<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-26855
PROSPECTUS
1,100,000 Shares
[FINE.COM CORPORATION LOGO]
Common Stock
---------------------------
ALL OF THE SHARES OF COMMON STOCK, NO PAR VALUE (THE "COMMON STOCK"), OFFERED
HEREBY ARE BEING SOLD BY FINE.COM CORPORATION (THE "COMPANY"). PRIOR TO THIS
OFFERING (THE "OFFERING"), THERE HAS BEEN NO PUBLIC MARKET FOR THE COMMON STOCK.
SEE "UNDERWRITING" FOR A DISCUSSION OF THE FACTORS CONSIDERED IN DETERMINING THE
INITIAL PUBLIC OFFERING PRICE. THE COMMON STOCK HAS BEEN APPROVED FOR QUOTATION
ON THE NASDAQ SMALLCAP MARKET UNDER THE SYMBOL "FDOT."
---------------------------
SEE "RISK FACTORS" ON PAGE 7 FOR CERTAIN INFORMATION
THAT SHOULD BE CONSIDERED BY
PROSPECTIVE INVESTORS.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
Per Share........................... $6.50 $0.65 $5.85
Total(3)............................ $7,150,000 $715,000 $6,435,000
</TABLE>
(1) Does not include a 3% non-accountable expense allowance payable to Coleman
and Company Securities, Inc. (the "Representative"). In addition, the
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company, estimated
at $689,500, including the non-accountable expense allowance.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
165,000 additional shares of Common Stock on the same terms as set forth
above for the purpose of covering over-allotments, if any. If the
Underwriters exercise such option in full, the total Price to Public,
Underwriting Discounts and Commissions, and Proceeds to Company will be
$8,222,500, $822,250 and $7,400,250, respectively. See "Underwriting."
---------------------------
The shares of Common Stock offered hereby are offered by the several
Underwriters subject to prior sale, when, as and if issued to and accepted by
the Underwriters and subject to the approval of certain legal matters by counsel
for the Underwriters and certain other conditions. The Underwriters reserve the
right to withdraw, cancel or modify the Offering and to reject any order in
whole or in part. It is expected that delivery of certificates representing such
shares will be made in New York, New York against payment therefor on or about
August 15, 1997.
---------------------------
COLEMAN AND COMPANY SECURITIES, INC.
The date of this Prospectus is August 11, 1997.
<PAGE> 2
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES OFFERED
HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE LOSS
COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 3
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information and the Financial Statements and
notes thereto appearing elsewhere in this Prospectus. Unless otherwise
indicated, all information in this Prospectus (i) assumes that the Underwriters'
over-allotment option is not exercised, (ii) gives retroactive effect to the
recapitalization described in Note 8 to the Financial Statements and (iii)
reflects the conversion of all of the outstanding shares of the Company's Series
A Preferred Stock, no par value (the "Series A Preferred Stock"), on the
effective date of the Registration Statement of which this Prospectus forms a
part. See "Description of Securities" and "Underwriting." Investors should
carefully consider the information set forth under the caption "Risk Factors."
fine.com and the fine.com logo are trademarks of the Company. INDEPENDENCE
DAY (TM) is a trademark of and is Copyright (C) 1997 by Twentieth Century Fox
Film Corporation. All rights reserved. "Twentieth Century Fox," "Fox" and their
associated logos are the property of Twentieth Century Fox Film Corporation.
Microsoft(R) SQL Server(TM), Microsoft(R) Internet Information Server Integrated
with Microsoft Windows NT(R) and the names of other Microsoft products
referenced in this Prospectus are trademarks or registered trademarks of
Microsoft Corporation. "Safeway" and the "S" logo are registered trademarks of
Safeway Inc. All other tradenames and trademarks appearing in this Prospectus
are the property of their respective holders.
THE COMPANY
fine.com Corporation ("fine.com" or the "Company") plans, creates,
maintains and hosts World Wide Web ("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
facilitates both internal and external corporate communications for clients.
The Company develops marketing driven, database oriented sites for
businesses which establish commercial presences on, or conduct Internet commerce
over, the Web. Corporate clients for which the Company has built and implemented
such Web sites include Twentieth Century Fox Home Entertainment, Inc., Safeway
Inc. and Microsoft Corporation ("Microsoft"). Web sites created for these
clients may be viewed at www.foxinternational.com, www.safeway.com and
www.developerstore.com, respectively. Through the planning and creation of
Intranet Web sites, the Company also serves businesses seeking to establish
efficient, confidential internal corporate communication systems. Intranet
clients of the Company include Microsoft and Marriott Corporation. Other clients
for which the Company has developed Web sites include Fluke Corporation, Intel
Corporation, Mann Packing Company, Optiva Corporation, Wall Data, Inc. and
Windermere Services Company. See "Business -- Clients and Services."
The Company believes that use of the Internet has grown rapidly since its
commercialization in the early 1990s. According to industry sources, the number
of people using the Internet is more than doubling every year.(1) It has been
estimated that the number of Internet users will exceed 700 million in the year
2000, increasing from approximately 57 million users in 1997.(2) In anticipation
of such growth, businesses are implementing commercial Internet Web sites at a
rapid pace. It has been estimated that fees paid to third-party Web site
developers will exceed $10 billion by the year 2000, compared to $582 million
- ---------------
(1)John S. Quarterman, 1997 Users and Hosts of the Internet and the Matrix,
MATRIX NEWS (January 1997); Press Release: Size of the Internet in October
1995, from the Third MIDS Internet Demographic Survey, MATRIX INFORMATION
AND DIRECTORY SERVICES, INC. (February 3, 1996) (hereinafter Demographic
Survey).
(2)Quarterman, supra note 1.
3
<PAGE> 4
in 1996.(3) Other industry sources have reported that the number of commercial
Internet sites, defined as domain names ending in ".com," increased from 4,912
in August 1995 to 171,738 in June 1996 and 609,275 in April 1997.(4) See
"Business -- The Internet and the Web" and "-- Internet Commerce and the
Marketing Communications Industry."
The Web permits real time, one-to-one communication, allowing users to
respond to questions and messages on a Web site. The Company believes that the
Web provides businesses with unique opportunities to gather valuable demographic
data, including information regarding users' identities and preferences.
Accordingly, the Company has created a Web site development process involving
both marketing and communications strategies and Web site design elements. For
example, in creating Web sites that compile user-provided information, the
Company works with its clients, first, to establish specific database driven
marketing strategies, and then to create unique Web site features designed to
entice visitors to provide information useful to the client regarding the
visitor's identity, interests and position in the customer life cycle. Through
such Web sites, the Company's clients may obtain databases useful in the
clients' overall sales and marketing efforts. Similar processes are also applied
to the collection, distribution and analysis of data for Intranet sites
developed by the Company. The Company also services certain clients by
maintaining and hosting such clients' Web sites. See "Business -- Clients and
Services -- Web Site Production and Support."
The Company has expertise in custom programming, relational databases and
computer graphics. In order to create Web sites that encourage continuous
dynamic interaction with Web site users, the Company relies upon expertise
beyond mere competency with HTML (hypertext markup language, the common Web site
language). Such expertise includes knowledge and effective utilization of
advanced programming languages such as Visual Basic, Visual J++, Visual C++ and
various scripting languages. Complex relational databases are developed by the
Company using Microsoft(R) SQL Server(TM) and operate in conjunction with server
products including Microsoft(R) Internet Information Server Integrated with
Microsoft Windows NT(R), Microsoft Exchange Server and Microsoft Merchant
Server. The Company believes that only a small percentage of current Web sites
effectively utilize the database integration technologies and interactive
database compilation and dissemination techniques and technologies that are
employed by the Company. The Company further believes that its encompassing
approach makes it well positioned to continue to take advantage of industry
changes as the Web and its commercial applications evolve. See
"Business -- Business Strategy," "-- Relationship with Microsoft" and
"Management."
The Company was incorporated in the State of Washington in October 1994.
The Company's principal executive offices are located at 1118 Post Avenue,
Seattle, Washington 98101, and its telephone and fax numbers are (206) 292-2888
and (206) 292-2889, respectively. The Company's e-mail address is [email protected]
and its Web site address is www.fine.com. Information accessed on or through the
Company's Web site does not constitute a part of this Prospectus.
- ---------------
(3)News Release, Web Outsourcing to Reach $10 Billion by 2000, FORRESTER
RESEARCH, INC. (February 5, 1997) (hereinafter Web Outsourcing).
