate unaffiliated third
parties in Costa Mesa, California and Franklin, Tennessee pursuant to a one year
and a two year lease, respectively, for annual rental amounts of approximately
$5,000 and $14,000, respectively.
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MANAGEMENT
The following table sets forth certain information concerning the directors and
executive officers of the Company:
<TABLE>
<CAPTION>
Name Age Title
- ---- --- -----
<S> <C> <C>
James G. Buick 66 Chairman of the Board of Directors
William M. Parker(1)(3) 44 Chief Executive Officer, President and director
Dane B. West 44 Vice President Business Development and Sales
and director
William H. Bowers 39 Chief Technical Officer and director
Gary A. Struzik 43 Chief Financial Officer and Secretary
Robert C. Varney, Ph.D. 54 Vice Chairman
Bruce E. Edgington(1)(3) 41 director
John J. Meindl, Jr.(1) 42 director
Clay T. Whitehead(2) 60 director
Earl E. Gjelde(2) 54 director
W.R. 'Max' Carey(2)(3) 51 director
</TABLE>
- ------------
(1) Members of Compensation Committee
(2) Members of Audit Committee
(3) Members of Nominating Committee
JAMES G. BUICK has been Chairman of the Board of Directors since January
15, 1998, and a director of the Company since April 1997. Since 1993 he has been
self employed as a management consultant in the area of business strategic long
range financial planning. From 1984 to 1993, he was President and Chief
Executive Officer of the Zondervan Corporation, a firm engaged in the
distribution of Bibles, books, computer software, and religious gifts. He
currently is on the Board of Directors of Spartan Stores, a firm engaged in food
wholesale and operations, and is Chairman of the Board of the Dove Foundation, a
not-for-profit foundation engaged in the creation, promotion, production and
distribution of wholesome family entertainment.
WILLIAM M. PARKER, has been the Chief Executive Officer and President
since April of 1998 and a director of the Company since March of 1998. From
April 1996 through March 1998, Mr. Parker was Executive Vice President and
Manager of the Information Systems Division of CACI International Inc., an
international information technology product and services company. From 1992 to
1996, he was Executive Vice President and Director of Business Development for
CACI International Inc., where he was instrumental in winning substantial new
business, leading to significant corporate growth. Mr. Parker received a B.S.
degree from the U.S. Naval Academy.
DANE B. WEST has been the Vice President of Business Development and
Sales since June of 1998, and a director of the Company and its predecessor
entities since the Company's inception in 1993. From May 1993 to April 1998, Mr.
West was President of the Company and its predecessor entities. From January
1992 through April, 1993, Mr. West was a student at the University of Virginia.
Mr. West is an ordained minister with 15 years of ministry leadership
experience. As a pastor, he recruited, trained and managed a volunteer staff of
more than 300 persons. He has completed doctoral studies in educational
administration at the University of Virginia. He received a B.A. in Biblical
Studies from The Washington Bible College in 1978, and an M.A. in Christian
Education from Talbot Theological Seminary in 1981.
WILLIAM H. BOWERS has been the Chief Technical Officer and a director of
the Company and its predecessor entities since the Company's inception. For
portions of 1997, and 1998, Mr. Bowers served as Chief Operating Officer of the
Company. Mr. Bowers was a Branch Chief of the Central Intelligence Agency from
April, 1990 until May, 1993, where his responsibilities included providing
engineering and technical support services. Mr. Bowers received a B.S. degree in
Engineering from Virginia Polytechnic Institute in 1983.
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GARY A. STRUZIK has been the Chief Financial Officer and Secretary of the
Company since April 1997 and was Vice President Finance and Administration of
the Company's predecessor entities from February 1996 until April 1997. Mr.
Struzik was Director of Accounting for Loral Defense Systems (formally Unisys
Defense Systems) from February 1995 through February 1996 and Director of
Accounting for Unisys Defense Systems from October 1987 through February 1995,
where his responsibilities included financial statement preparation, external
audit liaison, policy and procedures. Mr. Struzik received a B.A. degree in
Economics from the State University of New York at Oswego in May 1977 and an
M.B.A. from Chapman College in October 1984.
ROBERT C. VARNEY, PH.D. has been Vice Chairman of the Board of Directors
since April of 1998, and a director of the Company and its predecessor entities
since July 1995. From July 1995 to January of 1998, Dr. Varney also served as
Chairman of the Board of Directors of the Company. From July 1995 to April of
1998, Dr. Varney also served as Chief Executive Officer of the Company. From
1993 to 1995, he managed his personal real estate holdings. Dr. Varney was
Chairman and Chief Executive Officer of International Telesystems Corporation
("ITC"), a firm engaged in outbound call center automation, from 1985 through
1993. Dr. Varney received a B.S. degree from the University of Rochester in
June, 1966 and an M.S. and a Ph.D. degree in Computer Science from Pennsylvania
State University in 1969 and 1971, respectively.
BRUCE E. EDGINGTON has been director of the Company and its predecessors
since November 1995. From 1979 through 1988, Mr. Edgington was a registered
representative with Johnston Lemon & Co., a securities broker-dealer, where his
responsibilities included the management of retail securities accounts and
administration. In 1988 he founded and continues to be an officer, director and
stockholder of DiBiasio & Edgington, a firm engaged in providing software to
investment firms and money managers.
JOHN J. MEINDL, JR. has been director of the Company since April 1997,
has been self employed as a management consultant to medium and large firms in
the area of electronic records management, Internet strategies and business
reengineering since 1996. From 1993 through 1996 Mr. Meindl was Chief Operating
Officer of OTG Software, Inc., a firm engaged in the development of electronic
imaging and optical disk storage management software. Since 1988, he has been
Chief Executive Officer of GeneSys Data Technologies, Inc., a firm engaged in
providing software and services in the area of electronic records management.
