1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
/ / TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NUMBER 333-25937
Crosswalk.com, Inc.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1831588
------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
4100 Lafayette Center Dr. Suite 110
Chantilly, VA 20151
-------------------------------
(Address of principal executive offices)
(703) 968-4808
-------------------------------
(Registrant's telephone number, including area code)
Check whether the registrant: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
(1) Yes X No
As of August 13, 2001 there were 7,959,721 shares of the Registrant's common
stock outstanding.
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PAGE
NUMBER
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of December 31, 2000
and June 30, 2001............................................. 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 2000 and 2001................... 4
Condensed Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 2000 and 2001................... 5
Notes to Condensed Consolidated Financial Statements................... 6
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 10
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk............. 18
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings...................................................... 18
ITEM 2: Changes in Securities and Use of Proceeds.............................. 18
ITEM 3: Defaults Upon Senior Securities........................................ 18
ITEM 4: Submission of Matters to a Vote of Security Shareholders............... 18
ITEM 5: Other Information...................................................... 19
ITEM 6: Exhibits and Reports on Form 8-K....................................... 19
SIGNATURES and EXHIBITS................................................ 19
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CROSSWALK.COM, INC. AND SUBSIDIARIES
BALANCE SHEET
December 31, June 30
2000 2001
-------------------- --------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,272,256 $ 1,111,493
Short-term investments 936,737 -
Accounts receivable including unbilled receivables of $54,646 and
$61,063 December 31, 2000 and June 30, 2001, respectively 1,200,591 1,203,540
Deferred costs 356,842 337,956
Notes receivable from officers 22,111 40,186
Other current assets 37,559 22,718
-------------------- --------------------
Total current assets 3,826,096 2,715,893
-------------------- --------------------
LONG TERM INVESTMENTS 619,546 179,957
PROPERTY AND EQUIPMENT, net 1,452,311 976,131
OTHER ASSETS:
Deposits 91,151 87,472
Deferred costs 64,083 612
Intangible assets, net 5,256,366 4,677,812
-------------------- --------------------
Total other assets 5,411,600 4,765,896
-------------------- --------------------
TOTAL ASSETS $ 11,309,553 $ 8,637,877
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 428,964 $ 380,984
Accrued liabilities 598,578 594,766
Deferred revenue 509,946 321,183
-------------------- --------------------
Total current liabilities 1,537,488 1,296,933
-------------------- --------------------
OTHER LIABILITIES:
Accounts payable 105,002 116,773
Deferred revenue 227,649 139,206
Other liabilities 78,415 73,367
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 5,000,000 shares authorized,
80,000 shares issued and outstanding at both
December 31, 2000 and at June 30, 2001 80 80
Common stock, $.01 par value, 20,000,000 shares authorized,
7,926,971 and 7,959,721 shares issued and outstanding
December 31, 2000 and at June 30, 2001, respectively 79,270 79,597
Common stock warrants 127,660 127,660
Additional paid-in capital, common stock 41,228,118 41,256,567
Accumulated deficit (32,074,972) (34,453,857)
Accumulated other comprehensive loss:
Net unrealized loss on available-for-sale securities 843 1,551
-------------------- --------------------
Total stockholders' equity 9,360,999 7,011,598
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,309,553 $ 8,637,877
==================== ====================
See accompanying notes.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
======================================= ====================================
2000 2001 2000 2001
----------------- -------------------- ----------------- -----------------
OPERATING REVENUES:
Advertising/Sponsorship sales $ 1,716,997 $ 1,413,234 $ 3,216,692 $ 2,439,904
Retail sales 84,789 3,353 220,785 15,507
Internet services 29,742 10,650 45,741 36,131
----------------- -------------------- ----------------- -----------------
Total operating revenues 1,831,528 1,427,237 3,483,218 2,491,542
----------------- -------------------- ----------------- -----------------
OPERATING EXPENSES:
Cost of goods and services 686,449 523,484 1,495,171 862,343
Crosswalk operations 1,257,961 813,584 2,857,665 1,715,480
Sales and marketing 772,879 423,922 2,013,976 842,828
General and administrative 1,193,089 702,284 2,027,861 1,437,101
----------------- -------------------- ----------------- -----------------
Total operating expenses 3,910,378 2,463,274 8,394,673 4,857,752
----------------- -------------------- ----------------- -----------------
LOSS FROM OPERATIONS (2,078,850) (1,036,037) (4,911,455) (2,366,210)
OTHER INCOME (EXPENSE):
Interest income 63,724 21,393 118,632 57,016
Interest expense (435) (2,390) (435) (4,582)
Loss on sale of property and equipment 257 (37,577) 257 (65,109)
----------------- -------------------- ----------------- -----------------
Total other income (expense) 63,546 (18,574) 118,454 (12,675)
----------------- -------------------- ----------------- -----------------
Net loss before cumulative effect of a change
in accounting practice $ (2,015,304) $ (1,054,611) $ (4,793,001) $ (2,378,885)
Cumulative effect of a one-time adjustment to
reflect change in revenue and cost recognition - - (1,407,589) -
----------------- -------------------- ----------------- -----------------
NET LOSS $ (2,015,304) $ (1,054,611) $ (6,200,590) $ (2,378,885)
================= ==================== ================= =================
Amounts per common share:
Net loss before cumulative effect of a change
in accounting practice $ (0.26) $ (0.13) $ (0.62) $ (0.30)
Cumulative effect of a one-time adjustment to
reflect change in revenue and cost recognition - - (0.19) -
----------------- -------------------- ---------------- -----------------
Net loss per common share (basic and diluted) $ (0.26) $ (0.13) $ (0.81) $ (0.30)
================= ==================== ================ =================
Weighted average number of common
shares outstanding 7,703,005 7,943,312 7,663,288 7,935,186
================= ==================== ================ =================
See accompanying notes.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six Months
Ended June 30,
=============================================
2000 2001
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,200,590) $ (2,378,885)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 379,245 399,930
Amortization of intangible assets 590,817 602,713
Loss on disposal of property and equipment (257) 65,109
Stock compensation expense 7,693 -
Common stock issued in lieu of cash for advertising 532,750 -
Changes in operating assets and liabilities:
Accounts receivable 879,134 (2,949)
Notes receivable from officers 14,335 (18,075)
Deposits 42,879 3,679
Deferred costs (465,769) 82,357
Other current assets (2) 14,841
Accounts payable (1,840,575) (36,209)
Accrued liabilities (170,265) (8,860)
Deferred revenue 1,209,996 (277,206)
-------------------- --------------------
Net cash used in operating activities (5,020,609) (1,553,555)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (264,887) (13,018)
Sales and maturities of investments 4,900,017 1,377,034
Purchases of investments - -
-------------------- --------------------
Net cash (used in) provided by investing activities 4,635,130 1,364,016
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock and warrants 52,784 28,776
Cost of issuing common stock in lieu of cash (11,229) -
-------------------- --------------------
Net cash provided by financing activities 41,555 28,776
-------------------- --------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (343,924) (160,763)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 1,641,157 1,272,256
-------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 1,297,233 $ 1,111,493
==================== ====================
See accompanying notes.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
A. THE COMPANY AND BASIS OF PRESENTATION
Crosswalk.com, Inc. (including its subsidiaries, "Crosswalk" or the "Company")
is the creator of its Website www.crosswalk.com(TM) ("crosswalk.com"), which the
Company believes is the premier portal site for the online Christian and
family-friendly community, with a focus on "the intersection of faith and life",
covering a growing spectrum of everyday life within a Christian context.
