<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------------
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED OCTOBER 31, 1997
-- or --
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ___________
---------------------------
FINE.COM CORPORATION
Name of small business issuer as specified in its charter
0-22805
Commission File Number
STATE OF WASHINGTON 91-1657402
State or Other Jurisdiction of I.R.S. Employer Identification Number
Incorporation or Organization
1118 POST AVENUE
SEATTLE, WASHINGTON 98101
Address of Principal Executive Offices
206-292-2888
Issuer Telephone Number
---------------------------
Check whether the registrant (1) filed all reports required Yes [X] No [ ]
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 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.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
The number of shares of the registrant's common stock, no par value per share,
outstanding as of November 30, 1997 was 2,380,065.
<PAGE> 2
FINE.COM CORPORATION
FORM 10-QSB
FOR THE QUARTER ENDED OCTOBER 31, 1997
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements (Unaudited) 2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II. - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 12
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURE PAGE 14
EXHIBITS 15-16
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
fine.com CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
October 31, January 31,
1997 1997
------------ ----------
<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,925,029 $198,317
Marketable securities 1,584,576 --
Accounts receivable, less allowances 1,244,955 476,766
Work-in-progress 130,002 --
Income taxes refundable 784 784
Prepaid expenses and other 148,815 9,409
Notes receivable from officers 54,180 30,435
----------- --------
TOTAL CURRENT ASSETS 5,088,341 715,711
Marketable securities 2,318,420 --
Deferred offering costs -- 41,116
Deferred income tax asset 244,126 30,883
Equipment & furniture, net 199,132 80,827
----------- --------
TOTAL ASSETS $ 7,850,019 $868,537
=========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank $ 366,285 $ 90,286
Accounts payable 141,654 117,459
Accrued offering costs 144,000 16,002
Accrued expenses 10,812 28,046
Deferred revenue 13,077 36,722
Note payable to director -- 15,000
Deferred income tax liabilities 371,446 100,769
Capitalized lease obligations 5,380 9,699
----------- --------
TOTAL CURRENT LIABILITIES 1,052,654 413,983
SHAREHOLDERS' EQUITY:
Convertible Preferred stock, no par value:
No shares authorized, issued or
outstanding at October 31, 1997; and
1,000,000 shares authorized, 59,524
shares issued and outstanding at January 31, 1997 -- 239,918
Common Stock, no par value:
10,000,000 shares authorized, 2,380,065 shares
issued and outstanding at
October 31, 1997; and 9,000,000
shares authorized, 1,055,541 shares issued and 6,546,376 75,000
outstanding at January 31, 1997
Retained earnings 290,565 139,636
Unrealized loss on marketable securities (39,576) --
----------- --------
Total shareholders' equity 6,797,365 454,554
----------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 7,850,019 $868,537
=========== ========
</TABLE>
See accompanying notes.
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fine.com CORPORATION
STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
1997 1996 1997 1996
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Gross revenue $ 1,001,146 $ 318,006 $ 2,565,545 $ 810,134
Direct salaries and costs 599,802 192,175 1,700,797 464,081
----------- ----------- ----------- -----------
Gross profit 401,344 125,831 864,748 346,053
Selling, general and administrative
expenses 340,864 121,297 676,753 328,826
----------- ----------- ----------- -----------
Operating income 60,480 4,534 187,995 17,227
Interest income 72,236 -- 72,236 --
Interest expense (12,079) (2,673) (31,481) (5,451)
----------- ----------- ----------- -----------
Income before income taxes 120,637 1,861 228,750 11,776
Provision for income taxes 41,000 633 77,821 4,005
----------- ----------- ----------- -----------
Net income $ 79,637 $ 1,228 $ 150,929 $ 7,771
=========== =========== =========== ===========
Net income per share $ 0.04 $ 0.00 $ 0.10 $ 0.01
Shares used in computation of net
income per share 2,240,159 1,155,126 1,516,804 1,155,126
</TABLE>
See accompanying notes.