GeneSys Data Technologies, Inc. has been dormant and inactive since 1992 but was
not liquidated because of its pursuit of a claim which was successfully awarded
in 1996. In connection with winding up the affairs of GeneSys Data Technologies,
Inc. GeneSys Data Technologies, Inc. filed for bankruptcy protection in June
1996 (Case No. 96-5-50118-SD, U.S. Bankruptcy Court Baltimore, Maryland
District) and as of the date hereof has not been discharged.
CLAY T. WHITEHEAD, has been a director of the Company since April 1997
and, since 1987, has been the President of Clay Whitehead Associates, a
consulting firm in the areas of strategic planning and business development
concentrating on the telecommunications and media industries. Mr. Whitehead
holds a B.S. and M.S. in Electrical Engineering and a Ph.D. in Management, all
from the Massachusetts Institute of Technology and from 1969 through 1974 held
various federal government positions, including Director of the U.S. Office of
Telecommunications Policy.
EARL E. GJELDE has been a director of the Company since April 1997. From
1989 through 1993, he was Vice President of Chemical Waste Management, Inc. and
from 1991 to 1993 was Vice President of Waste Management Inc. (currently WMX
Technologies, Inc.). Since 1991, Mr. Gjelde has been Managing Director, Summit
Group International, Ltd., an energy and natural resource consulting firm with
Internet based security controlled document systems and Managing Director,
Summit Energy Group, Ltd., an energy development company and since 1996, a
partner in Pipeline Power Partners, LP, a natural gas services company. From
1980 through 1989, Mr. Gjelde held various federal government positions
including Under Secretary and Chief Operating Officer of the U.S. Department of
Interior from 1985 through 1989 and Special Assistant to the Secretary, Chief
Operating Officer, U.S. Department of Energy from 1982 through 1985. He is a
member of the Board of Directors of The United States Energy Association, The
World Energy Congress, the National Wilderness Institute, Allied Technologies
Group, Inc., and publicly held Electrosource, Inc.
37
<PAGE> 38
W.R. 'MAX' CAREY has been a director of the Company since June 1997.
Since 1981, he has been Chairman and Chief Executive Officer of Corporate
Resource Development, Inc., a sales and marketing consulting and training firm
based in Atlanta. He currently is also a member of the Board of Directors of
Outback Steakhouse, Inc., a restaurant franchiser and ROMAC International, a
leading specialty staffing services firm, both public companies.
The Board of Directors at DIDAX INC. may consider the addition of Board
members for appointment during 1999. Such appointment, if any, will be rendered
in a manner consistent with the Company's By-Laws and will be announced at the
time of appointment. Each director serves until the next annual meeting of
stockholders and the election and qualification of their successors. Subject to
the terms of employment agreements generally, executive officers are appointed
by the Board of Directors annually and serve at the discretion of the Board.
Each director serves until the next annual meeting of shareholders and
the election and qualification of their successors. Executive officers are
elected by the Board of Directors annually and serve at the discretion of the
Board.
EMPLOYMENT AGREEMENTS
Pursuant to the resignation of Robert C. Varney, Ph.D., as the Company's
Chief Executive Officer, the Company entered into a Conclusion of Employment
Agreement with Dr. Varney, dated February 27, 1998, Under the terms of this
Conclusion of Employment Agreement, Dr. Varney will maintain the right to
acquire 255,343 shares of the Company's Common Stock granted to him during the
course of his employment with the Company, at exercise prices ranging from $2.00
to $5.00 per share. Dr. Varney shall also have full rights to continue, at the
Company's expense, health care benefits comparable to group coverage provided by
the Company from time to time to its employees. This benefit coverage will cease
upon the date Dr. Varney is eligible for coverage by a succeeding employer, or
under other health care coverage such as medicare. Dr. Varney shall continue to
receive severance payment equivalent to his salary upon conclusion of his
employment, for a period which expires on October 22, 1999. In addition, both
Dr. Varney and the Company waived and released each other of and from any and
all claims and causes of action for damages or other relief that either Dr.
Varney or the Company may have against the other (or their personal
representatives, agents, assigns, attorneys, and their officers, directors,
employees, agents or representatives) based on Dr. Varney's employment or other
association with the Company, the conclusion of employment, or any event or
transaction that occurred before February 27, 1998.
In March, 1998, the Company entered into employment agreements with
William M. Parker, Dane B. West, William H. Bowers and Gary A. Struzik. These
employment agreements, which may be terminated by the employee or the Company
upon thirty days prior written notice, provide for annual base salaries of
$115,000 to Mr. Parker and $90,000 each for Messrs. West, Bowers and Struzik,
with incremental increases based on meeting revenue objectives as determined by
the Board of Directors, resulting in a maximum of salary of $130,000, $120,000,
$120,000, and $110,000 for Messrs. Parker, West, Bowers, and Struzik
respectively, when quarterly revenues exceed $400,000. Given achievement of the
quarterly revenue target in the fourth quarter of 1998, these maximum salary
levels commenced in the first quarter of 1999. The agreement with each of
Messrs. Parker, Bowers, West and Struzik provides that, if his employment is
terminated by the Company, then the employee is entitled to an additional six
(6) months of severance pay, health and group life coverage. Further, pursuant
to the employment agreements, each of Messrs. Parker, West, Bowers and Struzik
have agreed during the term of his respective employment with the Company and
for six months thereafter not to compete with the Company. For Messrs. West,
Bowers and Struzik, these employment agreements supersede a previous June 1997
set of employment agreements.