(4)Netcraft Ltd. Web Server Survey (August 1, 1995); Netcraft Ltd. Web Server
Survey (June 1, 1996); Netcraft Ltd. Web Server Survey(April 1997)
(hereinafter collectively Netcraft Surveys).
4
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered.......................... 1,100,000 shares
Common Stock Outstanding:
Prior to the Offering............... 1,115,065 shares(1)
After the Offering.................. 2,215,065 shares (1)(2)
Use of Proceeds............................... The Company anticipates that the net proceeds
of the Offering will be used for: (i) capital
expenditures for the establishment of new and
the expansion of existing facilities
(including leasehold improvements); (ii)
capital expenditures for the acquisition of
new and upgraded computer hardware and
software for existing and new facilities;
(iii) working capital to finance
work-in-progress prior to achieving payment
milestones; (iv) expenditures for marketing,
advertising and new business development; (v)
repayment of indebtedness; and (vi) working
capital to finance, among other things,
increases in accounts receivable and other
general corporate purposes. See "Use of
Proceeds."
Nasdaq SmallCap Market Symbol................. FDOT
</TABLE>
- ---------------
(1) Includes 59,524 shares of Common Stock to be issued on the effective date of
the Registration Statement of which this Prospectus forms a part upon
conversion of the outstanding shares of Series A Preferred Stock. Excludes
107,157 shares of Common Stock reserved for issuance upon exercise of stock
options granted under the Company's 1996 Incentive Stock Option Plan (the
"1996 Option Plan") and an additional 200,000 shares which have been
reserved for issuance upon exercise of options that may be granted under the
Company's 1997 Stock Option Plan (the "1997 Option Plan," and together with
the 1996 Option Plan, the "Option Plans"). See "Management -- Executive
Compensation and Other Information."
(2) Excludes (i) 110,000 shares of Common Stock issuable upon the exercise of
warrants to be issued to the Representative upon the consummation of the
Offering (the "Representative's Warrants") and (ii) 165,000 shares of Common
Stock issuable upon exercise of the over-allotment option granted to the
Underwriters. See "Underwriting."
5
<PAGE> 6
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE FISCAL FOR THE THREE MONTHS
YEAR ENDED JANUARY 31, ENDED APRIL 30,
------------------------ ------------------------
1996 1997 1996 1997
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross revenue.................................. $ 531,800 $ 1,485,869 $ 225,737 $ 811,433
Gross profit................................... 273,268 711,627 96,808 257,491
Operating income............................... 47,751 197,568 6,876 73,332
Income before income taxes..................... 45,030 188,728 5,896 65,794
Provision for income taxes..................... 14,948 64,454 2,005 22,370
Net income..................................... 30,082 124,274 3,891 43,424
Net income per share........................... $ 0.03 $ 0.11 $ -- $ 0.04
Shares used in computation of net income per
share(1).................................... 1,155,126 1,155,126 1,155,126 1,155,126
</TABLE>
<TABLE>
<CAPTION>
AT APRIL 30, 1997
-----------------------------
BALANCE SHEET DATA: AT JANUARY 31, 1997 ACTUAL AS ADJUSTED(2)
------------------- ----------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Working capital................................ $ 301,728 $ 90,029 $5,993,316
Total assets................................... 868,537 1,259,252 6,949,752
Total shareholders' equity..................... 454,554 497,978 6,243,478
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
determination of net income per share.
(2) Adjusted to give effect to the sale by the Company of the shares of Common
Stock offered hereby after deduction of the underwriting discounts and
commissions and estimated expenses of the Offering and application of the
net proceeds therefrom. See "Use of Proceeds" and "Capitalization."
RISK FACTORS
See "Risk Factors" beginning on page 7 for a discussion of certain factors
that should be considered by prospective purchasers of the shares of Common
Stock offered hereby.
6
<PAGE> 7
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should carefully consider each of the following risk
factors in evaluating an investment in the shares of Common Stock offered
hereby.
Uncertainties Regarding Adoption of New Media by Marketing Communications
Industry; Limited Operating History. The market for information gathering and
dissemination through new electronic media such as the Internet has only
recently begun to develop, is rapidly evolving and is characterized by an
increasing number of market entrants who have introduced or developed products
and services for communication and commerce through new electronic media. Demand
and market acceptance for recently introduced products and services are subject
to a high level of uncertainty. Additionally, the Company commenced operations
in October 1994 and, as a result, has a limited operating history upon which an
evaluation of the Company's prospects can be made. There can be no assurance
that commerce and communication through new electronic media will continue to
grow or that the Company will be successful in addressing the risks encountered
by companies which are operating in rapidly evolving markets. The use of new
electronic media in marketing and information gathering and dissemination,
particularly by businesses that have historically relied upon traditional means
of marketing, generally requires the acceptance of new methods of conducting
business and exchanging information. If commerce and communication through new
electronic media fail to gain widespread acceptance or develop more slowly than
expected, the Company would be materially adversely affected. See
"Business -- Internet Commerce and the Marketing Communications Industry."
Reliance on Management and Key Employees. The Company is dependent upon the
services of certain key management personnel, the loss of whose services would
have a material adverse effect on the Company. In particular, the Company
depends on the services of Daniel M. Fine, President and Chief Executive
Officer, James P. Chamberlin, Chief Financial Officer, and Daniel G. Stull,
Chief Operating Officer. The Company has obtained $1,000,000 of key person
insurance on the lives of each of Mr. Fine and Mr. Chamberlin. In addition, the
Company is dependent upon the services of qualified and experienced marketing,
technical and creative personnel. There can be no assurance that any of these
persons will remain employed by the Company or that these persons will not
participate in businesses that compete with the Company in the future. In
seeking qualified personnel, the Company is required to compete with companies
having greater financial and other resources than the Company. Since the
Company's future success will be dependent on its ability to attract and retain
qualified personnel, the inability to do so would have a material adverse affect
on the Company. See "Management."
Competition. The market for the Company's services is highly competitive
and is characterized by demands to adopt and utilize new capabilities and
technologies and to respond rapidly to evolving client requirements. The Company
faces competition from a number of sources, including potential clients that
perform Web site planning, creation, maintenance and hosting services inhouse.
Other sources of competition include Web site service firms, communications,
telephone and telecommunications companies, computer hardware and software
companies, established online services companies, direct Internet access
providers, advertising agencies and specialized and integrated marketing
communication firms, all of which are entering the Web site planning, creation,
maintenance and hosting markets in varying degrees. Many of the Company's
competitors have announced plans to offer expanded Web site planning, creation,
maintenance and/or hosting services and many of such competitors or potential
competitors have longer operating histories, longer customer relationships and
significantly greater financial, management, technological, development, sales,
marketing and other resources than the Company. The Company expects competition
to intensify in the future, as anticipated growth in the industry attracts other
participants. There can be no assurance that the Company will be able to compete
effectively, if at all, and its inability to do so would have a material adverse
effect on the Company. See "Business -- Competition."
Lack of Proprietary Protection; Intellectual Property Rights; Risk of
Infringement; Possible Litigation. The Company does not believe that its
business is dependent upon any patents, copyrights or trademarks and the Company
does not currently have any registered patents, copyrights or trademarks.
Consequently, the Company relies solely on a combination of common law and
statutory law to protect its trademarks,
7
<PAGE> 8
proprietary information and know-how. The majority of the Company's current
agreements with its clients contain provisions granting to the client
intellectual property rights to certain of the Company's work product, including
customized programming that is created during the course of a project. The
Company anticipates that agreements with future clients may contain similar
provisions. Other existing agreements to which the Company is a party are, and
future agreements may be, silent as to the ownership of such rights. To the
extent that the ownership of such intellectual property rights is expressly
granted to a client or is ambiguous, the Company's ability to reuse or resell
such rights will or may be limited. See "Business -- Clients and Services."
