United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 For the Period Ended June 30, 2002.
or
[ ] Transition Report Pursuant to 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 Small Business Issuer as Specified in Its Charter)
Delaware 54-1831588
---------------- ------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4100 Lafayette Center Drive Suite 110
Chantilly, VA 20151
--------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(703-968-4808)
--------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Not applicable
--------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter periods that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
-------- --------
Applicable Only to Corporate Issuers
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practical date:
Common Stock, $ .01 Par Value: 7,968,221 shares outstanding as of June 30, 2002
Transitional Small Business Disclosure Format (check 0ne):
Yes No X
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INDEX
PAGE
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
Balance Sheets--at December 31, 2001 and June 30, 2002 3
Statements of Operations--three and six months ended June 30, 2001 and 2002 4
Statements of Cash Flows--six months ended June 30, 2001 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis or Plan of Operation 11
Part II. OTHER INFORMATION
Items 1-6 Including Exhibits and Reports on Form 8-K 18
Signatures 20
CROSSWALK.COM, INC.
CONSOLIDATED BALANCE SHEETS
December 31, June 30,
2001 2002
---------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 901,195 $ 392,878
Short-term investments 51,777 306,246
Accounts receivable, including unbilled receivables of $55,568 and 656,130 420,918
$67,594 at December 31, 2000 and June 30, 2002, respectively
Stock subscription receivable 300,000 -
Deferred costs 114,519 203,800
Notes receivable from officers 17,856 16,183
Assets held for sale - 2,433,350
-------------- --------------
Total current assets 2,041,477 3,773,375
LONG TERM INVESTMENTS 131,227 52,822
PROPERTY AND EQUIPMENT, net 931,180 287,412
OTHER ASSETS:
Deposits 61,795 60,887
Deferred costs 609 609
Goodwill, net 3,505,228 750,399
Intangible assets, net 68,903 -
-------------- --------------
Total other assets 3,636,535 811,895
-------------- --------------
TOTAL ASSETS $ 6,740,419 $ 4,925,504
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 252,595 $ 317,232
Accrued liabilities 627,373 601,211
Deferred revenue 156,688 115,083
-------------- --------------
Total current liabilities 1,036,656 1,033,526
OTHER LIABILITIES:
Accounts payable 123,027 131,211
Deferred revenue 128,456 -
Other liabilities 43,817 19,439
COMMITMENTS - -
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value, 5,000,000 shares authorized,
80,000 Series "A" shares issued and outstanding at both 80 80
December 31, 2001 and at June 30, 2002
80,000 Series "B" shares issued and outstanding at June 30, 2002 - 80
Common stock, $.01 par value, 20,000,000 shares authorized, 7,959,721 and
7,968,221 shares issued and outstanding at
December 31, 2001 and at June 30, 2002, respectively 79,597 79,682
Common stock warrants 127,660 127,660
Additional paid-in capital 42,056,566 42,056,199
Accumulated deficit (36,859,485) (38,519,456)
Accumulated other comprehensive loss:
Net unrealized gain/(loss) on available-for-sale securities 4,045 (2,917)
-------------- --------------
Total stockholders' equity 5,408,463 3,741,328
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,740,419 $ 4,925,504
============== ==============
See accompanying notes.
3
CROSSWALK.COM, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Three Months For the Six Months
Ended June Ended June
2001 2002 2001 2002
---------------------------------------------------------------------------
TOTAL REVENUES $ 1,427,237 $ 311,350 $ 2,491,543 $ 484,615
OPERATING EXPENSES:
Cost of goods and services 523,484 246,627 862,344 374,340
Crosswalk operations 813,584 54,430 1,715,480 112,034
Sales and marketing 423,921 33,693 842,827 70,430
Amortization of Goodwill and Intangibles 296,399 - 591,669 -
General and administrative 443,462 162,349 910,541 351,777
-------------- -------------- --------------- --------------
Total operating expenses 2,500,850 497,099 4,922,861 908,581
-------------- -------------- --------------- --------------
LOSS FROM CONTINUING OPERATIONS (1,073,613) (185,749) (2,431,318) (423,966)
OTHER INCOME, NET 19,002 8,453 52,433 18,183
-------------- -------------- --------------- --------------
LOSS FROM CONTINUING OPERATIONS $ (1,054,611) $ (177,296) (2,378,885) (405,783)
Loss from discontinued operations - (282,211) - (504,187)
-------------- -------------- --------------- --------------
Loss before cumulative effect of a change
in accounting principle $ (1,054,611) (459,507) (2,378,885) (909,970)
Recognition of impairment loss as a result of
transitional goodwill impairment test - (750,000) - (750,000)
NET LOSS $ (1,054,611) $ (1,209,507) $ (2,378,885) $(1,659,970)
============== ============== =============== ==============
Amounts per common share:
Loss from continuing operations $ (0.13) $ (0.02) $ (0.30) $ (0.05)
Loss from discontinued operations - (0.04) - (0.06)
-------------- -------------- --------------- --------------
Loss before cumulative effect of a change
in accounting principle $ (0.13) $ (0.06) $ (0.30) $ (0.11)
Recognition of impairment loss as a result of
transitional goodwill impairment test - (0.09) - (0.10)
Net loss per common share (basic and diluted) $ (0.13) $ (0.15) $ (0.30) $ (0.21)
============== ============== =============== ==============
Weighted average number of common
shares outstanding 7,943,312 7,968,221 7,935,186 7,967,470
============== ============== =============== ===============
See accompanying notes.