Crosswalk.com offers content channels focused on entertainment, money, family
living, teens, homeschooling, news, women, spiritual life, sports, travel and
classifieds; and services ranging from safety, shopping, family-friendly movie
reviews, bible study, greeting cards, games, chat, forums, local events, music,
free email and more. Crosswalk also provides email subscription service to send
information to over 800,000 opt-in email addresses.
The Company's business includes the development and aggregation of content and
services, which it believes are conducive to the online Christian and
family-friendly community. The Company sells advertising in this venue and
generates royalty sales from products sold through affiliate vendors linked with
crosswalk.com. The Company intends to build traffic and visitors to
crosswalk.com through efficient marketing and product development activities,
with the goal of building market awareness and acceptance of its product, which
it believes will result in revenue growth and profitability. The Company
operates in one business segment.
The Company has prepared the accompanying unaudited financial statements as of
June 30, 2001 and 2000 pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). In the opinion of management, all
adjustments considered necessary for a fair presentation have been included. The
balance sheet at December 31, 2000 has been derived from the audited
consolidated financial statements at that date. These financial statements
should be read in conjunction with the Company's audited consolidated financial
statements and related notes included in the Company's Annual Report on Form
10-K for the year ended December 31, 2000. The results of operations for the six
months ended June 30, 2001 are not necessarily indicative of the results to be
expected for any subsequent quarter or for the entire fiscal year ending
December 31, 2001.
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements include the
financial statements of Crosswalk.com, Inc. and its wholly owned subsidiaries.
All significant intercompany balances and transactions have been eliminated in
consolidation.
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
current maturities of three months or less from the date of the balance sheet.
Short and long-term investments - The Company invests in U.S. government bonds
and treasury notes, municipal bonds, and corporate bonds. Investments with
current maturities greater than three months but less than twelve months from
the balance sheet date are short-term investments. Those investments with
current maturities greater than twelve months from the balance sheet date are
long-term investments.
The Company's marketable securities are classified as available-for-sale as of
the balance sheet dates and are reported at fair value, with unrealized gains
and losses, net of tax, recorded in shareholders' equity. Realized gains or
losses and permanent declines in value, if any, on available-for-sale securities
are reported in other income or expense as incurred.
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 to ten years using the straight-line method.
Revenue recognition - As of January 1, 2000, the Company's revenues were
primarily derived from the sale of banner advertising. Advertising revenues are
recognized in the period in which the advertisement is displayed and collection
of the resulting receivable is probable.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's revenue model prior to January 1, 2000 included significant
revenues from third party sponsorships for prime Website exposure in which the
Company recognized nonrefundable revenue upon completing the integration of a
sponsor's web based material onto the Crosswalk.com site. The Company previously
recognized nonrefundable content integration and development fees as revenue
upon completion of content integration. Effective January 1, 2000, the Company
changed its method of accounting for nonrefundable fees for Web integration
contracts entered into prior to January 1, 2000, to recognize such fees over the
term of the related agreement, which is generally a one to two year period when
the Company is maintaining the integrated content. The Company believes the
change in accounting principle is preferable based on guidance provided in SEC
Staff Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements.
The $1.4 million cumulative effect of the change in accounting principle was
reported as a charge in the quarter ended March 31, 2000, and represents the
associated revenues and related direct and incremental costs. The cumulative
effect was initially recorded as deferred revenue that will be recognized as
revenue over the remaining contractual terms of the agreements. During the
quarter ended March 31, 2000, the impact of the change in accounting was to
increase net loss by $1.0 million ($0.13 per share); comprised of the $1.4
million ($0.19 per share) cumulative effect of the change as described above,
net of $.4 million ($0.06 per share) of the related deferred revenue which was
recognized as revenue during the quarter. The impact of the change in accounting
for the six months and three months ended June 30, 2001 was to decrease net loss
by $ 138,903 or $0.02 per share, and $62,785 or $0.01 per share, respectively.
The impact of the change in accounting for the six months and three months ended
June 30, 2000 was to decrease net loss by $ 686,549 or $0.09 per share, and
$305,914 or $0.04 per share, respectively.
Barter transactions, amounting to less than five percent of revenues for the
quarter ended June 30, 2001, are recorded at the lower of estimated fair value
of the goods or services received or the estimated fair value of the services
given based on like-cash transactions. Barter transactions consist of providing
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.
Comprehensive income - Comprehensive income is defined as the change in equity
of a business enterprise during a period, from transactions and other events and
circumstances from non-owner sources. Accordingly, the Company presents the
elements of comprehensive income, which included net loss and unrealized losses
on available-for-sale securities. For the six months ended June 30, 2001 and
2000, the Company's comprehensive loss was $2,378,177 and $6,230,945,
respectively.