The Company utilizes technology owned, and may seek to use technology
developed in the future, by third parties. Although the Company believes that
there are currently sufficient alternative sources of third party technology
which would be available to it if any particular third party technology that it
is currently using were to be discontinued or otherwise become unavailable,
there can be no assurance that licenses for any technology owned or developed by
third parties that might be required for provision of the Company's services
will be available in the future on reasonable terms, or at all, and the
inability to obtain any such licenses could have a material adverse effect on
the Company. Although the Company does not believe that either its services or
its utilization of technology owned by third parties infringes the proprietary
rights of any third parties, there can be no assurance that third parties will
not in the future assert claims against the Company based on such services or
utilization or that any of those claims would not be successful. In addition,
litigation may be necessary in the future to enforce the Company's intellectual
property rights and to protect its proprietary information, to determine the
validity and scope of the proprietary rights of third parties or to defend
against claims of infringement or invalidity. Litigation of this nature, whether
or not successful, could result in substantial costs and diversion of resources,
which could have a material adverse effect on the Company. Furthermore, third
parties making claims against the Company could secure a judgment awarding
substantial damages, as well as injunctive or other equitable relief which could
directly or indirectly prohibit the Company from providing certain services. A
judgment of this nature could have a material adverse effect on the Company.
Additionally, the Company and other Web site developers face potential
liability for the actions of clients and others using their services, including
liability for infringement of intellectual property rights, rights of publicity,
defamation, libel and criminal activity under the laws of the United States and
foreign jurisdictions. Although the Company has obtained errors and omissions
insurance providing up to $5,000,000 of coverage, there can be no assurance that
such insurance will be adequate. Any imposition of liability based on the
actions of clients and others using the Company's services could have a material
adverse effect on the Company.
Dependence Upon Continued Development of Access to and Infrastructure of
the Internet. The Company's ability to generate revenues from the planning,
creation, maintenance and hosting of commercial Web sites will depend upon the
continued development of an infrastructure for providing Internet access and
carrying Internet traffic. The Internet may not prove to be a viable commercial
marketplace due to inadequate development of the necessary infrastructure or
delays in the development of complementary products. Moreover, other critical
issues concerning the commercial use of the Internet (including security,
reliability, cost, ease of use and access, and quality of service) remain
unresolved and may adversely impact the anticipated growth of Internet use. It
is difficult to predict whether the Internet will prove to be and remain a
viable commercial marketplace. If the infrastructure and complementary products
necessary to support the Internet's commercial viability are not developed or if
the Internet does not become a viable marketplace, the Company would be
materially adversely affected. See "Business -- The Internet and the Web."
Risk of Changing Technology. The services which the Company offers, and the
services which the Company expects to offer in the future, are impacted by
rapidly changing technology, evolving industry standards, emerging competition
and frequent service, software and other product introductions. There can be no
assurance that the Company will be able to successfully identify new business
opportunities and develop and bring new services to market in a timely and
cost-effective manner or that services, products or technologies developed by
others will not render the Company's services noncompetitive or obsolete. See
"Business -- Competition."
8
<PAGE> 9
Dependence on Microsoft. The Company has historically been dependent upon
Microsoft for new business referrals and for work as a paid Microsoft vendor. In
addition, the Company is dependent upon its expertise with Microsoft software
and relies upon such software in creating Web sites for the Company's clients.
Although the Company participates in the Microsoft Solution Provider Partner and
Site Builders Network programs, there can be no assurance that its relationship
with Microsoft will continue or that the Company will continue to derive
benefits from that relationship. In addition, if Microsoft's products, standards
or approach to the Internet or other markets were to fall into disfavor or other
parties were able to develop products, standards or approaches which had greater
market acceptance than those offered by Microsoft, the Company could be
materially adversely affected. See "Business -- Relationship with Microsoft."
Government Regulation. The Company is not currently subject to direct
regulation by any government agency, other than regulations applicable to
businesses generally. However, it is possible that laws and regulations may be
adopted with respect to the Internet, covering issues such as user privacy and
pricing, characteristics and quality of products and services. The adoption of
any such laws or regulations may decrease the growth of the Internet (which
could in turn decrease the demand for the Company's services), increase the
Company's cost of doing business, cause the Company to modify its operations or
otherwise have an adverse effect on the Company. Moreover, the applicability to
the Internet of existing laws governing issues such as property ownership, libel
and personal privacy is uncertain. The Company cannot predict the impact, if
any, that any future laws or regulations, or the applicability of such existing
laws, may have on its business.
Dilution. Purchasers of the Common Stock offered hereby will experience
immediate dilution of $3.68 (or 57%) per share in the net tangible book value
per share of Common Stock. See "Dilution."
Broad Discretion Over Use of Proceeds. Approximately 3,900,500, or 68%
($4,833,575, or 72%, if the over-allotment option is exercised in full) of the
estimated net proceeds of the Offering have been allocated for working capital
and other general corporate purposes. Due to the number and variability of
factors that will be analyzed before the Company determines how to use such net
proceeds, the Company will have broad discretion in allocating a significant
portion of the net proceeds of the Offering without any action or approval of
the Company's shareholders. Accordingly, investors in the Common Stock offered
hereby will not have the opportunity to evaluate the economic, financial or
other relevant information which will be considered by the Company in
determining the actual application of the net proceeds. See "Use of Proceeds."
Limitation on Liability of Directors. The Company's Articles of
Incorporation, as amended, provide that, to the extent permitted by the laws of
the State of Washington, the members of the Company's Board of Directors shall
not be personally liable to the Company or its shareholders for monetary damages
in the event of breach of fiduciary duty.
No Dividends. The Company does not intend to declare any dividends on the
Common Stock in the foreseeable future. See "Dividend Policy."
Control by Management. Upon completion of the Offering, 47.8% (44.5%, if
the Underwriters' overallotment option is exercised in full) of the outstanding
shares of Common Stock will be owned by current directors and executive officers
of the Company. All such shareholders, if they were to vote together, would
likely be able to elect all of the directors of the Company and influence the
outcome of all other matters submitted to a vote of the Company's shareholders.
See "Principal Shareholders" and "Description of Securities."
No Prior Public Market; Determination of Offering Price. Prior to the
Offering, there has been no public market for the Common Stock. Accordingly,
there can be no assurance that an active trading market will develop and be
sustained upon the completion of the Offering or that the market price of the
Common Stock will not decline below the initial public offering price. The
initial public offering price was determined by negotiations between the Company
and the Representative. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.
Shares Eligible for Future Sale. Upon completion of the Offering, 2,215,065
shares of Common Stock will be outstanding (2,380,065 shares, if the
Underwriter's over-allotment option is exercised in full), 107,157
9
<PAGE> 10
shares of Common Stock will be reserved for issuance under the 1996 Option Plan
and 200,000 shares of Common Stock will be reserved for issuance pursuant to the
1997 Option Plan. The shares of Common Stock sold in the Offering will be freely
transferable by persons other than affiliates of the Company. All of the
remaining outstanding shares are restricted securities and may not be sold other
than pursuant to an effective registration statement or Rule 144 or another
exemption from registration under the Securities Act. The Company and each of
its existing officers, directors, shareholders and optionees have entered into
lock-up agreements with the Representative, which agreements prohibit, for a
period of 18 months after the date of this Prospectus, the sale or other
disposition of any shares of Common Stock without the prior written consent of
the Representative. Additionally, in accordance with the policy statements
promulgated by the North American Securities Administrators Association, Inc.,
the Company's President and two members of its board of directors have entered
into promotional share escrow agreements pursuant to which such persons have
agreed for a period of two years after the completion of the Offering not to
transfer or dispose of an aggregate of 1,055,541 shares of Common Stock
beneficially owned by such persons prior to the Offering. No prediction can be
made as to the effect, if any, that future sales of shares, or the availability
of shares for future sale, will have on the market price of the Common Stock
prevailing from time to time. Sales of substantial amounts of Common Stock in
the public market, or the perception that such sales may occur, could adversely
affect prevailing market price for the Common Stock and could impair the
Company's ability to raise capital through an offering of its equity securities.
See "Shares Eligible for Future Sale" and "Underwriting."
10
<PAGE> 11
USE OF PROCEEDS
The net proceeds of the Offering to the Company, after deducting
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company, will be approximately $5,745,500 ($6,678,575, if the
Underwriters' over-allotment option is exercised in full). The Company currently
expects to apply the net proceeds as follows:
<TABLE>
<CAPTION>
USE AMOUNT PERCENTAGE
- --------------------------------------------------------------------- ---------- ----------
<S> <C> <C>
Capital expenditures for establishment of new and expansion of
existing facilities (including leasehold improvements)............. $ 240,000 4%
Capital expenditures for acquisition of new and upgrading of existing
computer hardware and software for existing and new facilities..... 355,000 6
Working capital to finance work-in-progress prior to achieving
payment milestones................................................. 470,000 8
Expenditures for marketing, advertising and new business
development........................................................ 480,000 9
Repayment of indebtedness............................................ 300,000 5
Working capital to finance, among other things, increases in accounts
receivable and other general corporate purposes.................... 3,900,500 68
----------
Total...................................................... $5,745,500 100%
==========
</TABLE>
The Company's expansion strategy focuses on adding personnel, expanding
existing facilities and establishing new facilities in a manner designed to
enable the Company to remain profitable. As a result, the Company anticipates
adding personnel and enlarging existing and establishing new facilities only in
instances when it has a reasonable expectation that long term demand will be
sufficient to maintain and enhance the profitability demonstrated by current or
near term projects and existing or anticipated near term demand.