In addition to their employment agreements, executive officers of the
Company may participate in the 1997 and 1998 Option Plans, as defined below. The
Company does not currently have any compensation plans or similar arrangements
under which an executive officer is entitled to benefits, except group life, a
Company 401K plan, and medical and dental insurance coverage.
38
<PAGE> 39
EXECUTIVE OFFICER COMPENSATION
No person employed by the Company received salary and bonus exceeding in
the aggregate $100,000 during the fiscal years 1996, 1997 and 1998. The
following Summary Compensation Table sets forth all compensation awarded to,
earned by or paid for services rendered to the Company in all capacities during
1996, 1997 and 1998 by the Company's Chief Executive Officer and President.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
----------------------
Annual Compensation Awards
------------------- ------
Name and Principal Position Year Salary($) Bonus($) Other Annual Securities All Other
Compensation Underlying Compensation
($)(2)(3) Options/ ($) (5)
SARs (4)
<S> <C> <C> <C> <C> <C> <C>
Robert C. Varney, Ph.D., Chief Executive 1996 38,203 0 4,271 162,836 140
Officer (1) 1997 17,349 0 5,845 21,807 390
1998 23,077 0 57,631 (100,000) 0
William M. Parker
Chief Executive Officer and Pres. 1998 80,177 0 2,542 270,000 160
</TABLE>
- --------------------------------------------------------------------------------
(1) In February 1998, the Board of Directors accepted the resignation of
Robert C. Varney, Ph.D., as Chief Executive Officer of the Company,
effective upon the hire of his replacement. In March 1998, the Company
entered into an Employment Agreement with William M. Parker, whereby Mr.
Parker agreed to serve as the Company's Chief Executive Officer and
President effective April 14, 1998. Since March 23, 1998, Mr. Parker has
served as a member of the Company's Board of Directors. Pursuant to the
terms of his Conclusion of Employment Agreement, Dr. Varney shall
continue to receive severance payment equivalent to his salary upon
conclusion of his employment, for a period which expires on October 22,
1999. Dr. Varney has agreed to continue to serve as a member of the
Company's Board of Directors as Vice Chairman of the Board. (See
"EMPLOYMENT AGREEMENTS.")
(2) Other Annual Compensation represents medical insurance premiums paid by
the Company on behalf of the named executive, except for (3) below.
(3) In 1998 Dr. Varney's Other Annual Compensation consists of $51,293 of
severance pay and $6,338 of medical insurance premiums paid by the
Company on his behalf
(4) See "OPTION GRANTS IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
(5) All Other Compensation represents life insurance premiums paid by the
Company for Dr. Varney and Mr. Parker.
The following tables set forth information with respect to stock options
pursuant to the Company's stock option plans granted to the executive officers
of the Company named in the "Summary Compensation Table" during fiscal year
ended December 31, 1998, and the fiscal year-end value of unexercised options
separately identified by those which are exercisable and unexercisable. No
options were exercised during 1998 by Dr. Varney, Mr. Parker or any other
director or officer of the Company.
39
<PAGE> 40
OPTION GRANTS TABLE
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
Percent of
Number of Securities Total Options Granted to Exercise
Underlying Options Employees or Base Price
Name Granted (1) in 1998 Per Share ($) Expiration Date
---- ------- --- -- ---- --- ----- --- ---------- ----
<S> <C> <C> <C> <C>
William M. Parker 270,000 65.7% $3.00 March 23, 2008
</TABLE>
- --------------------------------------------------------------------------------
- -------------------
(1) All options are non-qualified options. In connection with the Conclusion
of Employment Agreement entered between Dr. Varney and the Company, Dr.
Varney agreed to surrender options to acquired 100,000 shares of Common
Stock, all of which options were not exercisable.
FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Value of Unexercised
Number of Unexercised Securities In-The-Money Options at FY-End
Underlying Options at FY-End 1998 1998
Name Exercisable/Unexercisable Exercisable/Unexercisable
(#) ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Robert C. Varney, PhD. 210,031/45,312 1,449,782/220,896
- -----------------------------------------------------------------------------------------------------------------------------
William M. Parker 239,000/45,000 1,643,125/309,375
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
1998 STOCK OPTION PLAN
Effective as of April 6, 1998, the Board of Directors adopted, and on
April 29, 1998, the stockholders approved, the DIDAX INC. 1998 Stock Option Plan
(the "1998 Stock Option Plan"). The purpose of the 1998 Stock Option Plan is to
advance the interests of the Company by providing an opportunity to its
directors, selected key employees and consultants to purchase shares of the
Common Stock of the Company. By encouraging stock ownership, the Company seeks
to attract, retain and motivate directors, key employees, and consultants
including ministry partners. The 1998 Stock Option Plan will be administered by
the Compensation Committee of the Board of Directors or by the Board of
Directors as a whole.
The shares that may be purchased (through the exercise of options) under
the 1998 Stock Option Plan shall not exceed in the aggregate 400,000 shares. As
of the date herein, options to purchase 341,369 shares of the Company's Common
Stock were granted and will be outstanding under the 1998 Stock Option Plan of
which options to purchase 12,500 shares are exercisable. If any stock options
granted under the 1998 Stock Option Plan shall terminate, expire or be canceled
as to any Shares, new stock options may thereafter be granted covering such
shares. In addition, any shares purchased under this 1998 Stock Option Plan
subsequently repurchased by the Company pursuant to the terms hereof may again
be granted under the 1998 Stock Option Plan. The shares issued upon exercise of
stock options under this 1998 Stock Option Plan may, in whole or in part, be
either authorized but unissued shares or issued shares reacquired by the
Company.