4
CROSSWALK.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the Six Months
Ended June 30,
------------------------------
2001 2002
------------- --------------
OPERATING ACTIVITIES:
Net loss $ (2,378,885) $(1,659,970)
Adjustments to reconcile net loss to net cash
used in operating activities:
Net (gain)/loss on investments 4,575 (1,043)
Depreciation 410,974 283,701
Amortization 591,669 762,811
Loss on disposal of property and equipment 65,109 --
Changes in operating assets and liabilities:
Accounts receivable (2,949) 235,212
Notes receivable from officer (18,075) 1,673
Deposits 3,679 908
Deferred costs 82,357 (89,281)
Other current assets 14,841 --
Accounts payable (36,209) 72,821
Accrued liabilities (8,860) (50,540)
Deferred revenue (277,206) (170,061)
------------- --------------
Net cash used in operating activities (1,548,980) (613,769)
------------- --------------
INVESTING ACTIVITIES:
Purchases of property and equipment (13,018) (12,263)
Sales and maturities of investments 1,372,459 644,721
Purchase of investments -- (826,804)
------------- --------------
Net cash provided by (used in) investing activities 1,359,441 (194,346)
------------- --------------
FINANCING ACTIVITIES:
Net proceeds from issuance of preferred stock 28,776 292,360
Net proceeds from issuance of common stock -- 7,438
------------- --------------
Net cash provided by financing activities 28,776 299,798
------------- --------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (160,763) (508,317)
CASH AND CASH EQUIVALENTS,
BEGINNING OF PERIOD 1,272,256 901,195
------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,111,493 $ 392,878
============= ==============
See accompanying notes.
5
CROSSWALK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A. THE COMPANY AND BASIS OF PRESENTATION
Crosswalk.com, Inc. ("Crosswalk" or the "Company") is the creator of its Website
www.crosswalk.comTM ("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 focused on topical
and lifestyle channels like Entertainment, Money, News, HomeSchool, Family
Living, Spiritual Life, Women, Live It--Christian book reviews, and more; unique
online applications like cross-referenced Bible study databases, stock and
mutual fund screening tools, greeting cards, and more; community-building areas
like chat, discussion forums, the largest Christian Web site directory, and
more; and over thirty topical and community related email newsletters. Crosswalk
also provides email subscription service to over 1.1 million newsletter
subscribers encompassing over 650,000 opt-in email addresses.
The Company's business includes the development and aggregation of Internet
content and services, which it believes are conducive to the online Christian
and family-friendly community. Crosswalk.com generates revenue through the sale
of advertising; Internet services; royalties and referral fees from co-marketing
relationships. The Company operates in one business segment.
The accompanying unaudited financial statements as of June 30, 2002 and 2001
have been prepared by the Company 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.
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, 2001. The
results of operations for the three months ended June 30, 2002 are not
necessarily indicative of the results to be expected for any subsequent quarter
or for the entire fiscal year ending December 31, 2002
B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation - The consolidated financial statements include all of the
accounts of the Company which operates in one business segment. Certain items in
the accompanying financial statements for the period ending June 30, 2001 have
been reclassified to conform to the 2002 presentation.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and
No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years
beginning after December 15, 2001. Under the new rules, goodwill 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. Goodwill is no longer being amortized, effective January 1, 2002.
If SFAS No. 142 had been adopted at the beginning of 2001, the absence of
goodwill amortization would have decreased net loss by $287,678 for the three
months ended June 30, 2001, resulting in pro forma second quarter 2001 net loss
of $766,933 and basic and diluted loss per share of $0.09.
SFAS No. 142 requires the Company to test for the impairment of goodwill at
least an annual basis. The impairment test consists of a two-step process.
First, the current fair value of a reporting unit is compared to its carrying
value, including goodwill. The fair value of an asset is the amount at which
that asset could be bought or sold in a current transaction between willing
parties. The Company's two reporting units for purposes of this analysis are the
offline and online advertising areas. If the fair value of a reporting unit
exceeds its carrying amount, goodwill of the reporting unit is considered not
impaired and thus, the second step of the impairment test is not necessary. If
the carrying amount of a reporting unit exceeds its fair value, SFAS No. 142
requires that a second step be taken to assess the new value of goodwill. If the
second step is required, the fair value of all tangible and intangible assets of
the reporting unit other than goodwill (implied fair value) must be determined
and compared to the carrying value of the goodwill associated with that
reporting unit. If the carrying value of the reporting units goodwill exceeds
the implied fair value of the reporting unit, an impairment loss shall be
recognized in an amount equal to that excess. After a goodwill impairment loss
is recognized, the adjusted carrying amount of goodwill shall be its new
accounting basis for future impairment tests.
6
CROSSWALK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2002, the Company performed the transitional goodwill impairment tests
as described herein. This resulted in a $750,000 impact to earnings in the
second quarter. See Note E for further clarification.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which supersedes both SFAS 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and the accounting and reporting provisions of APB Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that Opinion). SFAS 144 retains the fundamental provisions in SFAS
121 for recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also providing
guidance on how a long-lived asset that is used as part of a group should be
evaluated for impairment. SFAS 144 also establishes criteria for when a
long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. SFAS 144 retains
the basic provisions of APB 30 on how to present discontinued operations in the
income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business).
The Company has adopted the provisions of SFAS 144, specifically as it relates
to the treatment of long-lived assets held for sale pursuant to the Company's
announcement of it's intent to sell substantially all of its Internet assets to
Salem Communications for $4.1 million. The Company believes that the asset sale
will close no later than the end of the third quarter of 2002. On June 1, 2002,
the Company determined that the plan of sale criteria of SFAS 144 had been met.