Deferred costs - Deferred costs at June 30, 2001 consisted of content fees,
conference fees, insurance costs, software maintenance, investor relations,
license fees, and deferred barter costs associated with revenue deferred
pursuant to compliance with SEC Staff Accounting Bulletin No. 101. The software
maintenance and license fees are ratably expensed over the life of the
maintenance and license agreements. The content, conference, and investor
relation fees are charged to expense once the services associated with these
fees have been delivered to the Company. Insurance costs are ratably expensed
over the life of the policy for which premiums have been paid. The barter costs
are recognized as services are rendered.
Derivative instruments and hedging activities - In June 1998, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging
Activities." In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133," and in June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
An Amendment to FASB Statement No. 133."
These rules require that all derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities,
be reported in the consolidated financial statements at fair value. Changes in
the fair value of derivatives are to be recorded each period in earnings or
other comprehensive income, depending on whether the derivative is designated
and effective as part of a hedged transaction, and on the type of hedge
transaction. Gains and losses on derivative instruments reported in other
comprehensive income must be reclassified as earnings in the period in which
earnings are affected by the underlying hedged item, and the ineffective portion
of all hedges must be recognized in earnings in the current period. The Company
adopted SFAS No. 133 on January 1, 2001. Management believes that the adoption
of this standard has no material effect on the Company's financial position or
results of operations.
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Reclassifications - Certain balances have been reclassified to conform to the
current period presentation.
C. CASH AND CASH EQUIVALENTS, SHORT AND LONG-TERM INVESTMENTS
The Company invests in U.S. government bonds and treasury notes and corporate
bonds. All highly liquid instruments with current maturities of three months or
less are considered cash equivalents; those with current maturities greater than
three months but less than twelve months from the balance sheet date are
considered short-term investments; and those with maturities greater than twelve
months from the balance sheet date are considered long-term investments. The
Company's marketable securities are classified as available-for-sale as of the
balance sheet date and are reported at fair value, with unrealized gains and
losses, net of tax, recorded in shareholders' equity. Realized gains or losses
and permanent declines in value, if any, on available-for-sale securities are
reported in other income or expense as incurred.
Securities available-for-sale in the accompanying balance sheet at June 30, 2001
total $384,223 that includes $204,266 in Cash and Cash Equivalents having
current maturities of three months or less. The Company has recorded an
unrealized gain of $1,551 and no unrealized loss as of June 30, 2001. The
aggregate market value, cost basis, and unrealized gains and losses of
securities available for sale, by major security type, as of June 30, 2001, are
as follows:
Gross Unrealized Gross Unrealized
Market Value Cost Basis Gains (Losses)
------------ ---------- ----- -------
U.S. Govt. Debt Securities $ 332,501 $ 331,179 $ 1,322 $ ---
Municipal Debt Securities 15,796 15,618 178 ---
Corporate Debt Securities 35,926 35,875 51 ---
-------------- -------------- ------------- ----------------
Total at June 30, 2001 $ 384,223 $ 382,672 $ 1,551 $ ---
============== ============== ============= ================
The Company recorded a net realized loss of $1,349 and $4,575 in the three
months and six months ended June 30, 2001.
D. RELATED PARTY TRANSACTIONS
At June 30, 2001, the Company had a Note Receivable from an officer of the
Company totaling $22,686. The Company is accruing interest at the minimum
federal statutory rate of the time of issuance of 5.7%. The due date was
extended to July 31, 2001 with the same terms. The Company is pursuing payment
and expects to liquidate this receivable in August 2001.
At June 30, 2001, the Company had an Advance Due from an Officer of the Company
in the amount of $17,500. The Company expects to receive payment in full before
December 31, 2001, and considers this advance to be a short-term receivable.
E. NET LOSS PER COMMON SHARE
The following is a reconciliation of the basic and diluted EPS calculations for
the periods presented:
For the Three Months For the Six Months
Ended June 30, Ended June 30,
--------------- --------------
2000 2001 2000 2001
---- ---- ---- ----
Net loss (numerator) $(2,015,304) $ (1,054,611) $ (6,200,590) $ (2,378,885)
Weighted average shares (denominator) 7,703,005 7,943,312 7,663,288 7,935,186
Basic net loss per share $ (0.26) $ (0.13) $ (0.81) $ (0.30)
---------- ----------- ----------- -----------
Dilutive shares (denominator) 7,703,005 7,943,312 7,663,288 7,935,186
Diluted net loss per share $ (0.26) $ (0.13) $ (0.81) $ (0.30)
---------- ----------- ----------- -----------
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CROSSWALK.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 2001
E. NET LOSS PER COMMON SHARE (CONTINUED)
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, 45,730 stock options and purchase warrants granted at below
market prices outstanding, for both the six months ended June 30, 2000 and June
30, 2001, are not included in the calculation of diluted EPS as their inclusion
would be anti-dilutive.
F. COMMITMENTS
In September 1999, the Company entered into a one-year Network Title Sponsorship
Agreement ("Agreement") with The Christian Network, Inc., which includes "Praise
on Pax" and "Worship on Pax." Under this Agreement, the Company was entitled to
a national title sponsorship on "Praise on Pax" telecasts and a national
corporate sponsorship on "Worship on Pax" telecasts. The Company also received
advertising and promotional rights. The total cost for these sponsorship and
advertising rights was $1,025,000, payable quarterly in cash or, at the
Company's option, in shares of the Company's common stock having a fair market
value equal to the required payment. The Company was also obligated to issue
additional shares of common stock for each new member generated for
Crosswalk.com as a result of these sponsorship and advertising arrangements,
based on a valuation of $1.00 for each member generated. In February, April,
July, and September 2000, respectively, 39,018, 52,196, 90,102, and 128,125
shares of Crosswalk common stock were issued for services rendered under this
Agreement that terminated September 30, 2000.