40
<PAGE> 41
The Board of Directors or the Compensation Committee administer the 1998
Stock Option Plan as delegated by the Board. The Board of Directors will have
sole authority to select the participants that will be granted stock options,
based on its own determination and the recommendations of the Compensation
Committee and Company management with respect to the contributions of each
participant to the success of the Company. No single participant may receive
options to purchase more than the total number of shares authorized for issuance
under the 1998 Stock Option Plan. The Compensation Committee will make
recommendations to the Board for approval of actions including, but not limited
to determining the nature, extent, timing, exercise price, vesting and duration
of stock options to the termination of the 1998 Stock Option Plan or
acceleration of stock option vesting. The Board of Directors independently, or
at the advice of the Compensation Committee, also has discretion to prescribe
all other terms and conditions consistent with the 1998 Stock Option Plan, to
interpret the 1998 Stock Option Plan, to establish any rules or regulations
relating to the 1998 Plan that it determines to be appropriate, and to make any
other; determination that it believes necessary or advisable for the proper
administration of the 1998 Stock Option Plan.
The Compensation Committee, upon approval of the Board of Directors, may
grant nonqualified stock options or incentive stock options to purchase shares
of Common Stock. The grant of stock options will be evidenced by Board
resolutions documenting their approval, and option agreements containing such
terms and provisions as are determined and approved by the Board of Directors,
including, but not limited to, the term of the stock option, vesting of the
stock option, and the exercise price of the stock option. The stock option
exercise price may be paid in cash, or, at the Company's option, in shares of
Common Stock.
Subject to the expiration and termination provisions of individual option
agreements, qualified incentive stock options expire ten years after the date of
grant. The expiration and termination periods of nonqualified stock options will
be determined by the Board of Directors based on recommendation of the
Compensation Committee and set forth in the individual stock option agreements.
Subject to the expiration and termination provisions of individual option
agreements, if a participant dies or becomes disabled, all vested stock options
may be exercised at any time within one year (or the remaining term of the stock
option, if less). If a participant ceases to be a Company employee for any other
reason, other than for cause, he or she must exercise any vested stock options
within thirty days (or the remaining term of the stock option, if less). The
Compensation Committee may recommend to extend nonqualified option exercise
dates on a cases by case basis, subject to Board approval.
The Board of Directors may amend or discontinue the 1998 Stock Option
Plan at any time, subject to certain restrictions set forth in the 1998 Stock
Option Plan, including the ability to revise the number of shares reserved for
issuance thereunder. Except in limited circumstances, no amendment or
discontinuance may adversely affect any previously granted stock option award
without the consent of the recipient thereof.
In January 1999, the Board of Directors adopted an amendment to the 1998
DIDAX INC. Stock Option Plan, for stockholder approval at the May 5, 1999 Annual
Stockholders Meeting, to increase the number of shares of Common Stock issuable
under the 1998 Plan from 400,000 to 800,000. The Board of Directors has deemed
the number of shares currently available under the 1998 Plan insufficient in
light of the continued growth in the Company's operations, including potential
increases in the number of employees and to the extent the Company completes
acquisitions of other companies or businesses.
1997 STOCK OPTION PLAN
In April 1997, the Board of Directors adopted, and the stockholders
approved the Company's 1997 Stock Option Plan (the "1997 Stock Option Plan"),
The 1997 Stock Option Plan provides for the issuance of up to 2,057,937 shares
of the Company's Common Stock. As of the date herein, options to purchase
2,057,937 shares of the Company's Common Stock were granted and will be
outstanding under the 1997 Stock Option Plan of which options to purchase
1,330,857 shares are exercisable, and 66,473 have been exercised. If any options
granted under the 1997 Stock Option Plan shall terminate, expire or be canceled
as to any shares, new options may thereafter be granted covering such shares. In
addition, any shares purchased under this 1997 Stock Option Plan subsequently
repurchased by the Company pursuant to the terms hereof may again be granted
under the 1997 Stock Option Plan. The shares issued upon exercise of options
under the 1997 Stock Option Plan may, in whole or in part, may be either
authorized but unissued shares or issued shares reacquired by the Company. The
purpose of the 1997 Stock Option
41
<PAGE> 42
Plan is to advance the interests of the Company by providing an opportunity to
its directors, employees and consultants, including ministry partners, to
purchase shares of the Company's Common Stock. By encouraging stock ownership,
the Company seeks to attract, retain and motivate directors, employees and
consultants. The 1997 Stock Option Plan provides for the grant of (i) incentive
stock options ("Incentive Options") as described in Section 422A of the Internal
Revenue Code of 1986, as amended (the "Code"); (ii) nonqualified stock options
("Nonqualified Options," and, together with the Incentive Options, the
"Options"); and (iii) rights to purchase shares of Common Stock ("Restricted
Stock") of the Company pursuant to restricted stock agreements and subscription
agreements. The Option Plan is administered by the Board of Directors, or at its
discretion, by a committee which is appointed by the Board to perform such
function. Under the terms of the 1997 Stock Option Plan, the exercise price for
Incentive Options may not be less than the fair market value of the underlying
stock at the time the Incentive Option is granted.
The 1997 Stock Option Plan has a provision which limits the number of
shares of the Company's Common Stock for which options may be granted to any
individual during any year. With this provision, options granted under the 1997
Stock Option Plan qualify as performance-based compensation for purposes of
Section 162(m) of the Code and the regulation thereunder, and the Company will
be entitled to deduct the compensation paid to certain executives pursuant to
the 1997 Stock Option Plan, notwithstanding the deduction limit contained in
Section 162(m).