Accordingly, prospective to this date, the long-lived assets related to this
asset sale have been separately presented as "Assets held for sale" on the June
30, 2002 balance sheet. The Company determined that the carrying value of
approximately $2.4 million for these assets held for sale was less than the fair
value less costs to sell, and therefore no impairment charge has been recorded
in this regard. In addition, consistent with SFAS 144, depreciation on the
property, plant and equipment included in the assets held for sale, ceased as of
June 1, 2002, as the carrying amount of these assets will be recovered through
the asset sale and not through future operations. Consistent with SFAS 144, the
Company has removed the activities of the Internet portion of its business from
continuing operations in the periodic statement of operations.
Use of estimates - Management uses estimates and assumptions in preparing the
consolidated 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 dates are short-term investments. Those investments with
current maturities greater than twelve months from the balance sheet dates 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 stockholders' equity.
7
CROSSWALK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Realized gains or losses and permanent declines in value, if any, on
available-for-sale investments are reported in other income or expense as
incurred.
Fair value of financial instruments - The carrying value of cash and cash
equivalents, investments, and accounts receivable, approximate fair value
because of the relatively short maturity of these instruments.
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 shorter of the life of the asset or the remaining lease term.
Intangible assets are amortized over useful lives of five to ten years using the
straight-line method. Amortization expense includes three capital leases
amortized over 36 and 48-month periods for Web server computer equipment and a
telephone system, respectively. Costs for the repair and maintenance of property
and equipment are expensed as incurred.
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. Revenue from royalty or referral fees
is recognized upon receipt of payment from third parties.
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
quarters ended June 31, 2001 and 2002, the impact of the change in accounting
was to decrease net loss by $62,768 or less than $0.01 per share and $43,332 or
less than $.01 per share, respectively. The impact of the change in accounting
for the six months ended June 30, 2001 and 2002 was to decrease net loss by
$138,886 or $0.02 per share and $86,664 or $.01 per share, respectively.
Barter transactions, from discontinued operations amounting to $42,000 or
approximately six percent of revenues for the quarter ended June 30, 2002, 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 unrelated to the counterparty in the barter transaction, that have
occurred no more than six months prior to the barter transaction, consistent
with EITF 99-17. "Accounting for Advertising Barter 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
2002, the Company's comprehensive loss was $2,378,177 and $1,666,932,
respectively.
8
CROSSWALK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred costs - Deferred costs consist of contract costs, 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
contract 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.
Deferred revenue - Deferred revenue consists primarily of revenue deferred
pursuant to the Company's change in method of accounting for nonrefundable fees
for Web integration contracts entered into prior to January 1, 2000 to
recognizing such fees over the term of the related agreement, which is generally
a one to two year period.
Website development and maintenance costs - Product-development costs include
expenses incurred by the Company to maintain, monitor and manage the Company's
Website. The Company recognizes Website development costs in accordance with
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use", and Emerging Issues Task Force (EITF)
Issue No. 00-02, "Accounting for Web-Site Development Costs". EITF 00-02 was
issued in March 2000 to provide additional guidance in the application of SOP
98-1. As such, the Company expenses all costs incurred that relate to the
planning and post-implementation phases of development. Costs incurred in the
development phase are capitalized and recognized over the product's estimated
useful life, if the product is expected to have a useful life beyond one year.
Costs associated with repair or maintenance of the existing site or the
development of Website content, are included in the Crosswalk operations expense
category in the accompanying statement of operations.
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, 2002
total $657,713 that includes $298,646 in cash and cash equivalents having
current maturities of three months or less. The Company has recorded an
unrealized gain of $3,745 and an unrealized loss of $6,662 for the six months
ended June 30, 2002. The aggregate market value, cost basis, and unrealized
gains and losses of securities available for sale, by major security type, as of
June 30, 2002, are as follows:
9
CROSSWALK.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Unrealized Gross Unrealized
Market Value Cost Basis Gains (Losses)
------------ ---------- ----- --------
U.S. Govt. Debt Securities $ 220,012 $ 216,267 $ 3745 $ --
Municipal Debt Securities 15,464 15,612 (148)
Corporate Debt Securities 422,237 428,751 -- (6,514)
--------- --------- ------- --------
Total at June 30, 2002 $ 657,713 $ 660,630 $ 3,745 $(6,662)
========= ========= ======= ========
The Company recorded gross realized losses of $2,286 and $1,896 and gross
realized gains of $6,861 and $853 for the six months ended June 30, 2001 and
2002, respectively. This translates to a net realized gain of $4,575 and a net
realized loss of $1,043 for the six months ended June 30, 2001 and 2002,
respectively.
D. RELATED PARTY TRANSACTIONS
At June 30, 2002, the Company had a note receivable from an officer of the
Company totaling $16,183. The advance accrues at 3.8% interest per annum. The
Company expects to receive payment in full before September 30, 2002 and
considers this advance to be a short-term receivable.
E. IMPAIRMENT TESTING
On January 1, 2002, the Company adopted Financial Accounting Standards Board
Statements of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets". Pursuant to this new rule, an impairment test was performed
in June 2002. Due to a significant reduction in revenues generated versus
operating plan in the first six months of 2002, operating profits and cash flows
related to the offline business area for the next six months of 2002 and
throughout 2003 are expected to be lower than previously planned. Based on this
trend, the cash flow forecast for the foreseeable future has been revised
accordingly. The result of this analysis was recognition of a goodwill
impairment loss of $750,000 related to the offline business area in June 2002.