G. SUBSEQUENT EVENTS
On June 16, 2001, the Board of Directors of Crosswalk.com appointed Eric Oliver
as a director of Crosswalk.com. Since 1998, Mr. Oliver is a General Partner and
lead investment officer for the Softvest L.P. investment fund, and is President
of Softsearch Investment, L.P. Also he is currently President of Midland Map
Company, an oil and gas ownership map company for the Permian Basin. From 1995
to 1997, Mr. Oliver was President of the Autofuel Company, a retail/wholesale
gasoline distributor. Mr. Oliver currently serves on the Board of Directors of
the First National Bank of Midland.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
BACKGROUND
Crosswalk.com, Inc. ("the Company") is primarily known as the creator of
crosswalk.com(TM), an interactive Website, which provides information and
resources that the Company believes generally appeals to the Christian and
family-friendly 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 primarily
through the sale of online and offline advertising and sponsorship contracts
("Advertising/sponsorship sales"); select online retailing of Christian and
family-friendly products (music, books, apparel, gifts, etc.) manufactured or
developed by others, and referral fees from co-marketing relationships ("Retail
sales"); and the provision of an array of Internet services ("Internet
services"). During the third quarter of 2000, the Company transitioned from
online retail sales to an affiliate model that provides advertising and
royalties to the Company for their products offered on crosswalk.com. This
transition has enabled the Company, and its affiliated distributors, the
opportunity to synergistically focus on core strengths, which the Company
believes will generate better margins and provide a better experience for users.
As a result of these developments, the Company's revenue mix between
advertisers, sponsors, retail and Internet services has changed over the years.
One of the key objectives of the Company is to operate on a cash flow positive
basis. Management believes that there is potential that this objective may be
achieved sometime in the fourth quarter of 2001. In order to execute on this
objective, the Company must increase margins through generating growth in higher
margin cash advertising revenue, create new revenue streams and continue focus
on efficient delivery of content on crosswalk.com. Advertisers are organizations
placing ads on crosswalk.com, for which Crosswalk.com is paid a flat fee or a
fee per ad impression delivered. Sponsors are organizations that receive
premiere positioning for their content on various areas of crosswalk.com and in
effect become a "sponsor" of those areas, a service for which Crosswalk.com
receives a fee. The Company has not accepted any new barter arrangements since
1999, but is committed to performing on those previously contracted. The
progress of this transition is that barter revenue dropped to below 5% for the
second quarter of 2001, from 18% in the same period of 2000. In the second
quarter of 2001, the Company continued to experience a higher gross margin of
63.3%, versus 62.5% in the second quarter of 2000 and 58.4% in the preceding
fourth quarter of 2000.
In the second quarter of 2001, the Company continued its focus on maintaining
consistent improvement in reducing the cash burn rate by generating growth in ad
sales, making prudent expense reductions and evaluating economies of scale to
streamline operations. By operating under this discipline, the Company reduced
the monthly cash burn rate to $175,000 in the second quarter of 2001, down from
$280,000 per month in the first quarter of 2001 and $365,000 per month in the
fourth quarter of 2000.
One of the key contributing influences on the Company's ability to improve
cost-efficiency in delivering content on crosswalk.com was the recently
announced alliance with Starwire (formerly known as Christianity.com), the
full-service Web network designed to bring technology solutions to the Christian
community. They will become the primary Web content management and network
infrastructure solution for Crosswalk.com. This partnership clarifies both
companies' focus and their individual roles in the Christian Internet market and
provides Crosswalk.com with a strategic partnership that the company believes
will prove to efficiently meet the technology needs of its growing community for
years to come.
Nielsen NetRatings continues to rank crosswalk.com as one of the top ten
"Religion and Spirituality" Website based on time spent per person and highest
number of visits per person. Advertising click-thru rates reported by Nielsen
ranked higher than any site among the Web's 10 largest advertising venues and
more than twice as high as averages for the Top 10, 25, and 50 advertising
supported sites. In addition, The netScore Buying Power Index (BPI) report for
May 2001 ranks Crosswalk.com as the number one Internet portal in terms of BPI,
which gauges the value of visitors to a Web site based on the dollars these
visitors spend across all sites on the Internet. With a BPI of 177,
Crosswalk.com rates above other popular portals such as Yahoo (125), America
Online (140), and Altavista (143). The netScore BPI report is compiled by
Diameter, a division of DoubleClick, Inc and comScore Networks, Inc. The number
one rating serves as a confirmation of the already-recognized loyal audience
unique to Crosswalk.com.
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The Company believes that by effectively serving its statistically proven loyal
Christian and family-friendly niche, it will continue to accelerate traffic and
thus revenue growth over time. The Company plans to continue enhancing
crosswalk.com in order to maintain its leadership position as the preferred
online resource for Christians in search of information, interaction and
involvement opportunities that help them apply a Christian worldview across the
breadth of their life and interests.
The Company believes that these independently derived demographics will attract
potential advertisers in recognizing that one of the most effective ways to
reach the Christian and family-friendly niche is to advertise on crosswalk.com.
The Company is actively seeking to generate strategic partnerships to enhance
long-term revenue opportunities with quality organizations, thus limiting
dependence on Internet companies for advertising on crosswalk.com. In the second
quarter of 2001, the Company signed World Vision, the world's largest, privately
funded, Christian relief and development organization to a comprehensive
advertising package including vertical banners, fixed ad slot position on the
Crosswalk.com homepage, e-mail newsletter sponsorship, and the new direct e-mail
product. In addition, ads for the NBC TV series "Kristin", the U.S. Navy, and
many colleges and universities, were added to crosswalk.com. In the second
quarter 2001, online advertising, excluding Sponsorships, grew 71% over the
second quarter of 2000 and 32% over the first quarter of 2001.
The opportunity for the Company to generate increasing revenues is largely
predicated upon the ability to maintain quality traffic on crosswalk.com and to
create new revenue streams through providing low cost value added services to
its loyal users. Therefore, the Company monitors and discloses statistics as to
the average monthly unique visitors, average monthly page views on crosswalk.com
and email views. The Company believes that reporting unique visitors instead of
registered users will provide a much more accurate, and industry-comparative
measurement. Unique visitors are determined through analysis of visitor data in
Web server files. For the second quarter of 2001 there were 3,537,684 unique
visitors on crosswalk.com. Page views and email views are a measure of total
pages viewed by visitors to crosswalk.com and the number of emails sent at the
request of Crosswalk.com's constituents in a month. Average monthly pageviews
for the second quarter were down 8.4% to 22,317,502 from the first quarter of
2001, and average monthly e-mail newsletter impressions for the second quarter
2001 were down 7% to 29,237,861 from 31,446,610 in the first quarter of 2001,
all reflecting a predictable one-month traffic slide as a result of the
significant resource allocation to the successful Starwire infrastructure
transition launched in July. Editorial and technical staffs were immersed in
this massive effort, which commanded much of their time at the end of the
quarter. Over the year, average monthly pageviews were up 10%, compared with
18,571,764 during the second quarter of last year.