The growth anticipated by the Company will necessitate additional office
space to house its workforce. Management believes that this expansion will occur
near its existing facility and in one or two new geographic locations. Although
the Company believes that additional space will be available as needed on
commercially reasonable terms, there can be no assurance that market rates for
such additional space will not exceed current expectations, requiring future
expenditures in amounts greater than those currently anticipated.
The expansion and addition of office space and personnel will require
acquisition of new or upgrading of current computer hardware and software in two
aspects: office infrastructure and individual workstations. Office
infrastructure purchases relate to the creation or upgrading of internal
networks, multiple development environments and the related security hardware
and software. The Company anticipates purchases of these items will occur
shortly after the expansion or opening of an office. The Company further expects
that individual workstation purchases will coincide with the addition of
personnel, normally on a person by person basis.
The planning and development of complex Web sites often require several
months to complete. As a result, the Company expects to use a portion of the
estimated proceeds from the sale of the Common Stock offered hereby to fund the
salaries and the other direct project costs related to work-in-progress on
planning and development contracts. In addition, the Company anticipates using a
portion of the estimated net proceeds from the sale of Common Stock offered
hereby to fund additional costs associated with increased marketing, advertising
and new business development activities as the Company attempts to expand both
the number of its clients and the scope of the projects it undertakes.
Approximately, $300,000 of the estimated net proceeds from the sale of Common
Stock offered hereby may be used by the Company to retire the current balance
outstanding under the Revolving Line of Credit with the Company's bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The Company intends to use the remaining proceeds from the sale of
the Common Stock offered hereby to finance the Company's ongoing working capital
needs. These working capital needs include financing growth in the Company's
accounts receivable and financing increased selling, general and administrative
expenses necessary to generate and sustain the organizational infrastructure
necessary to serve new and existing clients.
Exact application of the net proceeds and timing of use will vary depending
on numerous factors, including market and technological developments and
competitive pressures. Due to the number and
11
<PAGE> 12
variability of factors that may affect the Company's use of the net proceeds,
the Company will retain significant discretion over the actual application of
the net proceeds. Accordingly, there can be no assurance that actual application
will not vary substantially from the Company's current expectations.
Pending ultimate application, the net proceeds will be invested in
interest-bearing securities issued or guaranteed by the United States government
or its agencies.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on the Common
Stock. The Company currently anticipates it will retain future earnings for use
in the expansion and operation of its business and does not anticipate paying
cash dividends on the Common Stock in the foreseeable future. Any future
determination with regard to the payment of dividends will be at the discretion
of the Board of Directors and will be dependent upon the Company's future
earnings, financial condition, applicable dividend restrictions and capital
requirements and other factors deemed relevant by the Board of Directors. In
addition, pursuant to the agreement relating to the Company's lines of credit,
the Company is prohibited from paying cash dividends on the Common Stock without
the bank's prior written consent. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Capital Resources and
Liquidity."
DILUTION
The pro forma net tangible book value of the Company at April 30, 1997 was
$285,191, or $0.26 per share. Pro forma net tangible book value per share
represents the amount of total tangible assets of the Company reduced by the
Company's total liabilities, divided by the pro forma number of shares of Common
Stock outstanding, after giving effect to the issuance of 59,524 shares of
Common Stock upon conversion of all of the outstanding shares of Series A
Preferred Stock on the effective date of the Registration Statement of which
this Prospectus forms a part. After giving effect to the sale by the Company of
the 1,100,000 shares of Common Stock offered hereby (after deducting
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company), the adjusted pro forma net tangible book value of the
Company at April 30, 1997 would have been $6,243,478 or $2.82 per share. This
represents an immediate increase in pro forma net tangible book value of $2.56
per share to existing shareholders and an immediate dilution of $3.68, or 57%,
per share to new investors purchasing shares of Common Stock offered hereby. The
following table illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price....................................... $ 6.50
Pro forma net tangible book value per share at April 30, 1997..... $0.26
Increase per share attributable to new investors.................. 2.56
Adjusted net tangible book value per share after the Offering....... 2.82
-----
Dilution per share to new investors................................. $ 3.68
=====
</TABLE>
The following table sets forth on a pro forma basis at April 30, 1997,
after giving effect to the issuance of 59,524 shares of Common Stock upon
conversion of all outstanding shares of Series A Preferred Stock and the sale by
the Company of 1,100,000 shares of Common Stock offered hereby, the number of
shares of Common Stock purchased from the Company, the total consideration paid
to the Company and the average price paid per share by existing shareholders and
by investors purchasing shares of Common Stock offered hereby:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ---------- ------- --------------
<S> <C> <C> <C> <C> <C>
Existing Shareholders................ 1,115,065 50.3% $ 325,000 4.3% $ 0.29
New Investors........................ 1,100,000 49.7 7,150,000 95.7 $ 6.50
--------- ----- ---------- -----
Total...................... 2,215,065 100.0% $7,475,000 100.0%
========= ===== ========== =====
</TABLE>
The foregoing tables assume no exercise of any outstanding stock options.
As of July 31, 1997, there were outstanding options to purchase 107,157 shares
of Common Stock under the 1996 Stock Option Plan, at a weighted average exercise
price of $2.31 per share. To the extent that outstanding options are exercised,
there will be further dilution to new investors. See "Management -- Executive
Compensation and Other Information."
12
<PAGE> 13
CAPITALIZATION
The following table sets forth at April 30, 1997 the (i) actual
capitalization of the Company, (ii) the pro forma capitalization of the Company,
after giving effect to the conversion of the outstanding Series A Preferred
Stock into Common Stock, and (iii) the pro forma capitalization as adjusted to
reflect the receipt, on the effective date of the Registration Statement of
which this Prospectus forms a part, of the estimated net proceeds from the sale
of the 1,100,000 shares of Common Stock offered hereby, after deducting
underwriting discounts and commissions and estimated expenses of the Offering
payable by the Company. Since its inception in October 1994, the Company has
never had any long term debt. This table should be read in conjunction with the
Financial Statements and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AT APRIL 30, 1997
--------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
<S> <C> <C> <C>
Shareholders' equity:
Preferred Stock, no par value; 1,000,000 shares
authorized; 59,524 shares designated as Series A
Preferred Stock, 59,524 shares of Series A Preferred
Stock issued and outstanding; no shares authorized,
issued or outstanding, pro forma and pro forma as
adjusted............................................. $ 239,918 $ -- $ --
Common Stock, no par value; 9,000,000 shares authorized,
actual, and 10,000,000 shares authorized, pro forma
and pro forma as adjusted; 1,055,541 issued and
outstanding, actual; 1,115,065 issued and
outstanding, pro forma; 2,215,065 issued and
outstanding, pro forma as adjusted (1)............... 75,000 314,918 6,060,418
Retained earnings....................................... 183,060 183,060 183,060
-------- -------- ----------
Total shareholders' equity........................... 497,978 497,978 6,243,478
-------- -------- ----------
Total capitalization............................... $ 497,978 $ 497,978 $ 6,243,478
======== ======== ==========
</TABLE>
- ---------------
(1) Excludes: (i) 107,157 shares of Common Stock reserved for issuance upon
exercise of stock options granted under the 1996 Option Plan; (ii) 200,000
shares of Common Stock reserved for issuance upon exercise of options which
may be granted under the 1997 Option Plan; (iii) 110,000 shares of Common
Stock reserved for issuance upon exercise of the Representative's Warrant;
and (iv) 165,000 shares of Common Stock reserved for issuance upon exercise
of the Underwriters' over-allotment option. See "Management -- Executive
Compensation and Other Information" and "Underwriting."