Under the 1997 Stock Option Plan, the price payable upon exercise of
options may be paid in cash or check acceptable to the Company, or by any other
consideration that the Board deems acceptable. The exercise price may also be
paid in shares of the Company's Common Stock, duly owned by the optionee having
a fair market value equal to the option price on the date of exercise.
In April 1998, the Board of Directors resolved to amend the 1997 Stock
Option Plan. The substance of this change was to amend the actual administration
of the plan by making all options subject to the approval of the Board of
Directors, and in the case of a merger or a similar reorganization that the
Company does not survive, to cause only non vested stock options to be subject
to termination should the surviving entity not assume the obligation of all
granted options.
DIRECTOR COMPENSATION
In April 1997, the Company's (i) non-employee directors, other than Bruce
E. Edgington and (ii) an advisor to the Company's Board appointed by Barron
Chase Securities, Inc. (the "Advisor") each were granted under the Company's
1997 Stock Option Plan options to acquire an aggregate of 37,000 shares of the
Company's Common Stock at an exercise price of $5.00 per share, exercisable for
the following number of shares for a period of five years subsequent to the
satisfaction of the following conditions precedent (collectively the
"Non-Employee Director Options):
<TABLE>
<CAPTION>
NUMBER OF SHARES CONDITIONS PRECEDENT TO EXERCISE
---------------- --------------------------------
<S> <C>
1,000 shares per Board of Director Attendance at Board meeting
meeting for the first three years as a
member of the Board up to a maximum
of 4,000 shares per year.
5,000 shares Closing of the Company's IPO.
5,000 shares crosswalk.com's use exceeds one million hits per day.
5,000 shares The Company's quarterly earnings per share equaling or exceeding $.05.
5,000 shares The Company's quarterly earnings per share equaling or exceeding $.10.
5,000 shares The Company's quarterly earnings per share equaling or exceeding $.15.
</TABLE>
Under this compensation plan, non-employee directors excluding Bruce
Edgington and Dr. Varney, who including the Advisor have the right to acquire an
aggregate of 259,000 shares of the Company's Common Stock pursuant to the
Non-Employee Director Options. Dr. Varney did not receive any compensation as
Vice Chairman of the Board.
42
<PAGE> 43
In February 1999, the Company's non-employee directors were each granted under
the Company's 1998 Stock Option Plan, an additional 12,000 Non-Employee Director
Options to purchase shares of the Company's Common Stock at an exercise price of
$8.875 per share, exercisable for a period of five years subsequent to the
satisfaction of the Company's achievement of certain performance objectives
during calendar year 1999. Options tied to objectives that are not accomplished
in 1999, will be canceled and returned to the general pool. Under this
compensation plan, non-employee directors, will have the right to acquire an
aggregate of 120,000 shares of the Company's Common Stock pursuant to the
Non-Employee Director Options. This includes the reservation of 36,000 stock
options, should the Board add three more non-employee directors. In addition,
all non-employee directors, receive reimbursement of reasonable expenses
incurred in attending Board meeting.
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of the date hereof and as
adjusted to reflect the exercise of the Warrants and issuance of the Offered
Shares, by (i) each person who is known by the Company to own beneficially more
than five percent of the Company's Common Stock; (ii) each of the Company's
officers and directors; and (iii) all officers and directors as a group. No
assurance can be given as to the timing of exercise of the Warrants or whether
all or any of the Warrants will be exercised.
<TABLE>
<CAPTION>
BEFORE EXERCISE AND ISSUANCE AFTER EXERCISE AND ISSUANCE
---------------------------- ---------------------------
Amount and Approximate Approximate
Nature of Percentage of Percentage of
Name and Address Beneficial Outstanding Outstanding
of Beneficial Owner Ownership(1) Shares(2) Shares
- ------------------- ------------ --------- ------
<S> <C> <C> <C>
Bruce E. Edgington 424,782(3) 6.0% 5.7%
7857 Heritage Drive
Annandale, VA 22003
Robert C. Varney, Ph.D. 249,781(4) 3.5% 3.4%
4501 Daly Drive
Chantilly, VA 20151
Dane B. West 250,997(5) 3.6% 3.4%
4501 Daly Drive
Chantilly, VA 20151
William H. Bowers 245,236(6) 3.5% 3.4%
4501 Daly Drive
Chantilly, VA 20151
William M. Parker 245,000(7) 3.5% 3.4%
PO Box 307
Philomont, Virginia 20131
John J. Meindl, Jr. 74,000(8) 1.1% 1.1%
5 Old Tyler Court
Greenville, SC 29615
James G. Buick 19,000(9) .3% .3%
2047 Little Heron Court
Grand Rapids, MI 49546
Clay T. Whitehead 17,000(10) .3% .3%
1320 Old Chain Bridge Rd.
McLean, VA 22101
Earl J. Gjelde 16,500(11) .2% .2%
42 Bristlecone Crt.
Keystone, CO 80435
</TABLE>
43
<PAGE> 44
PRINCIPLE SHAREHOLDERS CONTINUED:
<TABLE>
<CAPTION>
BEFORE EXERCISE AND ISSUANCE AFTER EXERCISE AND ISSUANCE
---------------------------- ---------------------------
Amount and Approximate Approximate
Nature of Percentage of Percentage of
Name and Address Beneficial Outstanding Outstanding
of Beneficial Owner Ownership(1) Shares(2) Shares
- ------------------- ------------ --------- ------
<S> <C> <C> <C>
William R. 'Max' Carey 13,000(12) .2% .2%
665 River Knoll Drive
Marietta. GA 30067
All officers and directors
as a group (11 persons) 1,652,712 20.7% 19.9%
</TABLE>
(1) Unless otherwise noted, all persons named in the table have sole voting and
sole investment power with respect to all shares of Common Stock beneficially
owned by them, and no persons named in the table are acting as nominees for any
persons or are otherwise under the control of any person or group of persons. As
used herein, the term "beneficial ownership" with respect to a security is
defined by Rule 13d-3 under the Securities Exchange Act of 1934, as amended, as
consisting of sole or shared voting power (including the power to vote or direct
the vote) or sole or shared investment power (including the power to dispose or
direct the disposition) with respect to the security through any contract,
arrangement, understanding, relationship or otherwise, including a right to
acquire any such power during the period 60 days from the dat of the prospectus.