The Company has a relatively 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 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 potentially sensitive to trends in the advertising
market. As a result, the Company's mix of services and products has and may in
the future, continue to undergo substantial changes as the Company reacts to
competitive and other developments in the overall Internet market. The Company
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 June 30,
2001, the Company had an accumulated deficit of $34,453,857.
The Company's expense levels are based in part on possible future revenues, of
which there can be no assurance. The Company's ability to generate revenue from
the commercial sale of advertising space on crosswalk.com is tied to its ability
to generate traffic on the Website and emails, and the effectiveness of its
sales staff. The Company plans to significantly increase its sales efforts,
however a shortfall in revenues without commensurate reductions in cost, could
have an immediate adverse impact on the Company's business, results of
operations and financial condition. The Company expects to experience
significant fluctuations in future quarterly operating results and believes that
period-to-period comparisons of its results of operations are not necessarily
meaningful and should not be relied upon as any indication of future
performance.
The management and directors of Crosswalk.com are committed to removing any
concern that Crosswalk.com might join the ranks of the insolvent. They are
dedicated to the judicious use of cash, which will result in conservative
growth estimates for revenues and cash flow. Accordingly, the Company is
deferring any investments to initiate
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additional revenue streams, unless risk is shared through partnerships or until
the goal of becoming cash flow positive is achieved. It is the Company's
intention to develop a business that endures and to achieve this through prudent
investing in our portal and constant attention to the bottom line.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets, effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill and intangible
assets deemed to have indefinite lives will no longer be amortized but will be
subject to annual impairment tests in accordance with the Statements. Other
intangible assets will continue to be amortized over their useful lives.
The Company will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statements is expected to affect the amounts
the Company records to amortize its intangibles. During 2002, the Company will
perform the required impairment tests of goodwill and indefinite-lived
intangible assets as of January 1, 2002, and has not yet determined what the
effect of these tests will be on the earnings and financial position of the
Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." In June 1999, the FASB issued SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133," and in June 2000, the FASB issued
SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities - An Amendment to FASB Statement No. 133."
These rules require the Company to recognize all derivatives on the consolidated
balance sheet at fair value. Derivatives that are not designed, as part of a
hedging relationship, must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, the effective
portion of the hedge's change in fair value is either (1) offset against the
change in fair value of the hedged asset, liability or firm commitment through
income, or (2) held in equity until the hedged item is recognized in income. The
ineffective portion of a hedge's change in fair value is immediately recognized
in income. The Company adopted SFAS No. 133 on January 01, 2001. Management
believes that the adoption of this standard will have no material effect on the
Company's financial position or results of operations.
RESULTS OF OPERATIONS
THE SIX MONTHS ENDED JUNE 30, 2001 AND 2000
NET LOSS
For the six months ended June 30, 2001, the Company incurred a net loss before
cumulative effect of a change in accounting practice of $2,378,885, as compared
to $4,793,001 for the same period ended June 30, 2000. After the cumulative
effect of a change in accounting practice, the net loss for the six-month period
ended June 30, 2000 was $6,200,590. In the first quarter of 2000, the Company
booked a ($1,407,589) one-time adjustment in response to the Securities and
Exchange Commission Staff Accounting Bulletin 101 issued in December 1999. In
this regard, the Company chose to change its revenue and applicable cost
recognition on the integration and development fee portion of 1999-year
sponsorship deals, to a more preferable method of deferral ratably over the term
of the contract. The decrease in loss before cumulative effect of a change in
accounting practice for the first six months of 2001 over the first six months
of 2000 was $2,414,116 (50%). It was due primarily to a major decrease in
operating expenses, offset by a small decrease in total revenues. The decrease
in loss consisted of a $2,904,093 (42%) decrease in operating expenses excluding
cost of goods sold for the six months ended June 30, 2001 as compared to the six
months ended June 30, 2000, and a $991,676 (28%) decrease in total revenue.
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REVENUES
Total revenue for the first six months of 2001 was $2,491,542, down $991,676
(28%) from the same period in 2000. The $2,491,542 revenue earned in the first
six months of 2001 consisted of $2,439,904 from advertising/sponsorships sales,
$15,507 from retail sales, and $36,131 from internet services, while in the
first six months of 2000, the $3,483,218 revenue earned consisted of $3,216,692
from advertising/sponsorships sales, $220,785 from retail sales, and $45,741
from internet services. The year on year change in advertising/sponsorship sales
was a 24% ($776,788) decrease in 2001 from 2000, due to the Company's continued
phase out of an aggregate difference of $603,390 for barter deals, representing
5% and 21% respectively of total revenue for the first six months of 2001 and
2000. This decrease was offset by the growth in the Company's core focus, online
and E-mail advertising sales, a component of advertising/sponsorships sales. For
the first six months of 2001, online and E-mail advertising grew 104% to
$1,546,922 from $757,194 in the same period of 2000.
The year on year change for Retail sales was a 93% ($205,278) decrease in 2001
from 2000 since the Company significantly curtailed the unprofitable direct
retail sales in the third quarter of 2000. For internet services revenue, the
year on year change was a decrease of 21% ($9,610) in 2001 from 2000 due to the
emphasis being placed on advertising and away from various internet services for
the Company's clients. The result of these management initiatives showed an
increase in gross margin to 65.4% in the first six months of 2001 versus 57.1%
the same period in 2000.
In response to the Securities and Exchange Commission Staff Accounting Bulletin
101 issued in December 1999, the Company chose to change its revenue recognition
on the integration and development fee portion of 1999-year sponsorship deals,
to a more preferable method of deferral ratably over the term of the contract.