The fair value of that business area was estimated using the expected values of
future cash flows.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
FORWARD LOOKING STATEMENTS
Certain information in this section 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, but
not limited to, any projections of earnings, revenues or other financial items,
any statements of the plans and objectives of management for future operations,
any statements concerning proposed new products or services, any statements
regarding future economic conditions or performance, and any statement of
assumptions underlying any of the foregoing. In some cases, "forward-looking
statements" can be identified by the use of terminology such as "may," "will,"
"expects," "believes," "plans," "anticipates," "estimates," "potential," or
"continue," or the negative thereof or other comparable terminology. Although
the Company believes that the expectations reflected in its forward-looking
statements are reasonable, it can give no assurance that such expectations or
any of its "forward-looking statements" will prove to be correct, and actual
results could differ materially from those projected or assumed in the Company's
"forward-looking statements." We have identified our "forward-looking
statements" in italics throughout this section.
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 English speaking
Christian and family-friendly community. The Biblically based content offered is
available and may be conducive to helping families educate their children,
manage their money, evaluate opportunities for entertainment, and more,
regardless of religious persuasion. 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 online and offline advertising and sponsorship agreements; referral fees
from co-marketing relationships and the provision of limited Internet services.
In 2000, the Company abandoned the pursuit of sponsorship agreements,
transitioning to an ad sales model. Thus, sponsorship revenues generated in 2002
are in recognition of services provided under contracts signed prior to 2000.
Crosswalk.com offers content focused on topical and lifestyle channels like
Entertainment, Money, News, HomeSchool, Family Living, Spiritual Life, Women,
Live It--Christian book reviews and more; unique online applications like
cross-referenced Bible study databases, stock and mutual fund screening tools,
greeting cards, and more; community-building areas like chat, discussion forums,
the largest Christian Web site directory, and more; and over thirty topical and
community related email newsletters. Crosswalk also provides email subscription
service to send information to over 800,000 opt-in email addresses.
After achieving disappointing sales results early in the second quarter, the
directors of the Company reviewed financial performance, outlooks and strategies
going forward. Because of the lasting impact on the advertising market of
several factors such as the September 11 tragedy, and the troubled stock market,
compounded by the going concern qualification issued by our auditors in
connection with our 2001 Annual Report, we have not been meeting the revenue
targets necessary to generate progress toward consistent monthly cash positive
operations. In order to make progress toward reducing our monthly cash burn
rate, we continue to reduce expenses, which has had the effect of lowering the
fair market value of our Website asset.
Analysis of the Website's traffic patterns, and the outlook for online
advertising sales indicate that this trend of reducing cash burn could only be
maintained through further expense reductions, which would seriously impact the
effectiveness of the Website. The board of directors determined continuing
operations in this manner would generate only nominal cashflow for the
stockholders over the next few years, and hasten the risk of declining fair
market value of the Website. In addition, consideration of engaging new revenue
streams, involves further capital infusion which would only further dilute the
stockholders.
11
Therefore, in order for the Company to be in the best financial position to
satisfy outstanding obligations and maximize the potential for return of value
to stockholders, the board of directors authorized the chief executive officer
to explore the market for a potential sale of the Internet properties of
Crosswalk (the "asset sale"). This resulted in Crosswalk entering into a letter
of intent with OnePlace, LLC, a wholly owned subsidiary of Salem Communications
Corporation. Under the terms of the asset purchase agreement, Crosswalk will
sell substantially all of its Internet related intellectual property and other
technology assets, email lists and newsletters, customer base and trademarks to
Salem for $4,100,000 in cash. There is no assurance that the asset sale will be
completed, as it is subject in all respects to the satisfaction of the
conditions and covenants specified in the asset purchase agreement, including
stockholder approval.
The Company intends to utilize the proceeds of the asset sale to capitalize on
its material remaining assets of a public company foundation, and a net
operating tax loss carryforward (NOL) of over $29 million. The business plan
formulated in this regard involves the acquisition of currently cash generating
assets, consisting primarily of office buildings in secondary stagnant markets,
office buildings in out of favor growth markets and oil and gas royalties. This
focus is designed to diversify holdings while offering sufficient markets to
exploit in order to provide the greatest opportunity for seeking increased value
for the stockholders. The details of the proposed asset sale and the business
plan going forward are included in the preliminary proxy statement dated July
16, 2002, which is available free of charge from the Company or at the Website
maintained by the SEC at www.sec.gov. The definitive proxy is expected to be
filed and mailed soon after the SEC staff completes its review of the
preliminary proxy statement. Investors are urged to read this proxy statement
because it contains important information on the proposed transactions.
Crosswalk and its directors and officers may be deemed to be participants in the
solicitation of proxies from Crosswalk stockholders. The names of directors and
officers and description of their interests in Crosswalk and the transaction, if
any, will be contained in the proxy statement to be filed by Crosswalk. Any
additional information about the directors and officers of Crosswalk can be
found in Crosswalk's proxy statement for its 2002 Annual Meeting of stockholders
dated March 29, 2002.
While the Company has eliminated most discretionary and variable expenses, the
Company's inability to generate sales sufficient to cover an increasing portion
of relatively flat fixed expenses led to an increase in the second quarter
average monthly cash burn rate to $115,000 on revenues of $700,000, up from
$80,000 on revenues of $1,064,000 in the preceding first quarter of 2002. This
also compares to an average monthly cash burn rate in the second quarter of 2001
of $175,000 on revenues of $1,427,000. If the second quarter 2002 average
monthly cash burn rate of $115,000 is sustained, the Company would not be able
to maintain operations without further capital infusion beyond the end of fiscal
2002.