(2) Based upon 6,946,879 shares of Common Stock outstanding as of the date of
the prospectus.
(3) Includes 117,282 shares of Common Stock issuable to Mr. Edgington upon
exercise of currently exercisable stock options.
(4) Includes 210,031 shares of Common Stock issuable to Dr. Varney upon
exercise of currently exercisable stock options.
(5) Includes 165,996 shares of Common Stock issuable to Mr. West upon
exercise of currently exercisable stock options. Does not include 24,000
shares of Common Stock owned by Mr. West's parents and Mr. West's
spouse's parents, over which Mr. West disclaims beneficial ownership.
(6) Includes 140,044 shares of Common Stock issuable to Mr. Bowers upon
exercise of currently exercisable stock options.
(7) Includes 239,000 shares of Common Stock issuable to Mr. Parker upon
exercise of currently exercisable stock options.
(8) Includes 14,000 shares of Common Stock issuable to Mr. Meindl upon
exercise of currently exercisable stock options.
(9) Includes 15,000 shares of Common Stock issuable to Mr. Buick upon
exercise of currently exercisable stock options.
(10) Includes 14,000 shares of Common Stock issuable to Mr. Whitehead upon
exercise of currently exercisable stock options.
(11) Includes 14,000 shares of Common Stock issuable to Mr. Gjelde upon
exercise of currently exercisable stock options.
(12) Represents 13,000 shares of Common Stock issuable to Mr. Carey upon
exercise of currently exercisable stock options. Does not include 17,145
shares of Common Stock issuable to Corporate Resource Development Inc.,
(as part of compensation to Mr. Carey's employer, for providing
management consulting services to the Company commencing in February of
1998), upon exercise of options exercisable within 60 days.
44
<PAGE> 45
CERTAIN TRANSACTIONS
During 1996, Mr. Edgington and Dr. Varney, both directors of the Company,
advanced $212,000 to the Company to cover operating costs for certain periods,
which advances bear interest in the amount of 9.75% and were repaid from the
proceeds of the Company's private placement closed in February 1997.
Four separate promissory notes ("Officer Notes") aggregating $623,000
principal amount of debt bearing interest at 9.75% per annum were issued by the
Company to Dr. Varney ($201,000) and Mr. Edgington ($422,000), at that time, the
Chairman of the Company's Board of Directors and Chief Executive Officer, and a
director of the Company, respectively, on July 10, 1996, July 30, 1996,
September 26, 1996 and October 30, 1996, and the proceeds received by the
Company from the issuance of the Officer Notes were used for working capital.
The Company satisfied the Officer Notes at the closing of the Company's IPO. In
connection with the satisfaction of the Officer Notes, the Company issued to Dr.
Varney and Mr. Edgington, options to purchase up to 60,357 shares and 112,282
shares of the Company's Common Stock, respectively, at a purchase price of $4.00
per share, exercisable at any time and from time to time for a period commencing
with the satisfaction of the Officer Notes and for a period of eight years
thereafter.
In January 1997, John G. Meindl Jr., a director of the Company purchased
from the Company a promissory note in the aggregate principal amount of
$300,000, in exchange for $300,000 cash. The Company satisfied this promissory
note at the closing of the Company's IPO. In connection with the satisfaction of
this promissory note, the Company issued 60,000 shares of Common Stock to Mr.
Meindl.
In August and September of 1997, the Company in exchange for 130,000 and
$90,000, respectively, issued promissory notes for the purpose of working
capital, to Dr. Varney and Mr. Edgington in the aggregate of $130,000 and
$90,000 respectively, bearing 11.5% interest per annum. These promissory notes
were satisfied from the proceeds of the Company's IPO in October 1997.
In October of 1997, the Board of Directors approved the issuance of notes
receivable in the amount of $75,000 and $18,000 to Dane B. West and William H.
Bowers respectively. The Company is collecting interest on these notes
receivable through payroll deductions at the minimum federal statutory rate at
the time of issuance of 5.7%. The notes are due to be repaid to the Company on
October 31, 1999.
In February of 1998, the Board of Directors authorized the Company to
enter into an agreement for management consulting services with Corporate
Resource Development Inc. W. Max Carey, a director of the Company, is Chairman
and Chief Executive Officer of this firm. The agreement was in place for three
months, under which 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.
For the fiscal years ended December 31, 1997 through April 9, 1999, there
were no other material transactions between the Company and any of its officers
and/or directors which involved $60,000 or more.
Although the Company has no present intention to do so, it may in the
future enter into other transactions and agreements incident to its business
with its directors, officers, principal stockholders and other affiliates. The
Company intends for all such transactions and agreements to be on terms no less
favorable to the Company than those obtainable from unaffiliated third parties
on an arm's-length basis. In addition, the approval of a majority of the
Company's directors will be required for any such transactions or agreements.