Under this method, in the first six months of 2001, the amount of revenue
recorded that was previously deferred totaled $259,441 versus $1,072,875 for the
same period in 2000, a reduction of $813,434 or 76%. Total revenue in the first
six months of 2001 and 2000 would have been $2,232,101 and $2,410,343,
respectively net of the impact of this change in accounting method. Gross margin
in the first six months of 2001 would have been reduced by $138,905 or 9% to
$1,490,294, and overall gross margin increases to 66.8% net of the impact of
this change in accounting method. In the first six months of 2000, the gross
margin would have been reduced by $686,549 or 34.5% to $1,301,498, representing
an overall decrease to a 54% gross margin net of the impact of this change in
accounting method.
The Company's emphasis going forward will be on leveraging what the Company
believes is robust content important to its niche, and the great affinity of
crosswalk visitors and the Christian, family-friendly community. This involves
increasing the number of advertisers, and focusing on strategic relationships
that profitably enhance the Company's ability to deliver quality services and
content. With continued growth in site traffic, service enhancements, and
successful viral marketing campaigns, the Company hopes to achieve continued
progress in these revenue streams.
COST OF GOODS AND SERVICES
Cost of goods and services, consisting of commissions and other costs related to
delivery of client online content and offline advertising products; retailing
Christian interest products on crosswalk.com; and, the provision of internet
services was $862,343 and $1,495,171 for the six months ended June 30, 2001 and
2000, respectively. The Company's gross margin for the six months ended June 30,
2001 increased to 65.4% from 57.1% for the same period in 2000. This increase is
due primarily to the decrease in barter transactions that accounted for less
than 5% of revenues in the six months ended June 30, 2001 versus 21% in the same
period in 2000; the decrease as planned in low margin, high dollar sponsorship
deals; and significantly curtailed low margin direct retail activities.
In response to the Securities and Exchange Commission Staff Accounting Bulletin
101 issued in December 1999, the Company chose to change its revenue and
applicable cost recognition on the integration and development fee portion of
1999-year sponsorship deals, to a more preferable method of deferral ratably
over the term of the contract. Under this method, the amount of deferred cost
recorded in the first six months of 2001 was $120,536 versus $386,326 recorded
in the first six months of 2000, a reduction of $265,790 or 69%. Total cost of
goods and services in the first six months of 2001 and 2000 would have been
$741,807 and $1,108,845 respectively net of the impact of this change in
accounting method. Gross margin in the first six months of 2001 would have been
reduced by $138,905 or
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9% to $1,490,294, and overall gross margin would have increased to 66.8% net of
the impact of this change in accounting method. In the first six months of 2000,
the gross margin would have been reduced by $686,549 or 34.5% to $1,301,498,
representing an overall decrease to a 54% gross margin net of the impact of this
change in accounting method.
CROSSWALK OPERATIONS
Crosswalk operations expenses, consisting primarily of costs related to the
Company's development, maintenance, content and enhancements for crosswalk.com,
decreased to $1,715,480 for the six months ended June 30, 2001, as compared to
$2,857,665 for the same period in 2000. The 40% ($1,142,185) decrease in cost of
Crosswalk operations was due primarily to the reduction in staffing.
SALES AND MARKETING
In the first six months of 2001, sales and marketing expenses decreased to
$842,828 from $2,013,976 for the same period in 2000. This 58% ($1,171,148)
decrease was largely due to maximizing efficient methods of corporate marketing.
The Company increased the number of unique visitors and Website traffic through
efficient viral marketing, instead of the expensive cross-media marketing
campaigns that the Company utilized in the prior year.
GENERAL AND ADMINISTRATIVE
The Company decreased its general & administrative costs in the first six months
of 2001 to $1,437,101 from $2,027,861 in the first six months of 2000. This 29%
($590,760) decrease was due to $65,000 reduction in facility related expenses
commensurate with the Company's consolidation to the Chantilly, VA office; third
party administrative expenses related to investor relations' services were
reduced by $58,231; and $420,882 in other costs covering bad debt expense
provision, offset to an extent by the accrual of $60,000 for the dividends
payable on Series "A" preferred shares which had not existed in the first six
months of 2000.
OTHER INCOME NET
Other income net in the first six months of 2001 decreased to a loss of $12,675,
down from income of $118,454 for the same period in 2000. Interest income
decreased 52% to $57,016 from $118,632 for the first six months ended June 30,
2001 and 2000, respectively. This $61,616 decrease is due to the use of
investments for business operations. Interest expense increased to $4,582 from
$435 in 2000, due to costs associated with capital leases. In addition, as part
of the Company's facility consolidation efforts, the Company disposed of a net
$65,109 in the first six months of 2001.
THE THREE MONTHS ENDED JUNE 30, 2001 AND 2000
NET LOSS
For the quarter ended June 30, 2001, the Company incurred a net loss of
$1,054,611, as compared to a net loss of $2,015,304 the same quarter in 2000.
The decreased loss for the second quarter of 2001 over the same period in 2000
was $960,693 (48%). This was the result of an across the board decrease in all
four expense categories (cost of goods sold, crosswalk operations, sales and
marketing, and general and administrative), combined with a smaller decline in
total revenues.
The decreased loss for the quarter ended June 30, 2001 versus June 30, 2000
consisted of a $162,965 (24%) decrease in cost of goods sold; a $444,377 (35%)
decrease in crosswalk operations; a $348,957 (45%) decrease in sales and
marketing; a $490,805 (41%) decrease in general and administrative expenses; and
offset by a $404,291 (22%) decrease in total revenues; a $82,120 (129%) decrease
in other net income, and a $241,326 (21%) increase in gross margin.
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REVENUES
Total revenue for the quarter ending June 30, 2001 was $1,427,237 down 22%
($404,291) from the same period in 2000. The 18% ($303,763) decrease in
advertising/sponsorship sales for the second quarter 2001 over 2000 resulted
from a significant reduction of $523,092 (81%) in barter and the change in
accounting practice revenue recognition. Also in the category of
advertising/sponsorship sales is our online and E-mail advertising component,
which increased to $879,147 in the second quarter of 2001, and represented a 74%
($374,402) improvement from the $504,745 recorded in the second quarter of 2000.
The Company also significantly curtailed the unprofitable direct retail sales in
the third quarter of 2000. This contributed $81,436 to the quarterly year on
year revenue reduction. As a result of these management initiatives, the
Company's gross margin in the second quarter of 2001 increased to 63.3% from
62.5% in the second quarter of 2000.