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<PAGE> 5
fine.com CORPORATION
STATEMENTS OF CASH FLOW
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended October 31,
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 150,929 $ 7,771
Depreciation and amortization 59,748 22,343
Deferred income taxes 77,821 4,004
Net changes in:
Accounts receivable (768,189) (115,904)
Work-in-process (130,002) --
Prepaid expenses and other (139,406) (7,909)
Accounts payable 24,195 2,393
Accrued expenses (17,234) (1,194)
Deferred revenue (23,645) 17,712
Current taxes payable -- (1,277)
----------- ---------
Total cash used in operating activities (765,783) (72,061)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of marketable securities (3,962,959) --
Purchase of equipment and furniture (178,053) (18,411)
----------- ---------
Total cash used in investing activities (4,141,012) (18,411)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock,
net of issuance costs 6,400,572 --
Increase in notes payable to bank 275,999 70,000
Payments on capital lease obligations (4,319) --
Notes receivable from officers (23,745) --
Notes payable to director (15,000) 15,000
----------- ---------
Total cash used in financing activities 6,633,507 85,000
----------- ---------
Net increase (decrease) in cash and
cash equivalents 1,726,712 (5,472)
Cash and cash equivalents at beginning
of period 198,317 15,668
----------- ---------
Cash and cash equivalents at end of
period $ 1,925,029 $ 10,196
=========== =========
</TABLE>
See accompanying notes.
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<PAGE> 6
fine.com CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
fine.com Corporation (the "Company") in accordance with generally accepted
accounting principles for interim financial statements and with the instructions
to Form 10-QSB and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and disclosures required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, all adjustments (consisting of normal recurring accruals)
necessary for a fair presentation have been included. For further information,
refer to the financial statements and footnotes thereto for the year ended
January 31, 1997 included in the Company's Registration Statement on Form SB-2,
as amended (file no. 333-26855) (the "Registration Statement"), and the related
Prospectus dated August 11, 1997 (the "Prospectus") as filed with the Securities
and Exchange Commission (the "Commission").
Net Income Per Share. Net income per share is computed based on the
weighted average number of common shares outstanding and dilutive common
equivalent shares from stock options, using the treasury stock method. In
accordance with the Commission requirements, common and common equivalent shares
issued during the 12-month period prior to the filing of the Registration
Statement for the Company's initial public offering have been included in the
calculation as if they were outstanding for all periods presented using the
treasury stock method at the initial public offering price of $6.50 per share.
Common equivalent shares consisted of the common shares issuable upon the
conversion of the convertible preferred stock and shares issuable upon the
exercise of stock options.
Marketable Securities. Marketable securities, which consist primarily of
government agency securities, are carried at market value. Market values are
determined based on quoted prices. Marketable securities are classified in the
balance sheet as current and noncurrent based on maturity dates and the
Company's expectation of sales and redemptions in the following year.
Cash and Cash Equivalents. The Company considers highly liquid
investments with an original maturity of three months or less to be cash
equivalents. Excess cash is primarily invested in treasury bills, securities of
government agencies, and commercial paper. Cash equivalents are carried at
amortized cost, which approximates fair market value.
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2. NOTE PAYABLE TO BANK
The Company had a $200,000 revolving line of credit agreement with a
bank which was due on March 31, 1997. Borrowings under this agreement bear
interest at the bank's prime interest rate plus 2% (effective rate of 10.25% at
January 31, 1997). At January 31, 1997, $90,286 was outstanding under this
agreement. This obligation was collateralized by eligible accounts receivable.
This credit agreement expired on March 31, 1997 and was replaced with a new
credit agreement which provides for a revolving line of credit in the maximum
amount of $750,000 (the "New Revolving Line of Credit") and an equipment line of
credit in the maximum amount of $400,000 (the "Equipment Line of Credit").
The New Revolving Line of Credit expires on March 31, 1998 and is
secured by all accounts receivable and the personal guarantee of the Company's
President and Chief Executive Officer. Amounts outstanding under the New
Revolving Line of Credit bore interest at the bank's prime interest rate plus
2%. Effective as of September 1, 1997, the first day of the month following the
successful completion of the Company's initial public offering, amounts
outstanding under the New Revolving Line of Credit, by its terms, are to bear
interest at a reduced rate equal to the bank's prime interest rate plus 0.25%
(effective rate of 8.75% at October 31, 1997). At October 31, 1997, $366,285 was
outstanding under the New Revolving Line of Credit. The Equipment Line of Credit
expires on December 31, 2000, provides for interest at the same rate of interest
as applicable to the New Revolving Line of Credit and is secured by the
equipment purchased utilizing such funds, all accounts receivable and the
personal guarantee of the Company's President and Chief Executive Officer. The
credit agreement contains certain covenants, including maintenance of minimum
levels of working capital and tangible net worth and restrictions on change of
control of the Company. At October 31, 1997, no amounts were outstanding under
the Equipment Line of Credit.