13
<PAGE> 14
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Financial Statements and the notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
herein. The Statement of Income data for the fiscal years ended January 31, 1996
and 1997 and the Balance Sheet data at January 31, 1996 and 1997 are derived
from the Financial Statements, which have been audited by Ernst & Young LLP,
independent auditors, and are included elsewhere in this Prospectus, and are
qualified by reference to such Financial Statements and the notes thereto. The
selected financial data at April 30, 1997 and for the three months ended April
30, 1996 and 1997 is unaudited, but includes all adjustments that the Company
considers necessary for a fair presentation of the financial position at such
respective dates and the operations for the respective periods then ended. These
historical results are not necessarily indicative of future results.
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED FOR THE THREE MONTHS ENDED
JANUARY 31, APRIL 30,
--------------------------- --------------------------
1996 1997 1996 1997
----------- ----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Gross revenue........................ $ 531,800 $ 1,485,869 $ 225,737 $ 811,433
Direct salaries and costs............ 258,532 774,242 128,929 553,942
----------- ----------- ---------- ----------
Gross profit......................... 273,268 711,627 96,808 257,491
Selling, general and administrative
expenses.......................... 225,517 514,059 89,932 184,159
----------- ----------- ---------- ----------
Operating income..................... 47,751 197,568 6,876 73,332
Interest expense..................... 2,721 8,840 980 7,538
----------- ----------- ---------- ----------
Income before income taxes........... 45,030 188,728 5,896 65,794
Provision for income taxes........... 14,948 64,454 2,005 22,370
----------- ----------- ---------- ----------
Net income........................... $ 30,082 $ 124,274 $ 3,891 $ 43,424
=========== =========== ========== ==========
Net income per share................. $ 0.03 $ 0.11 $ -- $ 0.04
Shares used in computation of net
income per share (1).............. 1,155,126 1,155,126 1,155,126 1,155,126
</TABLE>
<TABLE>
<CAPTION>
AT JANUARY 31,
-------------------------- AT APRIL 30,
1996 1997 1997
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................................... $ 45,565 $ 301,728 $ 90,029
Total assets......................................... 149,602 868,537 1,259,252
Shareholders' equity................................. 90,362 454,554 497,978
</TABLE>
- ---------------
(1) See Note 1 of Notes to Financial Statements for information concerning the
determination of net income per share.
14
<PAGE> 15
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 the Financial
Statements and accompanying notes and the other financial information appearing
elsewhere in this Prospectus.
OVERVIEW
fine.com 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 facilitates 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 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 generated a net profit for each of the past two fiscal years.
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 sources 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.
Historically, the Company has been dependent upon Microsoft for work as a
paid vendor. The aggregate revenues generated from the multiple departments and
divisions at Microsoft for which the Company performed services accounted for
34% and 19% of the Company's gross revenue in the fiscal year ended January 31,
1996 ("fiscal 1996") and the fiscal year ended January 31, 1997 ("fiscal 1997"),
respectively. In addition, Twentieth Century Fox Home Entertainment, Inc. and
Safeway Inc. accounted for 11% and 14% of the Company's gross revenue during
fiscal 1997, respectively. Neither Twentieth Century Fox Home Entertainment,
Inc. nor Safeway Inc. were clients of the Company during fiscal 1996. Management
believes that the long term success of the Company is not dependent on any one
or a few major customers.
RESULTS OF OPERATIONS
Fiscal Years Ended January 31, 1997 and 1996
Gross Revenue. Gross revenue for fiscal 1997 and fiscal 1996 was $1,485,869
and $531,800, respectively. During each of these fiscal years, substantially all
of the Company's revenue was generated by its Web site planning and creation
services. The 179% increase in fiscal 1997 gross revenue over fiscal 1996 gross
revenue is attributable primarily to the number of clients contracting with the
Company for such services increasing from approximately 18 clients in fiscal
1996 to approximately 25 clients in fiscal 1997 as well as an increase in the
average amount billed per client from approximately $25,000 per client in fiscal
1996 to approximately $56,000 in fiscal 1997 for such services. The Company
believes that the increase in number of such clients was
15
<PAGE> 16
attributable to increased levels of marketing, advertising and new business
development activities. The average amount billed per client during fiscal 1997
for Web site planning and creation services increased from fiscal 1996 primarily
due to the Company's clients generally undertaking more sophisticated levels of
Web site development. See "Business -- Internet Commerce and the Marketing
Communications Industry" and "-- Clients and Services."
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 fiscal 1997
were $774,242, and consisted primarily of $619,884 paid as direct salaries,
taxes and benefits and, secondarily, of $154,358 as other direct costs of goods
sold related to specific projects. The Company hired additional employees during
fiscal 1997 to meet increased demand and had 21 full time employees at January
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 engages independent contractors and subcontractors to service
unanticipated projects. The Company's direct salaries and costs for fiscal 1996
were $258,532 and consisted, primarily, of $178,803 of direct salaries, taxes
and benefits and, secondarily, of $79,729 of other direct costs of goods sold
related to specific projects. The Company had 13 full time employees at January
31, 1996.
As a percentage of gross revenue, total direct salaries and costs increased
4% from fiscal 1996 to fiscal 1997. Such increase was due primarily to the
increased level of salaries paid to production employees. This increase,
combined with a greater reliance on production employees as compared to
independent contractors and/or subcontractors, resulted in the salaries, taxes
and benefits component of direct salaries and costs increasing from 69% in
fiscal 1996 to 80% in fiscal 1997.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $514,059 and $225,517 for fiscal 1997 and fiscal
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.
Marketing, advertising and new business development costs increased as a
percentage of gross revenue in fiscal 1997 from fiscal 1996. Marketing,
advertising and new business development costs were $68,687 representing 5% of
gross revenue in fiscal 1997 as compared to $10,237 representing 2% of gross
revenue in fiscal 1996. The Company believes that the increase in marketing,
advertising and new business development costs was instrumental in the 179%
increase in gross revenue from fiscal 1996 to fiscal 1997. 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 35% for fiscal 1997 as compared to 42% for fiscal 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 by increased marketing, advertising and new business
development. The Company anticipates administrative expenses increasing due to
the compliance and reporting obligations associated with becoming a publicly
held company.
Net Income. The Company recognized net income of $124,274 (representing 8%
of gross revenue) for fiscal 1997 as compared to $30,082 (representing 6% of
gross revenue) for fiscal 1996. The increase in profitability (as a percentage
of gross revenue) is due to the factors discussed above.
16
<PAGE> 17
RESULTS OF OPERATIONS -- THREE MONTHS ENDED APRIL 30, 1997 AND 1996
Gross Revenue. Gross revenue for the three months ended April 30, 1997 and
1996 was $811,433 and $225,737 respectively. During each of these periods,
substantially all of the Company's revenue was generated by its Web site
planning and creation services. The 259% increase in gross revenue for the three
months ended April 30, 1997 compared to the three months ended April 30, 1996 is
attributable primarily to the number of clients contracting with the Company for
such services increasing to approximately 17 clients during the three months
ended April 30, 1997 from approximately 11 clients during the three months ended
April 30, 1996 as well as an increase in the average amount billed per client
for such services to approximately $45,000 per client during the three months
ended April 30, 1997 from approximately $20,000 during the three months ended
April 30, 1996. The Company believes that the increase in number of such clients
was attributable to increased levels of marketing, advertising and new business
development activities. The average amount billed per client during the three
months ended April 30, 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. See
"Business -- Internet Commerce and the Marketing Communications Industry" and
"-- Clients and Services."
Direct Salaries and Costs. The Company's direct salaries and costs for the
three months ended April 30, 1997 were $553,942, and consisted primarily of
$285,745 paid as direct salaries, taxes and benefits and, secondarily, of
$268,197 as other direct costs of goods sold related to specific projects. The
Company's direct salaries and costs for the three months ended April 30, 1996
were $128,929 and consisted, primarily, of $89,093 of direct salaries, taxes and
benefits and, secondarily, of $39,836 of other direct costs of goods sold
related to specific projects.
As a percentage of gross revenue, total direct salaries and costs increased
11% for the three months ended April 30, 1997 from the three months ended April
30, 1996. This increase was due primarily 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 therefrom in the three months ended
April 30, 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 $184,159 and $89,932 for the three months ended
April 30, 1997 and April 30, 1996, respectively.