The Company has also historically published unique visitor, pageviews and email
views as a measure of the number of unique visitors, 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. In the second quarter of 2002, a
monthly average of 755,578 unique visitors came to crosswalk.com, versus 927,150
unique visitors in the first quarter of 2002. Visitor loyalty to crosswalk.com
remains high, as about 37%of visitors are repeat visitors. In the first quarter
of 2002, the Company changed its disclosure of pageviews to report only those
pages where advertisements are offered and viewed. This, the Company believes,
is a better reflection of crosswalk.com's value, as its revenue model is largely
dependent on the sale of advertising. In the second quarter of 2002, average
monthly page views as defined herein, fell to 9,167,000 from 9,384,000 reported
for the first quarter of 2002. Though the drop in unique visitors was
significant, the average number of pages viewed per visit in the first quarter
2002 versus second quarter, increased from four to six and therefore, the drop
in total pageviews was not as dramatic. Comparative pageviews generated in the
second quarter of 2001 were 8,572,000, representing a 6% year on year increase
in traffic with no expenditure on direct marketing of the Website.
Average monthly Email views during the second quarter of 2002 were approximately
14.4 million as compared to 15.8 million during the preceding first quarter of
2002. This reduction reflects the Company's continued challenges in upgrading
its email delivery software, which is intended to provide a more productive
method of delivering this opt-in email traffic, but has caused significant
interruptions of service. The Company has also consolidated several newsletters
and reduced the frequency of distribution in response to subscriber feedback.
Despite these occurrences, during the second quarter, subscriptions to the
thirty-five active newsletters remained at 1.1 million and the number of unique
subscribers increased 20% to 748,000 from 625,000.
12
The Company's business must be considered in light of the risks, expenses and
problems frequently encountered by companies in new and rapidly evolving
markets, such as the Internet. The market for the Company's services and
products, continues to develop, and may change based on market opportunities,
competitive forces, technology and availability of resources for expansion. As a
result, the Company's mix of services and products may undergo substantial
changes as the Company reacts to these 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, 2002, the Company had an accumulated deficit of
$38,519,456.
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 the effectiveness of its sales staff.
Continued shortfalls 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.
RESULTS OF OPERATIONS
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) 144, "Accounting for the Impairment of Disposal of Long-Lived
Assets," specifically as it relates to the treatment of long-lived assets held
for sale pursuant to the Company's announcement of it's intent to sell
substantially all of its Internet assets to Salem Communications for $4.1
million. The Company believes that the asset sale will close no later than the
end of the third quarter of 2002. On June 1, 2002, the Company determined that
the plan of sale criteria of SFAS 144 had been met. Accordingly, the Company's
periodic statement of operations for the three months and six months ended June
30,2002 include only as discontinued operations, the activities related to the
Internet portion of its business. However, so that the reader can assess
material changes in financial condition and results of operation for the periods
presented, the following comparative period information includes results related
to discontinued operations, with comparative data after discontinued operations
noted.
THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
NET LOSS
For the six months ended June 30, 2002, the Company incurred a net loss before
the cumulative effect of a change in accounting principle and after loss from
discontinued operations, of $909,970, as compared to $2,378,885 for the same
period ended June 30, 2001. Before the cumulative effect of a change in
accounting principle, the decreased net loss for the first six months of 2002
over the first six months of 2001 was $1,468,915 or 60%. This decrease,
inclusive of discontinued operations, is primarily due to a $2,428,640 or 49%
decrease in operating expenses, offset to an extent by a $925,475 or 37%
decrease in total revenues, and a $34,250 or 65% in other income, net.
In January of 2002, the Company adopted the provisions of SFAS 142, "Goodwill
and Other Intangible Assets," and the Company completed a transitional goodwill
impairment test related to both its online and offline advertising functions.
The result of this analysis was recognition of a goodwill impairment loss of
$750,000 related to the offline business area in June 2002. The fair value of
that business area was estimated using the expected values of future cash flows.
Pursuant to this rule, the $750,000 reduction in the carrying amount of goodwill
for this business area is reflected as the effect of a change in accounting
principle on the Company's consolidated statement of operations.
Discontinued operations, recorded in accordance with SFAS 144, amounted to
$534,573. This represents the loss associated with the Internet assets, which
are held for sale as of June 30, 2002, pursuant to the Company's sale of these
assets to Salem Communications, pending shareholder approval. The loss from
continuing operations of $423,966 for the six months ended June 30, 2002, is
comparable to a loss from continued operations of approximately $469,000 for the
six months ended June 30, 2001.
13
REVENUES
Total revenue for the first six months of 2002, including discontinued
operations, was $1,566,068, down $925,475 or 37% from the same period in 2001.
The $1,566,068 revenue earned in the first six months of 2002 consisted of
$1,459,145 from advertising/sponsorship sales, of which $484,615 was related to
the continuing operations of the offline advertising business, $19,813 from
royalties, and $87,110 from Internet services, while in the first six months of
2001, the $2,491,543 of revenue earned consisted of $2,439,904 from
advertising/sponsorship sales, of which $615,684 was related to the continuing
operations of the offline advertising business, $15,507 from royalties, and
$36,131 from Internet services. The year on year change in revenue includes an
$867,000 reduction in advertising sales and an $114,000 reduction in SAB 101 and
prior year sponsorship revenue recognition. This decrease in revenue was partly
offset by a $55,000 increase in Internet services and royalties.