3. SHAREHOLDERS' EQUITY
Convertible Preferred Stock. On January 31, 1997, the Company completed
a private placement for the issuance and sale of 59,524 shares of Series A
Preferred Stock of the Company for $250,000 less offering costs of $10,082. Upon
the effectiveness of the Company's Registration Statement relating to the
Company's initial public offering of the common stock, all outstanding shares of
the Series A Preferred Stock automatically converted into shares of common
stock, at a one-to-one conversion ratio. In addition, upon the effective date of
the Registration Statement, the authority of the Company to issue preferred
stock terminated and the number of authorized shares of preferred stock were
converted into additional authorized shares of common stock.
Initial Public Offering. On April 14, 1997, the Board of Directors
authorized the Company to file a registration statement with the Commission to
permit the Company to sell shares of common stock to the public. Additionally,
the Board of Directors approved a recapitalization of the issued and outstanding
shares of common stock which became effective on May 9, 1997. All outstanding
common and common equivalent shares and per-share amounts in the accompanying
financial statements and the related notes to the financial statements have been
retroactively adjusted to give effect to such recapitalization.
Immediately prior to the date of the initial public offering of common
stock, the Company had authorized capital stock consisting of 9,000,000 shares
of common stock, of which 1,055,541 shares were issued and outstanding, and
1,000,000 shares of preferred stock, of which 59,524 shares were designated as
Series A Preferred Stock and were issued and outstanding. On August 11, 1997,
the effective date of the Registration Statement relating to the initial public
offering of the Company's common stock, the issued and
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<PAGE> 8
outstanding shares of Series A Preferred Stock automatically converted into
59,524 shares of common stock (resulting in an aggregate of 1,115,065 shares of
common stock outstanding at such time). Additionally, on such date, all
authorized shares of preferred stock automatically converted into additional
authorized shares of common stock and, as a result, the Company's authorized
capital stock, on such date, consisted solely of 10,000,000 shares of common
stock.
On August 15, 1997, the Company completed its initial public offering
and issued 1,100,000 shares of common stock to the public at an initial public
offering price of $6.50 per share. On August 25, 1997, pursuant to the exercise
of an over-allotment option granted to the underwriters in the Company's initial
public offering, the Company issued an additional 165,000 shares of common stock
at a price of $6.50 per share. Proceeds to the Company, net of estimated
offering expenses of $1,991,042, amounted to approximately $6,231,458. Remaining
expenses of $144,000 have been accrued in the October 31, 1997 balance sheet and
offering expenses of $25,114 were paid prior to January 31, 1997.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with (i) the
financial statements and accompanying notes appearing in this Report, and (ii)
the Company's financial statements and accompanying notes appearing in the
Company's Registration Statement and Prospectus as filed with the Commission.
This Quarterly Report on Form 10-QSB contains forward-looking statements
which reflect the Company's current views with respect to future events and
financial performance. These forward-looking statements are subject to certain
uncertainties that could cause actual results to differ materially from
historical results or those anticipated. Words used in this Report such as
"believes," "anticipates," "expects," "intends," and similar expressions are
intended to identify forward-looking statements but are not the exclusive means
of identifying such statements. Readers are urged to carefully review and
consider the various disclosures made by the Company in this Report and in
section entitled "Risk Factors" appearing in the Registration Statement and the
Prospectus.
OVERVIEW
The Company plans, creates, maintains and hosts Web sites for major
national and international corporate clients and others. The Company's Web site
development process utilizes marketing expertise and state of the art
interactive database compilation and dissemination techniques and technologies.
Through the planning, creation, maintenance and hosting of interactive Web
presentations, the Company enhances clients' marketing campaigns, fosters the
collection of demographic data which is utilized by clients when allocating
marketing resources and facilities both internal and external corporate
communications for clients.
The Company generates substantially all of its revenues from fees
associated with the planning and creation of commercial Web sites for clients.
These fees are generally earned pursuant to long-term fixed fee contracts (with
terms typically ranging from two to seven months). Revenues generated from
long-term contracts are recognized under the percentage-of-completion method.