45
<PAGE> 46
DESCRIPTION OF SECURITIES
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.01 par value per share. As of the date of this Prospectus, 6,704,379 shares of
Common Stock are outstanding.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held
of record on all matters to be voted on by stockholders. There is no cumulative
voting with respect to the election of directors, with the result that the
holders of more than 50% of the shares voted for the election of directors can
elect all of the directors. The holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of the Company, the holders of Common Stock are entitled to share ratably in
all assets remaining available for distribution to them after payment of
liabilities and after provision has been made for each class of stock, if any,
having preference over the Common Stock. Holders of shares of Common Stock, as
such, have no conversion, preemptive or other subscription rights, and, except
as noted herein, there are no redemption provisions applicable to the Common
Stock. All of the outstanding shares of Common Stock are, and the Shares, when
issued and paid for as set forth in this Prospectus, will be, fully paid and
nonassessable.
The holders of Common Stock do not have any subscription, redemption or
conversion rights, nor do they have any preemptive or other rights to acquire or
subscribe for additional, unissued or treasury shares. Accordingly, if the
Company were to elect to sell additional shares of Common Stock following this
Offering, persons acquiring Common Stock in this Offering would have no right to
purchase additional shares, and, as a result, their percentage equity interest
in the Company would be reduced.
Pursuant to the Company's Bylaws, except for any matters which, pursuant
to Delaware corporate law (the "Corporate Law"), require a greater percentage
vote for approval, (including, for example certain mergers and consolidations
and the amendment of certain provisions of the Company's Bylaws), the holders of
majority of the issued and outstanding Common Stock entitled to vote, if present
in person or by proxy, are necessary and sufficient to constitute a quorum for
the transaction of business at meetings of the Company's shareholders. Further,
except as to any matter which, pursuant to Corporate Law, requires a greater
percentage vote for approval (including, for example, certain mergers,
consolidations, sales of substantially all of the assets, and amendments of
certain provisions of the charter and Bylaws, of the Company), the affirmative
vote of the holders of a majority of the Common Stock voted on the matter
(provided a quorum as aforesaid is present) is necessary and sufficient to
authorize, affirm or ratify any act or action except the election of directors,
which is by a plurality of the votes cast. See "BUSINESS - Christian Statement
of Faith: the Company's Policy."
The holders of Common Stock do not have cumulative voting rights.
Accordingly, the holders of more than half of the outstanding shares of Common
Stock can elect all of the directors to be elected in any election. In such
event, the holders of the remaining shares of Common Stock would not be able to
elect any directors. The Board of Directors is empowered to fill any vacancies
on the Board of Directors created by the resignation, death or removal of
directors.
In addition to voting at duly called meetings at which a quorum is
present in person or by proxy, Corporate Law, the Charter and the Company's
Bylaws provide that stockholders may take action without the holding of a
meeting by written consent or consents signed by the holders of that number of
the outstanding shares of the capital stock of the Company entitled to vote
thereon which would be required to take the subject action. Prompt notice of the
taking of any action without a meeting by less than unanimous consent of the
shareholders will be given to those stockholders who do not consent in writing
to the action. The purposes of this provision are to facilitate action by
stockholders and to reduce the corporate expense associated with annual and
special meetings of stockholders. Pursuant to the rules and regulations of the
Commission, if stockholder action is taken by written consent, the Company will
be required to send to each stockholder entitled to vote on the matter acted on,
but whose consent was not solicited, an information statement containing
information substantially similar to that which would have been contained in a
proxy statement.
46
<PAGE> 47
As of the date herein, the Company's executive officers and directors
will beneficially own approximately 21.0% of the outstanding shares of Common
Stock, and may accordingly be in a position to significantly influence the
voting results of certain actions required or permitted to be taken by
shareholders of the Company, including the election of directors. As a result,
the officers and directors of the Company are in a position to control the
outcome of substantially all matters on which shareholders are entitled to vote,
including the election of directors.
SHARES ELIGIBLE FOR FUTURE SALE
As of the date hereof, there are 9,354,712 shares of Common Stock
outstanding including an aggregate of (i) 2,328,833 shares of Common Stock
issuable upon the exercise of the Outstanding Stock Options, and (ii) an
aggregate of 79,000 shares issuable upon the exercise of the Warrants. See
"CAPITALIZATION." Of these, 1,582,130 shares currently outstanding, as well as
the shares issuable upon exercise of the Outstanding Stock Options
(collectively, the "Current Shares") are "restricted securities" as defined in
Rule 144 and may not be sold without registration under the Securities Act
unless pursuant to an applicable exemption therefrom (collectively, the
"Restricted Shares").
Of the shares of Common Stock issued and outstanding before giving effect to
this Offering (which amount, for this purpose, includes shares issuable upon the
exercise of the Outstanding Stock Options), 3,910,963 shares are "restricted
securities," as that term is defined under Rule 144 ("Rule 144"), promulgated
under the Securities Act, and may only be sold pursuant to a registration
statement under the Securities Act or in compliance with Rule 144. Furthermore,
holders of 470,292 shares of the restricted securities have agreed not to sell,
transfer or otherwise dispose of any shares of Common Stock until June 30, 1999
(130,292 shares) and September 24, 1999 (340,000 shares), or any longer period
required by the laws of any state. The Company is unable to predict the effect
that any subsequent sales of the Company's securities by its existing
shareholders, under Rule 144 or otherwise, may have on the then-prevailing
market price of the Common Stock, although such sales could have depressive
effect on such market price. Nevertheless, the possibility that substantial
amounts of Common Stock may be sold in the public market may adversely affect
prevailing market prices of the Common stock and could impair the Company's
ability to raise capital through the sale of its equity securities. See
"DESCRIPTION OF SECURITIES-Shares Eligible for Future Sale."