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 2002, the amount of revenue
recorded from discontinued operations that was previously deferred totaled
$113,826 versus $259,441 for the same period in 2001, a reduction of $145,615 or
56%. Total revenue in the first six months of 2002 and 2001 would have been
$1,452,242 and $2,232,101, respectively net of the impact of this change in
accounting method. Gross margin in the first six months of 2002 would have been
reduced by $86,644 or 9% to $878,763, and overall gross margin increases to
60.5% net of the impact of this change in accounting method. In the first six
months of 2001, the gross margin would have been reduced by $138,905 or 9% to
$1,490,294, representing an overall increase to a 66.8% gross margin net of the
impact of this change in accounting method.
The decrease in revenues is a reflection of the Company's inability to establish
the strategic partnerships and advertising agency relationships necessary to
increase revenues. While the Company has been able to retain several significant
customers and entered into numerous long-term advertising agreements, it has
been unable to tap into the ad budgets of larger organizations due to the
potential concerns with niche affiliation, overall recession in the ad market
and the absence of funding to effectively market the Company. While the
Company's sales team remains as productive as possible with the resources at
their disposal, the team of five has been inadequate to generate revenues
necessary to cover the mostly fixed costs of operation.
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; and the
provision of Internet services, including discontinued operations, was $600,661,
of which $374,340 was related to the continuing operations of the offline
advertising business, and $862,344, of which $510,142 was related to the
continuing operations of the offline advertising business, for the six months
ended June 30, 2002 and 2001, respectively. The Company's gross margin,
including discontinued operations, for the six months ended June 30, 2002
decreased to 61.6% from 65.4% for the same period in 2001. This decrease is due
primarily to the overall decrease in higher margin online advertising revenues.
Gross margin from continuing operations increased to 22.7% from 17% for the six
months ended June 30, 2002 and 2001, respectively.
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
from discontinued operations recorded in the first six months of 2002 was
$27,182 versus $120,536 recorded in the first six months of 2001, a reduction of
$93,354 or 77%. Total cost of goods and services in the first six months of 2002
and 2001 would have been $573,479 and $741,807, respectively net of the impact
of this change in accounting method. Gross margin in the first six months of
2002 would have been reduced by $86,644 or 9% to $878,763, and overall gross
margin increases to 60.5% net of the impact of this change in accounting method.
In the first six months of 2001, the gross margin would have been reduced by
$138,905 or 9% to $1,490,294, representing an overall increase to a 66.8% gross
margin net of the impact of this change in accounting method.
14
CROSSWALK OPERATIONS
Crosswalk operations expenses, consisting primarily of costs related to the
Company's development, maintenance, content and enhancements for the
discontinued operations of crosswalk.com, and depreciation related to continuing
operations, decreased to $692,830 for the six months ended June 30, 2002, as
compared to $1,715,480 for the same period in 2001. The approximate $1,022,000
or 59% decrease in cost of Crosswalk operations was due primarily to a $291,000
reduction in hosting & software licensing costs, a $389,000 reduction in salary
related expenses, $128,000 reduction in depreciation, a $180,000 reduction in
content acquisition costs, and a $31,000 reductions in consulting expenditures.
Depreciation related to continuing operations is unchanged at approximately
$112,000 for the comparative six-month periods.
SALES AND MARKETING
In the first six months of 2002, sales and marketing expenses, including
discontinued operations, decreased to $474,105 from $842,827 for the same period
in 2001. This $368,722 or 44% decrease was largely due to the transition to
reduced and more efficient methods of corporate marketing which led to the
reduction of $240,000 in salary related expenses, $39,000 in travel, $20,000 in
telecommunications, $54,000 in consulting and promotions, and an $8,000
reduction in software licensing. Sales and Marketing from continuing operations
were $70,430 to $95,769 for the six-month period ending June 30, 2002 and 2001,
respectively.
GENERAL AND ADMINISTRATIVE
The Company decreased its general & administrative costs, including discontinued
operations, in the first six months of 2002 to $726,625 from $1,502,210 in the
first six months of 2001. This decrease of over $775,000 or 51% is mostly due to
the adoption of FASB 142, "Goodwill and Other Intangible Assets," which resulted
in a $578,000 reduction in recognition of goodwill amortization. Other expenses
included in this category such as salary expenses, rent expenses, investor
relations, legal, taxes, office expenses, outside services, telecommunications
and travel expenses, accounted for approximately $220,000 of the overall
reduction, offset to an extent by the accrual of $24,000 in dividends related to
the Series "B" preferred stock issued in January 2002. General and
Administrative expenses from continuing operations were $419,432 and $351,777
for the six month period ending June 30, 2002 and 2001, respectively.
OTHER INCOME NET
Other income net in the first six months of 2002 decreased to $18,183, down
$52,433 for the same period in 2001. This $34,250 or 65% decrease is due to the
use of investments for business operations. Also, interest expense increased to
$5,643 from $4,582 for the same period in 2001, due to costs associated with
capital leases.
THE THREE MONTHS ENDED JUNE 30, 2002 AND 2001
NET LOSS
For the quarter ended June 30, 2002, before the cumulative effect of a change in
accounting principle, and after loss from discontinued operations, the Company
incurred a net loss of $459,506, as compared to a net loss of $1,054,611 the
same quarter in 2001. This decreased loss of $595,105 or 56% was the result of
an across the board decrease in all four operating expense categories (cost of
goods sold, crosswalk operations, sales and marketing, and general and
administrative) of $1,332,887, offset in part by a decline in total revenues of
$727,234, and a $10,549 reduction in other income net.