Percentage-of-completion is generally measured on the attainment of specific
contract milestones (based on the ratio of costs incurred to total estimated
project costs). Estimated earnings from long-term contracts are reviewed
periodically as work progresses. All other revenue is recorded on the basis of
performance of services. The Company assumes greater financial risk on fixed fee
contracts than on either time-and-material or
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<PAGE> 9
cost-reimbursable contracts. Failure to anticipate technical problems, estimate
costs accurately or control costs during performance of a fixed fee contract may
reduce the Company's profit or cause a loss individually on a particular project
and in the aggregate.
The Company has recently initiated efforts to generate recurring
revenues from Web site maintenance and Web site hosting fees. The amount of
revenue generated to date from the Company's provision of such services has not
been significant. Even if revenues from such source increase, fees for
maintenance and hosting services may not become a significant percentage of the
Company's revenues, if and to the extent that revenues increase from the
planning and creation of Web sites. No assurance can be given that revenues from
maintenance and hosting fees, or from other new methods of generating recurring
revenues, will be sufficient to offset the costs incurred by the Company in
performing such services.
RESULTS OF OPERATIONS FOR NINE MONTHS ENDED OCTOBER 31, 1997 AND 1996
Gross Revenue. Gross revenue for the nine months ended October 31, 1997
and 1996 was $2,565,545 and $810,134, respectively. During each of these
nine-month periods, substantially all of the Company's revenue was generated by
its Web site planning and creation services. The 217% increase in the first
three quarters of fiscal 1998 gross revenue over gross revenue for the same
period in fiscal 1997 is attributable primarily to an increase in the average
amount billed per client for such services from approximately $38,000 per client
in the first nine months of fiscal 1997 to approximately $97,000 for the same
period in fiscal 1998, as well as to the number of clients contracting with the
Company for such services increasing from approximately 21 clients in the first
nine months of fiscal 1997 to approximately 24 clients for the same period in
fiscal 1998. The average amount billed per client during the first nine months
of fiscal 1998 for Web site planning and creating services increased from the
same period in fiscal 1997 primarily due to the Company's clients generally
undertaking more sophisticated levels of Web site development. The Company
believes that the increase in the number of clients was attributable to
increased levels of marketing, advertising and new business development
activities.
Direct Salaries and Costs. Direct salaries and costs include all
internal labor costs and other direct costs related to project performance, such
as project specific independent contractor fees, supplies and specific
project-related expenditures. The Company's direct salaries and costs for the
nine months ended October 31, 1997 were $1,700,797 and consisted primarily of
$1,020,295 paid as direct salaries, taxes and benefits and secondarily of
$680,502 as other direct costs of goods sold related to specific projects. The
Company hired additional employees during fiscal 1998 to meet increased demand
and had 20 full-time production employees at October 31, 1997. The Company
expects that it will hire additional staff if and as needed to meet demand
from current clients and prospective clients whose projects are anticipated to
commence within ninety days after hiring. The Company also engages independent
contractors and subcontractors to service unanticipated projects. The Company's
direct salaries and costs for the nine months ended October 31, 1996 were
$464,081 and consisted, primarily, of $369,347 paid as direct salaries, taxes
and benefits and secondarily, of $94,734 as other direct costs of goods sold
related to specific projects. The Company had 16 full-time production employees
at October 31, 1996.