In general, under Rule 144, a person (or persons whose shares are
required to be aggregated) who has satisfied a one-year holding period may,
under certain circumstances, sell within any three- month period a number of
Restricted Shares, and an "affiliate" of the Company may, under certain
circumstances, sell within any three-month period a number of shares, whether or
not Restricted Shares, which does not exceed the greater of 1% of the
then-outstanding shares of Common Stock or the average weekly trading volume
during the four calendar weeks prior to such sale a reported on Nasdaq, all
exchanges and the consolidated transaction reporting system. Rule 144 also
permits the sale of Restricted Shares without any quantity limitations by a
person who is not an "affiliate" of the Company, who has not been an "affiliate"
of the Company for at least three months immediately preceding the sale, and who
has owned the shares for at least two years. The holders of 470,292 of the
Current Shares have agreed not to sell, transfer or otherwise dispose of any
shares of Common Stock until June 30, 1999 (130,292 shares) and September 24,
1999 (340,000 shares), or any longer period required by the laws of any state
(the "Lock-up").
The Company is unable to predict the effect that any subsequent sales of
the Company's securities by its existing shareholders, under Rule 144 or
otherwise, may have on the then-prevailing market price of the Common Stock,
although such sales could have a depressive effect on such market price. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
DIVIDENDS
The Company has not paid any dividends on its capital stock to date and
does not currently intend to pay cash dividends. The payment of dividends, if
any, will be contingent upon the Company's revenues and earnings, if any,
capital requirements and general financial condition at that time. The payment
of any dividends will be within the discretion of the Company's Board of
Directors. It is the current intention of the Board of Directors to retain all
earnings, if any, for use in the Company's business operations and, accordingly,
the Board does not anticipate paying any cash dividends in the foreseeable
future.
47
<PAGE> 48
TRANSFER AND WARRANT AGENT
The transfer agent for the Common Stock is American Stock Transfer &
Trust Company, New York, New York.
PLAN OF DISTRIBUTION
The Company shall issue the Offered Shares upon the exercise of the
Warrants by the holders thereof. Warrants may be exercised by surrendering the
certificate evidencing such Warrant , with the form of election to purchase on
the reverse side of such certificate properly completed and executed, together
with payment of the exercise price and any transfer tax, to the Company. If less
than all of the Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Warrants. Payment of the
exercise price may be made by cash, wire, bank draft or official bank or
certified check equal to the exercise price or by cashless exercise in which
event the number of shares to be purchased shall be determined by dividing (i)
the number obtained by multiplying the number of shares that are the subject of
the warrant by the amount, if any, by which the fair market value of the
Company's Common Stock exceeds the exercise price per share by (ii) the per
share exercise price. The Company will be prevented, however, from issuing
Common Stock upon exercise of the Warrants in certain circumstances. See "Risk
Factors - Continuing Registration Required to Exercise Warrants."
LEGAL PROCEEDINGS
The Company is not a party to, nor is it aware of, any pending litigation
to which it is a party or of which its property is subject.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Berman Wolfe & Rennert, P.A. Miami, Florida. Gammon & Grange, P.C.
McLean, Virginia, has acted as counsel to the Company on matters relating to the
Company's use of religious criteria in employment practices.
EXPERTS
The consolidated financial statements of the Company at December 31, 1997
and 1998, appearing in this Prospectus and Registration Statement have been
audited by Hoffman, Morrison & Fitzgerald, P.C., independent auditors, as set
forth in their report thereon appearing elsewhere herein, and are included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
48
<PAGE> 49
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
December 31, 1998 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7-17
</TABLE>
F-1
<PAGE> 50
[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> 51
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> 52
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> 53
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> 54
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<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> 55
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 original 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> 56
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> 57
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> 58
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> 59
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 $134,518, 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> 60
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> 61
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> 62
DIDAX INC. AND SUBSIDIARY
(DEVELOPMENT STAGE COMPANIES)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
J. COMMITMENTS AND CONTINGENCIES (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> 63
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> 64
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> 65
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> 66
No dealer, salesman or any other person has been authorized to give any
information or to make any representation, other than those contained in this
Prospectus, in connection with the offering described herein, and, if given or
made, such information or representation must not be relied upon as having been
authorized by the Company or the Underwriter. This Prospectus in connection with
the Offering does not constitute an offer to sell or solicitation of any offer
to buy, by any person in any jurisdiction in which it is unlawful for such
person to make such offer or solicitation. Neither the delivery of this
Prospectus nor any offer, solicitation or sale made hereunder, shall under any
circumstance, create any implication that the information herein is correct as
of any time subsequent to the date of the Prospectus.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
- ----
<S> <C>
Prospectus Summary........... 4
Risk Factors................. 7
Use of Proceeds.............. 15
Capitalization............... 16
Dilution..................... 17
Management's Discussion and
Analysis or Plan
of Operation............... 18
Proposed Business............ 24
Management................... 36
Principal Shareholders....... 43
Description of Securities.... 46
Plan of Distribution......... 48
Legal Proceedings............ 48
Legal Matters................ 48
Experts...................... 48
Financial Statements......... F-1
</TABLE>
DIDAX INC.
24,000 COMMON STOCK UNDERWRITER WARRANTS
55,000 WARRANT UNDERWRITER WARRANTS
55,000 UNDERWRITER UNDERLYING WARRANTS
79,000 SHARES OF COMMON STOCK UNDERLYING
24,000 COMMON STOCK UNDERWRITER WARRANTS AND
55,000 UNDERWRITER UNDERLYING WARRANTS
PROSPECTUS