15
In January of 2002, the Company adopted FASB 142, "Goodwill and Other Intangible
Assets," and the Company completed a transitional goodwill impairment test
related to both its online and offline advertising functions. The result of this
analysis was recognition of a goodwill impairment loss of $750,000 related to
the offline business area in June 2002. The fair value of that business area was
estimated using the expected values of future cash flows. Pursuant to this rule,
the $750,000 reduction in the carrying amount of goodwill for this business area
is reflected as the effect of a change in accounting principle on the Company's
consolidated statement of operations.
Discontinued operations, recorded in accordance with SFAS 144, amounted to
$312,597. This represents the loss associated with the Internet assets, which
are held for sale as of June 30, 2002, pursuant to the Company's sale of these
assets to Salem Communications, pending shareholder approval. The loss from
continuing operations of $185,749 for the three months ended June 30, 2002, is
comparable to a loss from continued operations of approximately $246,000 for the
three months ended June 30, 2001.
REVENUES
Total revenue for the quarter ending June 30, 2002, including discontinued
operations, was $700,003 down $727,234 or 51% from the same period in 2001. The
reduction in revenue consists of a $645,000 reduction in advertising sales,
including an $81,000 reduction on the continuing operations of the offline
advertising business and an $83,000 reduction in SAB 101 and prior year
sponsorship revenue recognition.
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 from discontinued operations
recorded in the second quarter of 2002 was $56,913 versus $123,054 recorded in
the second quarter of 2001, a reduction of $66,141 or 54%. Total revenue in the
second quarter of 2002 and 2001 would have been $643,090 and $1,304,183
respectively net of the impact of this change in accounting method. Gross margin
in the second quarter of 2002 would have been reduced by $43,322 or 11% to
$349,408, and overall gross margin would have decreased to 54.3% net of the
impact of this change in accounting method. In the second quarter 2001, gross
margin would have been reduced by $62,786 or 7% to $840,967, representing an
overall increase to a 64.5% gross margin net of the impact of this change in
accounting method.
The decrease in revenues is a reflection of the Company's inability to establish
the strategic partnerships and advertising agency relationships necessary to
increase revenues. While the Company has been able to retain several significant
customers and entered into numerous long-term advertising agreements, it has
been unable to tap into the ad budgets of larger organizations due to the
potential concerns with niche affiliation, overall recession in the ad market
and the absence of funding to effectively market the Company. While the
Company's sales team remains as productive as possible with the resources at
their disposal, the team of five has been inadequate to generate revenues
necessary to cover the mostly fixed costs of operation.
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 and the
provision of Internet services, including discontinued operations, was $307,273
and $523,484 for the quarters ended June 30, 2002 and 2001, respectively. Cost
of goods and services from continuing operations decreased from $331,368 to
$245,627 for the quarters ended June 30, 2002 and 2001, respectively. The
Company's gross margin for the quarter ended June 30, 2002, including
discontinued operations, decreased to 56.1% from 63.3% for the same period in
2001. This decrease is due primarily to the associated reduction in advertising
revenue.
16
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
from discontinued operations recorded in the second quarter of 2002 was $13,591
versus $60,268 recorded in the second quarter of 2001, a reduction of $46,677 or
77%. Total cost of goods and services in the second quarter of 2002 and 2001
would have been $293,682 and $463,216 respectively net of the impact of this
change in accounting method. Gross margin in the second quarter of 2002 would
have been reduced by $43,322 or 11% to $349,408, and overall gross margin would
have decreased to 54.3% net of the impact of this change in accounting method.
In the second quarter 2001, gross margin would have been reduced by $62,786 or
7% to $840,967, representing an overall increase to a 64.5% 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 the
discontinued operations of crosswalk.com, decreased to $261,314 for the quarter
ended June 30, 2002, as compared to $813,584 for the same period in 2001. The
$552,270 or 67% decrease in cost of Crosswalk operations was primarily due to a
$245,000 reduction in hosting & software licensing, a $107,000 reduction in
salary related expenses, a $98,000 reduction in depreciation, a $91,000
reduction in content acquisition cost, and an $11,000 reduction in consulting
expenditures. Depreciation related to continuing operations is unchanged at
approximately $54,000 for the comparative three-month periods.
SALES AND MARKETING
In the quarter ended June 30, 2002, sales and marketing expenses, including
discontinued operations, decreased to $245,010 from $423,921 for the same period
in 2001. This $178,911 or 42% decrease was largely due to the transition to
reduced and more efficient methods of corporate marketing. The reduction in
sales and marketing expenditures includes $125,000 in salary related expenses,
$32,000 in travel, and a $20,000 in telecommunications. Sales and Marketing from
continuing operations were $50,391 and $33,693 for the three- month period
ending June 30, 2002 and 2001, respectively.
GENERAL AND ADMINISTRATIVE
The Company decreased its general & administrative costs in the second quarter
of 2002, including discontinued operations, to $354,366 from $739,861 in the
same period of 2001. This $385,495 or 52% decrease is primarily due to the
adoption of FASB 142, "Goodwill and Other Intangible Assets," which resulted in
reduced amortization in the second quarter of 2002 to $5,136 from $296,399 in
the same quarter of 2001. Other expenses included in this category such as
salary expenses, rent expenses, investor relations, legal, taxes, office
expenses, outside services, telecommunications and travel expenses, accounted
for approximately $104,000 of the overall reduction, offset to an extent by the
accrual of $12,000 in dividends related to the Series "B" preferred stock issued
in January 2002. General and Administrative expenses from continuing operations
were $222,553 and $162,349 for the three month period ending June 30, 2002 and
2001, respectively.