Marketing, advertising and new business development costs increased as a
percentage of gross revenue in the three months ended April 30, 1997 compared to
the three months ended April 30, 1996. Marketing, advertising and new business
development costs were $37,437 representing 5% of gross revenue in the three
months ended April 30, 1997 as compared to $4,674 representing 2% of gross
revenue in the three months ended April 30, 1996. The Company believes that the
increase in marketing, advertising and new business development costs was
instrumental in the 259% increase in gross revenue from the three months ended
April 30, 1996 to the three months ended April 30, 1997. 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 amounted to 23% for the three months ended April 30, 1997 as
compared to 40% for the three months ended April 30, 1996.
17
<PAGE> 18
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 by increased marketing, advertising and new business
development. The Company anticipates administrative expenses increasing due to
the compliance and reporting obligations associated with becoming a publicly
held company.
Net Income. The Company recognized net income of $43,424 (representing 5%
of gross revenue) for the three months ended April 30, 1997 compared to $3,891
(representing 2% of gross revenue) for the three months ended April 30, 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 private
placements of its capital stock. The Company had cash in the aggregate amount of
$198,317 and $20,558 at January 31, 1997 and April 30, 1997, respectively.
The Company's working capital increased $256,163, from $45,565 at January
31, 1996 to $301,728 at January 31, 1997, primarily due to an increase in
accounts receivable. Accounts receivable increased $412,911, from $63,855 at
January 31, 1996 to $476,766 at January 31, 1997 primarily due to the increase
in gross revenue during fiscal 1997. Operating activities for fiscal 1997
required net cash in the amount of $101,280.
The purchase of equipment and furniture required cash in the amount of
$50,372 during fiscal 1997. These expenditures were made primarily for computer
hardware and software, furniture, fixtures and leasehold improvements necessary
to accommodate an increase in Company personnel. The Company believes that the
increase in personnel was a principal factor enabling the Company to generate
higher gross revenue in fiscal 1997. Net cash provided from financing activities
was $334,301, primarily due to an increase of $90,286 in borrowings under a
secured revolving line of credit with a commercial bank (the "Revolving Line of
Credit") and net proceeds in the amount of $239,918 from the sale of 59,524
shares of Series A Preferred Stock. See "Certain Transactions."
Net cash used in operating activities was $260,333 for the three months
ended April 30, 1997. During this period, the primary use of cash was funding
growth in the Company's accounts receivable balance which increased principally
due to the increase in gross revenue. For the three months ended April 30, 1997,
cash in the amount of $87,652 was used to finance an increase in work-in-process
resulting from services being performed by the Company in advance of invoicing
the client(s). The Company requires cash to fund its accounts receivable and
work-in-process balances ($673,972 and $87,652, respectively, at April 30,
1997), due in part to the Company's billing cycle and its clients' payment
histories. The Company invoices its clients primarily at the end of each month
and evaluates the status of its contracts at the end of each month. As a result,
the Company's need for cash to fund its billed and unbilled production activity
(accounts receivable and work-in-process, respectively) in a period can be a
significant portion of the Company's gross revenue in such period. At April 30,
1997, the combined accounts receivable and work-in-process balances represented
approximately 94% of the gross revenue for the three months then ended. The
average number of days outstanding of the Company's accounts receivable was
approximately 69 days for fiscal 1997 and 64 days for the three months ended
April 30, 1997, respectively. To the extent the Company continues to add major
national and international companies to its client base, the average number of
days outstanding of the Company's accounts receivable may increase in future
periods. Cash used in investing activities was $87,257 for the three months
ended April 30, 1997. These expenditures were made for computer hardware and
software, furniture, fixtures and leasehold improvements. Net cash provided from
financing activities was $169,831 for the three months ended April 30, 1997.
During this period the primary source of funds was an increase in borrowings
under the Company's secured revolving line(s) of credit.
At January 31, 1997, the maximum amount available under the Revolving Line
of Credit was $200,000. Amounts outstanding under the Revolving Line of Credit
bore interest at the bank's prime interest rate plus 2% (10.25% at January 31,
1997) and were secured by all of the Company's accounts receivable. At January
31, 1997, $90,286 was outstanding under the Revolving Line of Credit.
18
<PAGE> 19
The Revolving Line of Credit expired on March 31, 1997 and was replaced by
a new revolving line of credit (the "New Revolving Line of Credit"). The maximum
amount available under the New Revolving Line of Credit is $750,000. Prior to
the first day of the month following the completion of the Offering, amounts
outstanding under the New Revolving Line of Credit bear interest at the bank's
prime interest rate plus 2% (10.5% at July 31, 1997). On the first day of the
month following the successful completion of the Offering, the interest rate
will be reduced to the bank's prime interest rate plus 0.25%. 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. See
"Certain Transactions." The New Revolving Line of Credit requires that the
Company maintain working capital amounts (as calculated therein), tangible net
worth, and maximum capital expenditures (as defined therein) for the 1997
calendar year. The New Revolving Line of Credit limits the Company's ability to
incur additional debt, to repurchase the Company's capital stock or amend its
capital structure, to pay cash dividends or to undergo a merger, consolidation
or liquidation. In addition, a change in ownership of twenty-five percent of the
Common Stock (other than this Offering for which a waiver has been obtained)
constitutes an event of default. 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.
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. After this
Offering, amounts outstanding under the Equipment Line of Credit will bear
interest at the same rate of interest as applicable to the New Revolving Line of
Credit. 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. See "Certain
Transactions." The financial covenants and restrictions described above under
the New Revolving Line of Credit are also applicable to the Equipment Line of
Credit.
As of April 30, 1997, the Company's principal commitments consisted of
obligations outstanding under operating leases. Although the Company currently
has no material commitments for capital expenditures, it anticipates that its
capital expenditures and lease commitments will increase consistent with
anticipated growth in operations, infrastructure and personnel. The Company may
acquire additional office space or fixed assets through capital leases, which
will require it to commit to additional lease obligations.
The Company believes that the funds available pursuant to the New Revolving
Line of Credit, the Equipment Line of Credit, the funds provided by the Offering
and revenues from operations will be sufficient for it to meet its capital
requirements for the foreseeable future.
In February 1997, the Financial Accounting Standards Board adopted
Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS
No. 128"). The Company, which is required to adopt the provisions of SFAS No.
128 during the fiscal year ended January 31, 1998, does not expect such adoption
to have any significant effect on earnings per share.
SEASONALITY AND INFLATION
The Company does not believe that inflation or seasonality has had a
significant effect on the Company's operations to date.
19
<PAGE> 20
BUSINESS
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 facilitates both internal and external corporate
communications for clients.
The Company develops marketing driven, database oriented sites for
businesses which establish commercial presences on, or conduct Internet commerce
over, the Web. Corporate clients for which the Company has built and implemented
such Web sites include Twentieth Century Fox Home Entertainment, Inc., Safeway
Inc. and Microsoft. Web sites created for these clients may be viewed at
www.foxinternational.com, www.safeway.com and www.developerstore.com,
respectively. Through the planning and creation of Intranet Web sites, the
Company also serves businesses seeking to establish efficient, confidential
internal corporate communication systems. Intranet clients of the Company
include Microsoft and Marriott Corporation. Other clients for which the Company
has developed Web sites include Fluke Corporation, Intel Corporation, Mann
Packing Company, Optiva Corporation, Wall Data, Inc. and Windermere Services
Company. See "-- Clients and Services."
BUSINESS STRATEGY
The Company specializes in producing complex, database driven and
relationship marketing oriented Web sites. The Company believes that such state
of the art Web sites -- as compared to traditional, one-way broadcast media
(such as television) or many first-generation Web sites -- will become an
essential means of conducting business for many commercial organizations. The
Company's business strategy is to derive and maximize revenue from the planning
and creation of such Web sites. In addition, the Company believes that, as
commercial Internet and internal corporate markets for Intranet sites develop,
ongoing maintenance and hosting of Web sites will become a more important aspect
of the Company's business.
The Company believes that there are thousands of Web site developers who
have created hundreds of thousands of Web sites, but that only a small
percentage of current commercial Web sites effectively utilize database
integration technologies or interactive database marketing techniques. Relying
upon its knowledge of marketing principles as well as its specific expertise in
custom programming and the development of relational databases, the Company
works with each of its commercial Web site clients, first, to establish specific
database driven relationship marketing strategies, and then to create unique Web
site features designed to entice visitors to provide information useful to the
client regarding the visitor's identity, interests and position in the customer
life cycle. Through such Web sites, the Company's clients may obtain
information-rich databases for use in the clients' overall sales and marketing
efforts. Similar techniques and strategies are also applied to the collection,
distribution and analysis of information for Intranet sites developed by the
Company.