As a percentage of gross revenue, total direct salaries and costs
increased 9% for the first three quarters of fiscal 1998 over the same period in
fiscal 1997. This increase was due to a combination of
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<PAGE> 10
increased level of salaries paid to production employees and to an increase in
the number of independent contractors and subcontractors hired to fulfill the
production requirements which exceeded the capacity of the Company's internal
staff, partially offset by the reclassification of salaries paid to
administrative personnel as sales, general and administrative expenses in the
third quarter of fiscal 1998. The Company engages independent contractors and
subcontractors to service project demand that exceeds anticipated levels and
will continue to do so if and to the extent the Company's hiring of additional
staff does not enable it to service all project demand internally. The Company
believes that staffing client projects with independent contractors and
subcontractors results, on a project-by-project basis, in the incurrence by
the Company of costs that are greater than those the Company would experience
if projects were internally staffed. Such cost increases were not offset by
corresponding increases in amounts billed to customers or gross revenue
generated in the nine months ended October 31, 1997 due to the fact that the
relevant project budgets assumed costs at internally staffed rates. Management
intends, to the extent feasible, to build cost adjustments into future project
budgets, but cannot predict how such adjustments may impact gross revenue from
period to period. Management believes that direct salaries and costs from
period to period as a percentage of gross revenue are subject to increase, and
that gross profits from period to period as a percentage of gross revenue are
subject to decrease, in comparison to prior periods until sufficient internal
staffing levels are achieved to meet increasing project demand.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $676,753 and $328,826 for the nine months ended
October 31, 1997 and 1996, respectively. In each period, these expenses
consisted primarily of administrative salaries, professional fees, occupancy
costs, telephone and related Internet connectivity fees, computer network costs,
office expenses and supplies, marketing, advertising and new business
development costs. The increase in expenses from fiscal 1997 to 1998 was
primarily due to the addition of administrative staff, telephone costs,
administrative services and rent costs. The Company had 6 administrative
personnel at October 31, 1997 as compared with 4 at October 31, 1996.
Marketing, advertising and new business development costs increased as a
percentage of gross revenue in the first nine months of fiscal 1998 from the
first nine months of fiscal 1997. Marketing, advertising and new business
development costs were $116,223 (representing 5% of gross revenue) in the first
nine months of fiscal 1998, as compared to $32,137 (representing 4% of gross
revenue) in the first nine months of fiscal 1997. The Company believes that the
increase in marketing, advertising and new business development costs was
instrumental in the 217% increase in gross revenue from the first nine months of
fiscal 1997 to the same period of fiscal 1998. Management believes that these
costs will continue to increase as a percentage of gross revenue in future
periods and may reach approximately 6% of gross revenue.
Overall, selling, general and administrative expenses as a percentage of
gross revenue were 26% for the nine months ended October 31, 1997 as compared to
41% for the nine months ended October 31, 1996. This overall decrease in
selling, general and administrative expenses as a percentage of gross revenue
was a result of the Company's ongoing effort to control expenses and effectively
assimilate higher volumes of business using existing resources, offset in part
by increased marketing, advertising and new business development. The Company
anticipates, however, that administrative expenses may increase in future
periods due to the compliance and reporting obligations associated with being a
publicly held company.
Net Income. The Company recognized net income of $150,929 (representing
6% of gross revenue) for the first nine months of fiscal 1998 as compared to
$7,771 (representing 1% of gross revenue) for the same period in fiscal 1997.
The increase in profitability (as a percentage of gross revenue) is due to the
factors discussed above.
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RESULTS OF OPERATIONS FOR THREE MONTHS ENDED OCTOBER 31, 1997 AND 1996
Gross Revenue. Gross revenue for the three months ended October 31, 1997
and 1996 was $1,001,146 and $318,006, respectively. During each of these
periods, substantially all of the Company's revenue was generated by its Web
site planning and creation services. The 215% increase in gross revenue for the
three months ended October 31, 1997 compared to the three months ended October
31, 1996 is attributable primarily to the increase in the average amount billed
per client to approximately $52,000 per client during the third quarter of
fiscal 1998 from approximately $19,000 during the same period in fiscal 1997.
The number of clients contracting with the Company for such services increased
to approximately 17 clients during the three months ended October 31, 1997 from
approximately 16 clients during the three months ended October 31, 1996. The
average amount billed per client during the three months ended October 31, 1997
for Web site planning and creation services increased from the same period in
1996 primarily due to the Company's clients generally undertaking more complex
levels of Web site development.
Direct Salaries and Costs. The Company's direct salaries and costs for
the three months ended October 31, 1997 were $599,802 and consisted primarily of
$349,339 paid as direct salaries, taxes and benefits and secondarily of $250,463
as other direct costs of goods sold related to specific projects. The Company's
direct salaries and costs for the three months ended October 31, 1996 were
$192,175 and consisted, primarily, of $163,807 of direct salaries, taxes and
benefits and, secondarily, of $28,368 of other direct costs of goods sold
related to specific projects. The Company hired additional employees during
fiscal 1998 to meet increased demand and had 20 full-time production employees
at October 31, 1997.