Barter agreements which allow for the exchange of goods and services such as
advertising, marketing, and content services on the Company's and the customer's
Internet websites, amounted to less than five percent of the revenue earned in
the second quarter of 2001, due to the Company's growing emphasis on leveraging
content and attracting advertisers to the loyal niche that Crosswalk.com serves.
This compared to eighteen percent of revenue in the second quarter of 2000.
In response to the Securities and Exchange Commission Staff Accounting Bulletin
101 issued in December 1999, the Company chose to change its revenue recognition
on the integration and development fee portion of 1999-year sponsorship deals,
to a more preferable method of deferral ratably over the term of the contract.
Under this method, the amount of deferred revenue recorded in the second quarter
of 2001 was $123,054 versus $482,183 recorded in the second quarter of 2000, a
reduction of $359,129 or 74%.
Total revenue in the second quarter of 2001 and 2000 would have been $1,304,183
and $1,349,345 respectively net of the impact of this change in accounting
method. Gross margin in the second quarter of 2001, would have been reduced by
$62,786 or 7% to $840,967, and overall gross margin would have increased to
64.5% gross margin net of the impact of this change in accounting method. In the
second quarter 2000, gross margin would have been reduced by $305,914 or 27% to
$839,165, representing an overall decrease to a 62.2% gross margin net of the
impact of this change in accounting method.
The Company's emphasis going forward will be on leveraging what the Company
believes is content which is engaging to its niche, the personal experiences
shared on crosswalk.com, and the great affinity of crosswalk visitors and the
Christian community. The market share potential for the Company has changed
significantly over the last year, with the dissolution of several competitive
Websites and partnerships the Company has with the few remaining sizeable
Websites serving the Christian and family-friendly niche. The Company hopes to
also leverage this market position through additional strategic relationships
and long-term advertising agreements. With continued growth in site traffic, and
strategic alliances, improved market position, and successful viral marketing
campaigns, the Company hopes to achieve continued progress in generating
quality-advertising revenues.
COST OF GOODS AND SERVICES
Cost of goods and services, consisting of commissions and other costs related to
delivery of client online content and offline advertising products; retailing
Christian interest products on crosswalk.com; and, the provision of Internet
services was $523,484 and $686,449 for the quarters ended June 30, 2001 and
2000, respectively. The Company's gross margin for the quarter ended June 30,
2001 increased to 63.3% from 62.5% for the same period in 2000. This increase is
due primarily to the decrease in barter transactions, which accounted for less
than 5% of revenues in the quarter ended June 30, 2001 versus 18% in the same
period in 2000; a decrease in accepting low margin, high dollar sponsorship
deals; and significantly curtailed low margin direct retail activities.
In response to the Securities and Exchange Commission Staff Accounting Bulletin
101 issued in December 1999, the Company chose to change its revenue and
applicable cost recognition on the integration and development fee portion of
1999-year sponsorship deals, to a more preferable method of deferral ratably
over the term of the contract. Under this method, the amount of deferred cost
recorded in the second quarter of 2001 was $60,268 versus $176,269
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recorded in the second quarter of 2000, a reduction of $116,001 or 66%. Total
cost of goods and services in the second quarter of 2001 and 2000 would have
been $463,216 and $510,180 respectively net of the impact of this change in
accounting method. Gross margin in the second quarter of 2001, would have been
reduced by $62,786 or 7% to $840,967, and overall gross margin would have
increased to 64.5% gross margin net of the impact of this change in accounting
method. In the second quarter 2000, gross margin would have been reduced by
$305,914 or 27% to $839,165, representing an overall decrease to a 62.2% gross
margin net of the impact of this change in accounting method.
CROSSWALK OPERATIONS
Crosswalk operations expenses, consisting primarily of costs related to the
Company's development, maintenance, content and enhancements for crosswalk.com,
decreased to $813,584 for the quarter ended June 30, 2001, as compared to
$1,257,961 for the same period in 2000. The 35% ($444,377) decrease in cost of
Crosswalk operations was due primarily to reduction in staffing. Other expenses
included in this category of content expenses, software license and maintenance
charges, consulting expenses and various other staff related costs such as
travel and office supplies, accounted for approximately 20% of the overall
reduction.
SALES AND MARKETING
In the second quarter of 2001, sales and marketing expenses decreased to
$423,922 as compared to $772,879 for the same period in 2000. Sales and
marketing expenses decreased 45% ($348,957) largely due to maximizing efficient
methods of corporate marketing. The Company was able to increase the number of
unique visitors and Website traffic through efficient viral marketing, instead
of the expensive cross-media marketing campaigns that the Company engaged in
earlier.
GENERAL AND ADMINISTRATIVE
The Company decreased its general & administrative costs in the second quarter
of 2001, to $702,284 from $1,193,089 in the second quarter of 2000. This 41%
decrease ($490,805) is mostly due to a $424,673 decrease in provision of bad
debt expense for 2001 from 2000. The remaining decrease resulted from reductions
in facility related expenses commensurate with the Company's consolidation to
the Chantilly, VA office; the elimination of two general and administrative
staff positions; and some third party administrative expenses relating to legal,
accounting and investor relations services, offset to an extent by the accrual
of $30,000 for the dividend payable on Series "A" preferred shares that did not
exist in the second quarter of 2000.
OTHER INCOME NET
Other income net consists of interest income that decreased 66% to $21,393 from
$63,724 for the quarters ended June 30, 2001 and 2000, respectively. This
$42,331 decrease was due to the use of investments for working capital. The
remaining decrease in other income net for the quarters ended June 30, 2001 and
2000 consisted of $37,834 for realized loss on disposed idle or obsolete
property and equipment, and interest expense of $1,955 for costs associated with
the capital leases.
LIQUIDITY AND CAPITAL RESOURCES
During the quarters ending June 30, 2001 and 2000, net cash used in operating
activities was $1,553,555 and $5,020,609 respectively. Net cash provided by
investing activities was $1,364,016 for the second quarter of 2001, and
$4,635,130 for the same period of 2000. Net cash provided by financing
activities for the quarter ended June 30, 2001 and 2000 was $28,776 and $41,555,
respectively.