The Company's producers, programmers, media designers, graphic artists,
writers and other personnel use third party software (primarily from Microsoft),
third party hardware and internally developed and customized software to plan,
create, maintain and host Web sites for the Company's clients. The Company works
with Microsoft to demonstrate to third parties the manner in which Microsoft
products can be used to establish a commercial presence on the Web. As a result
of this relationship, Microsoft has provided the Company with marketing
materials, assisted the Company with new business development and given
recognition to the Company on the Microsoft Web site (www.microsoft.com). See
"-- Relationship with Microsoft."
THE INTERNET AND THE WEB
Overview. The Company believes that the Internet and the Web offer new and
powerful mediums for commercial organizations to rapidly, economically and
productively target and manage a wider and better defined customer base.
Companies from many industries are publishing product and company information
for their vendors and customers, providing customer support, allowing customers
to buy products and permitting
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companies to collect customer feedback and demographic information online. User
friendly software now permits businesses to offer multimedia content such as
audio files and video clips, as well as text, spreadsheet and graphical data,
over the Web. These enhanced means of communication are also being used by
businesses internally for confidential corporate communications via Intranets.
History of the Internet. The Internet began in 1969 as ARPANET, an
experimental project funded by the U.S. Department of Defense and its Advanced
Research Programs Agency. ARPANET was designed for the military to link diverse
types of computer networks that would withstand the destruction of any part of
the network and continue to function. In 1986, the National Science Foundation
("NSF") established a program to promote the scientific use of ARPANET in
universities in the United States, and a year later awarded a contract to
various private companies to create and manage NSFNET, which became the
Internet's backbone. Although ARPANET officially ceased to exist in 1990, the
academic and private sector consortium had gathered significant momentum to
continue development.
Public and governmental agencies that funded the development of the
Internet established policies that prohibited commercial use, including
advertising, on the Internet. Nevertheless, the academic community began to
formulate independent connections to the Internet, which eventually evolved into
today's commercial access providers. Commercial access providers established the
Commercial Internet Exchange in 1991 to transmit traffic in a manner avoiding
the publicly funded portion of the Internet and the ban on its commercial use.
By 1995 in the United States, control of the Internet had largely passed from
the public sector to the private sector.
LOGO
Source: Robert Zakon, Hobbes' Internet Timeline v 2.5, INTERNET SOCIETY (1996).
How the Internet Works. The Internet is a global "network of networks"
linking thousands of public and private computer networks that allows computers
attached to the Internet to communicate utilizing an open communications
protocol known as Transmission Control Protocol/Internet Protocol ("TCP/IP"). As
a result, diverse computing resources can be connected to the Internet on the
TCP/IP language, thereby enabling the free exchange of data without regard to
the various languages used by any specific computer. The primary uses of the
Internet include electronic mail, file transfer, news and chat services and,
increasingly, commerce over the recently developed network of servers and
information available on the portion of the Internet known as the Web.
Businesses and individuals access the Internet and the Web in two primary ways:
direct access to the Internet through an Internet Service Provider (commonly
known as an "ISP"), such as AT&T, MCI, Sprint, NETCOM, PSI or UUNET; or access
to the Internet through an online service, such as CompuServe, America Online or
Prodigy, each of which provide Internet access gateways.
The backbone of the Internet consists of international and nationwide
networks of data communications circuits and telecommunications lines designed
and operated specifically to carry TCP/IP-based traffic. High performance, high
bandwidth data communications circuits are interconnected at high performance
hubs, which are then connected to other regional hub locations. Computers at
both ends are typically connected to
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the network by means of a traditional local access line provided by regional
telephone companies. Thus, through ISPs or online services, Internet users
connect to the global network of networks with the convenience and cost of a
local telephone call.
LOGO
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Sites on the Web portion of the Internet can capture and maintain the
attention of a site visitor in a way that is not easily achievable with
conventional media. Web sites can be designed to retain a visitor's attention by
analyzing visitor responses, determining visitor interests and providing content
dynamically tailored by the visitor's feedback. Web sites allow commercial
organizations to offer their products and services to anyone with access to the
Internet. Businesses can encourage repeated visitor interaction by continuously
updating online information and can monitor the popularity of content and make
timely changes in response to real-time feedback. For example, a company can
estimate the volume of traffic on a Web site, gather information about the
visitors to that site and monitor the visitor's level of interest in that
company's products and services.
The Web. The recent growth in Internet use by businesses and individuals is
largely due to the emergence of a network of servers and information available
on the Web. The Web is a client/server system of multimedia data files
introduced in 1992, in which certain computers ("servers" or "home pages") store
files and respond to requests issued by remote computers ("clients") to download
files, thus allowing multiple, geographically dispersed users to view
information stored on a single server.
A Web site is a collection of one or more electronic documents, or "Web
pages," which may contain textual, audio and video information, that are
published in the common format known as HTML. A Web site can contain from one to
thousands of Web pages. Users with Web browsers, or software specifically
designed to search for and access information available on Web servers, can
specify which Web sites they wish to view by entering a site's unique electronic
Web address, known as its URL. Alternatively, users can navigate the Web by
making use of the hypertext link capabilities of Web documents. Hypertext links
are active areas on a Web page which, when selected by a user, automatically
cause the browser to display a specified page which may be located anywhere else
on the Web, thus enabling users to move from one Web site to another without
having to know the underlying address, or URL, of each site.
Growth of the Internet and the Web. Internet use has grown rapidly since
the early 1990s, fueled by increasing use of personal computers and modems, the
development of the Web, the introduction of easy-to-use Web browsers and the
availability of informational, entertainment and commercial software
applications. Technological advances relating to the Internet have occurred and
continue to occur rapidly, resulting in a more robust, lower-cost
infrastructure, improved security and increased value-added services and
content. According to a recent industry report, the number of people using the
Internet is, at a minimum, doubling every year.(5) Industry sources expect this
rate of growth to continue until at least the year 2000, at which time the
number of Internet users is expected to exceed 700 million, increasing from
approximately 57 million users in 1997.(6)
According to another industry source, Internet user growth is occurring at
a rapid pace in both households and businesses. That industry source estimates
that by the year 2000, the number of U.S. households with ready access to the
Internet will increase to 33 million, from 10 million in 1996, and the
percentage of U.S. businesses connected to the Internet will rise to 33% from 4%
in November 1996.(7) Noting that the numbers represent U.S. estimates only, that
industry source concludes that worldwide growth presents significant
opportunities for the transaction of business over the Internet.(8) In
anticipation of such growth, commercial Internet sites are being created at an
explosive pace. According to other industry sources, the number of commercial
Internet sites, defined as domain names ending in ".com," has increased from
4,912 in August 1995 to 171,738 in June 1996 and 609,275 in April 1997.(9) See
"-- Internet Commerce and the Marketing Communications Industry."
- ---------------
(5)Quarterman, supra note 1; Demographic Survey, supra note 1.
(6)Quarterman, supra note 1.
(7)News Release, Business-to-Business E-Commerce Explodes in 2000, FORRESTER
RESEARCH, INC. (November 29, 1996) (hereinafter E-Commerce).
(8)E-Commerce, supra note 7.
(9)Netcraft Surveys, supra note 4.
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INTERNET COMMERCE AND THE MARKETING COMMUNICATIONS INDUSTRY
Internet Commerce Generally. The Internet provides companies, individuals
and others with new means to conduct business and other activities rapidly,
economically and productively. According to an industry source, in 1996,
Internet commerce, defined as business-to-business and business-to-consumer
transactions, product marketing, advertising, entertainment, electronic
publishing, electronic services and customer support, accounted for $9.6 billion
in revenues.(10) This industry source projects that Internet commerce will
generate approximately $196 billion in revenues by the year 2000.(11) Another
industry source estimates that $66 billion of the aggregate $196 billion is
expected to result from business-to-business Internet commerce and the remaining
$140 billion is expected to be allocated among business and professional
information services ($37 billion), financial services ($22 billion), consumer
retail ($7 billion) and technical services relating to Internet infrastructure
and access ($74 billion).(12) The Company believes that the planning, creation,
maintenance and hosting of Web sites comprise services that are fundamental to
all of these areas of Internet commerce. As a result, the Company believes that
it is strategically positioned to profit from growth in all areas of Internet
commerce.