Total direct salaries and costs stayed relatively constant at
approximately 60% of gross revenue for the three months ended October 31, 1997
and 1996. During the third quarter of fiscal 1998, the Company reclassified
certain salaries paid to administrative personnel as selling, general and
administrative expenses, resulting in a decrease of approximately $61,000 to the
Company's direct salaries and costs. This decrease was offset by rising costs,
consistent with prior quarters, due to increased levels of salaries paid to
production employees and to an increase in the number of independent contractors
and subcontractors hired to fulfill the production requirements which exceeded
the capacity of the Company's internal staff. The Company engages independent
contractors and subcontractors to service project demand that exceeds
anticipated levels and will continue to do so if and to the extent the Company's
hiring of additional staff does not enable it to service all project demand
internally. The Company believes that staffing client projects with independent
contractors and subcontractors results, on a project-by-project basis, in the
incurrence by the Company of costs that are greater than those the Company would
experience if projects were internally staffed. Such cost increases were not
offset by corresponding increases in amounts billed to customers or gross
revenue generated in the three months ended October 31, 1997 due to the fact
that the relevant project budgets assumed costs at internally staffed rates.
Management intends, to the extent feasible, to build out adjustments into future
project budgets, but cannot predict how such adjustments may impact gross
revenue from period to period. Management believes that direct salaries and
costs from period to period as a percentage of gross revenue are subject to
increase, and that gross profits from period to period as a percentage of gross
revenue are subject to decrease, in comparison to prior periods until sufficient
internal staffing levels are achieved to meet increasing project demand.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $340,864 and $121,297 for the three months ended
October 31, 1997 and 1996, respectively.
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<PAGE> 12
Marketing, advertising and new business development costs stayed
relatively constant as a percentage of gross revenue in the three months ended
October 31, 1997 compared to the same period in 1996. Marketing, advertising and
new business development costs were $53,975 (representing 5% of gross revenue)
in the third quarter of fiscal 1998 as compared to $15,451 (representing 5% of
gross revenue) in the third quarter of fiscal 1997. The Company believes that
the increase in marketing, advertising and new business development costs was
instrumental in the 215% increase in gross revenue from the three months ended
October 31, 1997.
Overall, selling, general and administrative expenses as a percentage of
gross revenue amounted to 34% for the three months ended October 31, 1997 as
compared to 38% for the same period in 1996. This decrease in selling, general
and administrative expenses as a percentage of gross revenue from the third
quarter of fiscal 1998 to the third quarter of fiscal 1997 was more modest than
the decrease for the comparable nine month periods as described above, due in
part to the addition of administrative staff, increased expenses from
compliance and reporting obligations associated with the Company's initial
public offering which closed during the three month period ended
October 31, 1997, and in part to the reclassification of certain administrative
salaries as selling, general and administrative expenses from direct salaries
and costs. Management believes that those costs may increase as a
percentage of gross revenue in future periods due to the compliance and
reporting obligations associated with being a publicly held company.
Net Income. The Company recognized net income of $79,637 (representing
8% of gross revenue) for the three months ended October 31, 1997 as compared to
$1,228 (representing less than 1% of gross revenue) for the three months ended
October 31, 1996. The increase in profitability (as a percentage of gross
revenue) is due to the factors discussed above.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company has funded its capital requirements through
earnings, borrowings from affiliates and commercial lenders, and equity
financing and private placements of its capital stock. The Company had cash and
cash equivalents in the aggregate amount of $1,925,029 and $198,317 at
October 31, 1997 and January 31, 1997, respectively.
The Company's working capital increased $3,733,959, from $301,728 at
January 31, 1997 to $4,035,687 at October 31, 1997. Operating activities for the
nine months ended October 31, 1997 required net cash in the amount of $765,783,
primarily due to increases in work in process, accounts receivable and prepaid
expenses. Work in process increased $130,002 from $0 at January 31, 1997.
Accounts receivable increased $768,189, from $476,766 at January 31, 1997 to
$1,244,955 at October 31, 1997, primarily due to the increase in gross revenue
during the nine months ended October 31, 1997. Prepaid expenses increased
$139,406 due to deposits made for future consulting and marketing services and
prepaid insurance costs.