The Company issued 80,000 shares of Series "A" preferred stock on September 29,
2000. The three-year Series "A" preferred Stock is convertible into 862,069
shares of common stock. This is the equivalent to $2.32 per common share,
representing a 42.8% premium over the average closing price of Crosswalk's
common stock for the five trading days preceding closing. The Series "A"
preferred Stock also accrues a 6% dividend per annum.
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The Company currently anticipates that its $1,418,960 working capital balance at
June 30, 2001 will be sufficient to meet the Company's anticipated working
capital, lease commitments, and capital expenditure requirements for the
remainder of 2001. However, the Company may seek to raise additional funds (1)
in order to expand the overall marketing of crosswalk.com and to pursue
potential leveraged joint marketing opportunities, (2) in the event that the
Company's estimates of operating losses and capital requirements change or prove
inaccurate, or (3) in order that the Company may respond to increased demand or
to take advantage of other unanticipated opportunities. There can be no
assurance that current working capital will be sufficient to meet the Company's
needs, or that additional financing will be available to the Company or will be
available on acceptable terms.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS
As a result of the Company's limited operating history and the rapid
technological change experienced in the Internet industry generally, the Company
has limited historical financial data upon which to base future operating
expenses. Accordingly, the Company's expense levels are based in part on its
expectations as to future revenues, of which there can be no assurance. There
can be no assurance that the Company will be able to accurately predict the
levels of future revenues, if any, and the failure to do so would have a
materially adverse effect on the Company's business, results of operations and
financial condition.
The Company expects to experience significant fluctuations in future quarterly
operating results that may be caused by multiple factors. Causes of such
significant fluctuations may include, among other factors, demand for the
Company's services; the number, timing and significance of new service
announcements by the Company and its competitors; acceptance of its marketing
initiatives; the ability of the Company to develop, market and introduce new and
enhanced versions of its services on a timely basis; the level of product and
price competition; changes in operating expenses; changes in service mix;
changes in the Company's sales incentive strategy; and general economic factors.
The Company's operating expense levels are based, in significant part, on the
Company's expectations of future revenue on a quarterly basis. If actual revenue
levels on a quarterly basis are below management's expectations, both gross
margins and results of operations are likely to be adversely affected because a
relatively small amount of the Company's costs and expenses varies with its
revenue in the short term.
FORWARD LOOKING STATEMENTS
Certain information in this quarterly report on Form 10-Q may contain
forward-looking statements within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended. All statements other than statements of
historical fact are forward-looking statements for purposes of these provisions,
including any projections of earnings, revenues or other financial items, any
statements of the plans and objectives of management for future operations, any
statements concerning proposed new products or services, any statements
regarding future economic conditions or performance, and any statement of
assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of terminology such as "may," "expects,"
"believes," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative thereof or other comparable terminology. Although the Company
believes that the expectations reflected in its forward-looking statements are
reasonable, it can give no assurance that such expectations or any of its
forward-looking statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the Company's
forward-looking statements.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None to report.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On June 13, 2001, the Company filed an Item 5 Form 8-K disclosing that Scott
Fehrenbacher, President and Chief Executive Officer of Crosswalk.com, Inc. was
named in criminal proceedings in Orange County Florida involving business
matters with his former company prior to joining Crosswalk.com in 1998. The
allegations, which do not involve Crosswalk.com, are related to a dispute with a
former business competitor who was involved in purchasing Mr. Fehrenbacher's
successful former business, but which apparently suffered losses since it's sale
in 1998.
ITEM 2. CHANGE IN SECURITIES
None to report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None to report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) On Wednesday, May 2, 2001, the Company held its Annual Meeting of
Stockholders. Proxies for the meeting were solicited pursuant to Regulation 14A
under the Exchange Act.
(b) The Board of Directors of Crosswalk set the number of directors constituting
the Board at eleven. The Company's shareholders of record, as of the close of
business on March 16, 2001, approved the election of the following seven
individuals to the Company's Board of Directors, all of whom served as directors
of the Company on the date of the meeting:
James G. Buick
Scott Fehrenbacher
Bruce E. Edgington
Clay T. Whitehead
Earl E. Gjelde
W.R. 'Max' Carey
Jon M. Morgan
Each director will hold office until the annual meeting of stockholders in the
year 2002 or until his successor is duly elected and qualified. The Board of
Directors intends to seek nominees to fill the remaining positions as soon as
possible following the Annual Stockholder Meeting:
(c) The results of the vote on the election of nominees to the Company's Board
of Directors was 7,203,998 shares voting for all members or 96.3% of the votes
cast with 275,478 shares withholding on one or more of the directors up for
election, and thus by plurality of the votes cast, the Board stands elected.
The Stockholders also approved the ratification of the selection of Ernst and
Young LLP as the Company's independent accountants. The result of the election
was 7,465,103 shares voting for the proposal, 8,149 shares voted against, 6,224
shares voted to abstain. Thus by majority of the votes cast, the selection of
independent auditor was ratified.
(d) There were no settlements to report.
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ITEM 5. OTHER INFORMATION
None to Report.
ITEM 6. EXHIBITS, LIST AND REPORTS ON FORM 8-K
(a) EXHIBITS:
EXHIBIT
NUMBER DESCRIPTION
------ -----------
11 Computation of Earnings Per Share
(b) Reports on Form 8-K
On June 13, 2001, the Company filed an Item 5 Form 8-K disclosing that Scott
Fehrenbacher, President and Chief Executive Officer of Crosswalk.com, Inc. was
named in criminal proceedings in Orange County Florida involving business
matters with his former company prior to joining Crosswalk.com in 1998. The
allegations, which do not involve Crosswalk.com, are related to a dispute with a
former business competitor who was involved in purchasing Mr. Fehrenbacher's
successful former business, but which apparently suffered losses since it's sale
in 1998.
SIGNATURES
In accordance with the requirements of Securities Act of 1934, Crosswalk.com,
Inc., the registrant, has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CROSSWALK.COM, INC.
August 15, 2001 By: /s/ Scott Fehrenbacher
----------------------
Scott Fehrenbacher
Chief Executive Officer and President
August 15, 2001 By: /s/ Gary A. Struzik
-------------------
Gary A. Struzik, Chief Financial Officer
and Secretary, Chief Accounting Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION PAGE
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11 Computation of Earnings Per Share 1
19