OTHER INCOME NET
Other income net in the second quarter of 2002 decreased to $8,453, down from
income of $19,002 for the same period in 2001. This $10,549 or 56% decrease is
due to the use of investments for business operations. Also, interest expense
increased to $2,977 from $2,391 in the second quarter of 2002, due to costs
associated with capital leases.
17
LIQUIDITY AND CAPITAL RESOURCES
During the six months ending June 30, 2002 and 2001, net cash used in operating
activities were $613,769 and $1,548,980 respectively. Net cash used in investing
activities was $194,346 for the first half of 2002, and provided by investing
activities was $1,359,441 for the same period of 2001. Net cash provided by
financing activities for the six months ended June 30, 2002 and 2001 was
$299,798 and $28,776, respectively.
The Company currently anticipates that its $306,499 working capital balance at
June 30, 2002 will be sufficient to meet the Company's anticipated working
capital, lease commitments, and capital expenditure requirements for the
remainder of 2002. However, if sales deteriorate further or there are unforeseen
expense increases, 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.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In June 2001, Scott Fehrenbacher, President and Chief Executive Officer of
Crosswalk.com, Inc. learned that he 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 directly, 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 its sale in 1998. The State
of Florida is the plaintiff; the sole defendant is Scott Fehrenbacher. Since
this is a criminal proceeding, no relief is specified. Crosswalk.com is not a
party to the proceeding and therefore would have no liability, monetary or
otherwise, if the proceeding's outcome is adverse to Mr. Fehrenbacher. However,
any verdict against Mr. Fehrenbacher could impair his ability to carry out his
duties as an employee of the Company, and therefore could negatively impact the
Company, depending upon Mr. Fehrenbacher's duties at the time of such verdict.
Defense counsel continues to seek a dismissal of charges against Mr.
Fehrenbacher while the case remains in the discovery phase. It is the opinion of
defense counsel and of Company management that the allegations against Mr.
Fehrenbacher are of a purely civil nature and do not rise to the level of
criminal conduct.
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 8, 2002, 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 15, 2002, approved the election of the following eight
individuals to the Company's Board of Directors, all of whom, except for Dr.
Dwight Reighard, served as directors of the Company on the date of the meeting:
James G. Buick
Scott Fehrenbacher
Bruce E. Edgington
Earl E. Gjelde
W.R. 'Max' Carey
Jon M. Morgan
Eric Oliver
Dr. Dwight 'Ike' Reighard
18
Each director will hold office until the annual meeting of stockholders in the
year 2003 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 9,304,973 shares voting for all members or 93.2% of the votes
cast with 674,935 shares withholding on one or more of the directors up for
election, and 254,915 broker non-votes. 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 8,995,612 shares or 90.5% of the votes cast, voting for the proposal,
482,463 shares voted against, 501,913 shares voted to abstain and 254,835 broker
non-votes. Thus by majority of the votes cast, the selection of independent
auditor was ratified.
The Stockholders also approved a proposal granting the Company authorization to
issue common stock for payment of Series "B" preferred stock dividends, which
directly and indirectly includes directors of Crosswalk.com, should the
declaration of these dividends result in the issuance of common stock at a basis
of less than $0.64 per share and the number of shares issued below this price
exceed 1,591,000 or 20% of the 7,959,721 shares outstanding on December 31,
2001, the date of the binding agreement.
The result of the election was 3,138,237 shares or 72.1% of the votes cast,
voting for the proposal, 1,195,580 shares voted against, 20,120 shares voted to
abstain and 4,947,617 broker non-votes. Thus by majority of the votes cast, the
Company was granted authorization to issue common stock for the payment of
certain dividends on its Series "B" preferred stock as indicated in the
proposal.
Lastly, the Stockholders also approved a proposal granting the Company
authorization to issue common stock pursuant to conversion and/or dividend
payment to Series "A" Preferred Stockholders, which indirectly includes
directors of crosswalk.com, should conversion and/or declaration of these
dividends result in the issuance of common stock at a basis of less than $1.50
per share and the number of shares issued below this price exceed 1,585,000 or
20% of the 7,926,971 shares outstanding on September 28, 2000, the date of the
binding agreement.
The result of the election was 2,892,815 shares or 67.7% of the votes cast,
voting for the proposal, 1,205,680 shares voted against, 8,930 shares voted to
abstain and 4,177,618 broker non-votes. Thus by majority of the votes cast, the
Company was granted authorization to issue common stock pursuant to certain
conversion and/or the payment of certain dividends on its Series "A" preferred
stock as indicated in the proposal.
(d) There were no settlements to report.
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 4, 2002, the Company filed an Item 5 Form 8-K, amended July 16, 2002,
disclosing that on June 3, 2002, Crosswalk.com, Inc. issued a press release
announcing that it has signed a letter of intent to sell its award-winning
crosswalk.com portal site (www.crosswalk.com) and extensive email business to
Salem Communications for $4.1 million. The cash sale is subject to among other
things, the parties reaching a definitive agreement, shareholder approval and
the receipt of a fairness opinion by Crosswalk.
19
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 14, 2002 By: /s/ Scott Fehrenbacher
----------------------
Scott Fehrenbacher
Chief Executive Officer and President
August 14, 2002 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
20