The purchase of equipment and furniture required cash in the amount of
$178,053 during the nine months ended October 31, 1997. These expenditures were
made primarily for computer hardware and software, furniture, fixtures and
leasehold improvements necessary to accommodate an increase in Company
personnel. Net cash provided from financing activities was $6,633,507, primarily
due to the net proceeds of $6,400,572 from the initial public offering and an
increase of $275,999 in borrowings under the New Revolving Line of Credit,
offset by a note receivable from a shareholder, repayment of a note payable to a
shareholder and payments on capital lease obligations.
The Company's revolving line of credit expired on March 31, 1997 and was
replaced by the New Revolving Line of Credit. The maximum amount available under
the New Revolving Line of Credit is $750,000. Amounts outstanding under the New
Revolving Line of Credit bore interest at the bank's prime interest rate plus
2%. Effective as of September 1, 1997, the first day of the month following the
successful
-11-
<PAGE> 13
completion of the Company's initial public offering, amounts outstanding under
the New Revolving Line of Credit, by its terms, are to bear interest at a
reduced rate equal to the bank's prime interest rate plus 0.25% (effective rate
of 8.75% at October 31, 1997). Amounts outstanding under the New Revolving Line
of Credit are secured by all of the Company's accounts receivable and the
personal guaranty of Daniel M. Fine, the Company's President and Chief Executive
Officer. The New Revolving Line of Credit expires on March 31, 1998 (the
"Expiration Date"). On the Expiration Date, the Company must pay in full the
aggregate unpaid principal amount then outstanding and all accrued interest,
together with all applicable fees, costs and charges, if any. At October 31,
1997, $366,285 was outstanding under the New Revolving Line of Credit.
The Company has also obtained an additional line of credit (the
"Equipment Line of Credit") from the commercial bank which has made the New
Revolving Line of Credit available. The maximum amount available under the
Equipment Line of Credit is $400,000. Amounts drawn by the Company pursuant to
the Equipment Line of Credit may be used exclusively for the purchase of
computer hardware and software, furniture and fixtures, and leasehold
improvements. Amounts outstanding under the Equipment Line of Credit by its
terms are to bear interest at the same rate of interest as applicable to the New
Revolving Line of Credit (effective rate of 8.75% at October 31, 1997). Monthly
payments of accrued interest only are due until January 31, 1998, from which
date the balance outstanding under the Equipment Line of Credit will be required
to be amortized over a 36-month period. Amounts outstanding under the Equipment
Line of Credit will be secured by the assets purchased with funds borrowed under
the Equipment Line of Credit, all of the Company's accounts receivable and the
personal guaranty of Daniel M. Fine. At October 31, 1997, no amounts were
outstanding under the Equipment Line of Credit.
On August 15, 1997, the Company completed its initial public offering
and issued 1,100,000 shares of common stock to the public at an initial public
offering price of $6.50 per share. On August 25, 1997, pursuant to the exercise
of an over-allotment option granted to the underwriters in the Company's initial
public offering, the Company issued an additional 165,000 shares of common stock
at a price of $6.50 per share. Proceeds to the Company, net of estimated
offering expenses of $1,991,042, amounted to approximately $6,231,458. Remaining
expenses of $144,000 have been accrued in the October 31, 1997 balance sheet and
offering expenses of $25,114 were paid prior to January 31, 1997. Pending
ultimate application of the net proceeds from the offering, the Company invested
such proceeds primarily in certain interest bearing securities issued or
guaranteed by the United State government or its agencies and secondarily in
money market funds.
The Company believes that existing cash and cash equivalent balances,
cash generated from operations and the funds available to it under credit
facilities, together with the remaining proceeds from the initial public
offering, will be sufficient to fund its operations through the next fiscal
year.
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company's Registration Statement on Form SB-2, as amended (file
number 333-26855), relating to the Company's initial public offering of the
Company's common stock, was declared effective by the Commission on Monday,
August 11, 1997. Total proceeds from the offering were $8,222,500, of which the
Company received gross proceeds of $7,400,250, of which the remaining $822,250
was allocated as underwriting discounts and commissions.
-12-
<PAGE> 14
From the effective date of the Registration Statement through the end of
the Company's fiscal quarter ended October 31, 1997, the Company incurred an
estimated $1,991,042 in expenses for the Company's account in connection with
the issuance and distribution of the securities registered, including
underwriting discounts and commissions ($822,250), expenses paid to or for the
underwriters ($346,738) and other expenses ($822,054). The Company believes that
none of these payments were made, directly or indirectly, to: (i) directors or
officers of the Company or their affiliates; (ii) persons owning ten percent or
more of the Company's common stock; or (iii) affiliates of the Company.
From the effective date of the Registration Statement through the end of
the Company's fiscal quarter ended October 31, 1997, the Company has applied an
estimated $6,231,458 of the net offering proceeds to the following uses:
repayment of indebtedness under the Company's New Revolving Line of Credit
($245,000); equipment purchases ($45,671); working capital to finance
work-in-progress ($130,002); marketing, advertising and business development
($53,975); and working capital to finance accounts receivable and other general
corporate purposes ($58,523). The Company believes that none of these payments
were made, directly or indirectly, to: (i) directors or officers of the Company
or their affiliates; (ii) persons owning ten percent or more of the Company's
common stock; or (iii) affiliates of the Company. To date, the Company believes
that it has used the offering proceeds in a manner consistent with the use of
proceeds described in the Registration Statement and Prospectus. The remaining
$5,698,287 of the net offering proceeds is invested primarily in marketable
securities and secondarily in money market funds.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11.1 Statement regarding computation of net income per share
27.1 Financial data schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended
October 31, 1997.
-13-
<PAGE> 15
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated December 15, 1997.
fine.com CORPORATION
(Registrant)
By /s/ Daniel M. Fine
------------------------------------------------
Daniel M. Fine
President and Chief Executive Officer
(principal executive officer)
By /s/ James P. Chamberlin
------------------------------------------------
James P. Chamberlin
Secretary and Chief Financial Officer
(principal financial and principal
accounting officer)
-14-
<PAGE> 1
Exhibit 11.1
fine.com CORPORATION
STATEMENT REGARDING COMPUTATION OF NET INCOME PER SHARE
<TABLE>
<CAPTION>
Three Months Ended October 31, Nine Months Ended October 31,
------------------------------ -----------------------------
1997 1996 1997 1996
--------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding 2,198,477 1,055,541 1,436,732 1,055,541
Net effect of stock options exercised
and granted, and preferred stock
issued during the 12-month period
prior to the Company's filing of its
initial public offering at less than
the offering price, calculated using
the treasury stock method at the
initial offering price of $6.50 per
share, and treated as outstanding for
all periods presented 11,907 99,585 70,038 99,585
Net effect of dilutive stock options based
on the treasury stock method using
the higher of the average market price
or the period end market price 29,775 -- 10,034 --
--------- --------- --------- ---------
Shares used in computation of net
income per share 2,240,159 1,155,126 1,516,804 1,155,126
========= ========= ========= =========
Net income 79,637 1,228 150,929 7,771
========= ========= ========= =========
Net income per share $ 0.04 $ 0.00 $ 0.10 $ 0.01
========= ========= ========= =========
</TABLE>
-15-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> YEAR 9-MOS
<FISCAL-YEAR-END> JAN-31-1997 JAN-31-1998
<PERIOD-START> FEB-01-1996 FEB-01-1997
<PERIOD-END> JAN-31-1997 OCT-31-1997
<CASH> 198,317 1,925,029
<SECURITIES> 0 1,584,576
<RECEIVABLES> 476,766 1,244,955
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 715,711 5,088,341
<PP&E> 142,812 320,865
<DEPRECIATION> 61,985 121,733
<TOTAL-ASSETS> 868,537 7,850,019
<CURRENT-LIABILITIES> 413,983 1,052,654
<BONDS> 0 0
0 0
239,918 0
<COMMON> 75,000 6,546,376
<OTHER-SE> 139,636 250,989
<TOTAL-LIABILITY-AND-EQUITY> 868,537 7,850,019
<SALES> 1,485,869 2,565,545
<TOTAL-REVENUES> 1,485,869 2,565,545
<CGS> 774,242 1,700,797
<TOTAL-COSTS> 774,242 1,700,797
<OTHER-EXPENSES> 514,059 676,753
<LOSS-PROVISION> 0 0
[INTEREST-INCOME] 0 72,236
<INTEREST-EXPENSE> 8,840 31,481
<INCOME-PRETAX> 188,728 228,750
<INCOME-TAX> 64,454 77,821
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 124,274 150,929
<EPS-PRIMARY> 0.11 0.10
<EPS-DILUTED> 0.11 0.10
</TABLE>