Interactive Marketing Communications. The Company believes that the
Internet enables businesses to reach and establish personalized two-way
communication with well-defined target audiences without paying the significant
costs required to buy traditional media (e.g. paper, print space, broadcast
media time and mail). The Internet thereby enables such businesses to target and
track customers with specific brand messages, to capture customer and corporate
constituent preferences, opinions, needs and desires, to have instant access to
consumer feedback and to continuously sharpen marketing plans to address the
current marketplace.
Early adopters of Web sites considered such sites to be a relatively
inexpensive way to signal a technologically sophisticated image without
requiring the expenditure of a significant portion of their overall marketing
communications budget. The Company believes, however, that as businesses become
more familiar with interactive marketing techniques and opportunities, the
amounts spent to utilize the new media will increase rapidly. Industry sources
have estimated that online spending for advertising alone will grow from $312
million in 1996 to $5 billion by 2000.(13) Approximately $161 billion was spent
on advertising in the United States in 1995, according to a leading advertising
agency.(14) The Company believes that over the next few years the rate of growth
of expenditures on new media will greatly exceed that of expenditures for
traditional media as more households and businesses connect to the Web and
marketers come to understand the potential benefits of communicating through
that media.
The Intranet Market. Once a corporation provides its employees with Web
access from their desktops, it may then have an internal corporate Web site
installed to distribute information internally within the corporation and to
host corporate applications. The Company believes that, in addition to the
development of publicly accessible Internet sites, the planning, creation,
maintenance and hosting of Intranets will provide significant business
opportunities for Web site developers.(15) Although the exact number of
corporate Intranets presently in existence is unknown, an industry source
estimates that the private Intranet market is far larger than its public
counterpart. According to this industry source, the number of publicly
accessible Internet sites, estimated at over 1 million, may be only a quarter of
the number of Intranets installed.(16) This market is
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(10)Stan Gibson, Attention Shoppers: E-Commerce Is Here!, PC WEEK (November 25,
1996).
(11)Gibson, supra note 10.
(12)E-Commerce, supra note 7.
(13)Glenn Hasek, Web's Ad Revenues Rise, CYBERMANAGEMENT (October 7, 1996).
(14)McCann-Erickson, Insider's Report (December 4, 1995).
(15)Ellis Booker, Change in Market Share; Microsoft Server Tops Netscape's, WEB
WEEK (April 7, 1997).
(16)Booker, supra note 15.
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expected to experience rapid growth and development over the next three
years.(17) As of March 1996, corporate Intranets allowed employees to use the
Web only for internal document sharing.(18) New applications, however, have been
developing monthly.(19) By 2000, a "Full Service Intranet" is anticipated, which
is expected to provide five core applications consisting of directory services,
electronic mail, file management, print services and network management.(20)
Through Intranets, corporations may utilize the Web to extend their
internal information systems and applications to geographically dispersed
facilities, remote offices and mobile employees. An Intranet can yield
significant operational efficiencies and cost reductions by (1) lowering or
eliminating the costs of long distance telephone charges and leased telephone
lines that connect decentralized offices and staff, (2) permitting the delivery
and receipt of information more quickly, and (3) reducing paper, printing and
postage or delivery costs. Because security concerns have been, and continue to
be, addressed by improving technology, companies are now beginning to utilize
Intranets for confidential communications within the enterprise. Intranets are
also now being used by organizations for confidential communications to
customers and vendors (when used in this manner, Intranets may be referred to as
"Extranets"). An industry source predicts that, as corporations begin to take
advantage of the expanding benefits of Intranets, the total Intranet market will
grow from $12 billion in 1997 to $28 billion by 1999.(21)
Production and Hosting of Web Sites. As the number of Internet users
increases, the need by businesses to obtain effective and engaging Web sites is
expected to create significant opportunities for Web site developers. It has
been estimated that by 2000 fees paid to third party developers for building Web
sites will exceed $10 billion, compared to $1.2 billion paid to third party
developers of Web sites in 1996.(22) Of this $10 billion, it is estimated that
approximately $8.9 billion will be used for building promotional and commercial
Web sites, principally sites that advertise a company's products or services or
provide interactive shopping, banking or customer services.(23) The $10 billion
estimate, however, does not include estimated expenditures relating to Intranet
development.
An industry source has noted that most companies lack the internal
resources necessary to develop their own Web sites or effectively capture
commercial opportunities made available through utilization of the Web.(24) As a
result, businesses are relying upon Web site developers to define and implement
unique Web strategies and to keep businesses current with Internet
technology.(25) According to an industry source, businesses spend in the range
of $10,000 to $100,000 for Web site development. (26)
The construction of Web sites represents only part of the Web site
development industry. Businesses are also utilizing Web site development firms
to host their Web sites. An industry source reports that two-thirds of Fortune
1,000 companies currently use outside entities to host their Web sites, a
service which is estimated to
- ---------------
(17)Forrester Report, FORRESTER RESEARCH, INC. (March 1, 1996).
(18)Forrester Report, supra note 17.
(19)Paul Korzeniowski, Intranet Bets Pay Off Corporations are Leaping Headfirst
into Intranet Waters, Eschewing Traditional Return on Investment Research,
INFOWORLD ELECTRIC (January 13, 1997).
(20)Forrester Report, supra note 17.
(21)Next-Generation Nets, INTERNETWORK (January 1997).
(22)Web Outsourcing, supra note 3.
(23)Web Outsourcing, supra note 3.
(24)News Release, Most Businesses Outsourcing Web Site Hosting, FORRESTER
RESEARCH, INC. (January 15, 1997) (hereinafter Site Hosting).
(25)Web Outsourcing, supra note 3.
(26)Site Building, CYBER ATLAS, from ActivMedia, Inc. (February 1, 1996).
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cost 20% less than a comparable, internally hosted site.(27) The Company
believes that businesses may continue to outsource hosting to acquire the
technical expertise, increased reliability and reported savings associated with
outside hosting.
CLIENTS AND SERVICES
The Web permits real time, one-to-one communication with consumers,
allowing consumers to respond to questions and messages on a Web site. The
Company believes that the Web provides commercial enterprises with unique
opportunities to gather valuable demographic data, including information
regarding users' identities and preferences. Accordingly, the Company has
created a Web site development process involving marketing and communications
strategies and Web site design elements. For example, in creating Web sites that
compile user-provided information, the Company works with its clients, first, to
establish specific database driven marketing strategies, and then, to create
unique Web site features designed to entice visitors to provide information
useful to the client regarding the visitor's identity, interests and position in
the customer life cycle. Through such Web sites, the Company's clients may
obtain information-rich databases for use in the clients' overall sales and
marketing efforts. The Company also services certain clients by maintaining and
hosting such clients' Web sites.
Company Clients. Since it began operations in 1994, the Company has
designed and created more than 50 Web sites. The Company's clients to date
include Twentieth Century Fox Home Entertainment, Inc., Safeway Inc., Microsoft,
Optiva Corporation, Fluke Corporation, Intel Corporation, Wall Data, Inc., The
DeWolfe Company, Windermere Services Company and Mann Packing Company. The
Company has designed and created Intranet sites for Cairnstone Incorporated,
Microsoft and Windermere Services Company. The Company has also entered into a
contract to design, create and produce Intranet sites for the Marriott
Corporation.
Web Site Production and Support. The Company has expertise in custom
programming, relational databases and computer graphics. The Company attempts to
provide each of its clients with the appropriate product or service for its
particular need. As detailed on the chart and in the text below, the Company's
services with respect to a particular client's interactive Web site may fall
within any combination of up to four major areas: Web site planning; Web site
creation; Web site maintenance; and Web site hosting.
- ---------------
(27)Site Hosting, supra note 24.
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[GRAPH]
27
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[GRAPH]
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WEB SITE PLANNING. The Company's process of developing a Web site begins
with planning. Web site planning generally consists of marketing and business
process consultation and the delivery of a Web site blueprint.
- Internet Marketing Consultation. The Company believes that one of its
strengths is its knowledge and utilization of marketing principles. Every
Internet Web site created by the Company is designed with the idea that
the end product should be an integrated part of the client's overall
marketing plan. The Company believes that its use of marketing principles,
in the context of developing Web sites and designing the manner in which
such Web sites are capable of interacting with users, differentiates the
Company from its competitors.
- Intranet Business Process Consultation. Many of the marketing principles
used in designing an Internet Web site are also applied by the Company in
designing Intranet Web sites for its clients. Utilizing marketing
principles, the Company and client identify the target audience and match
applicable information with the appropriate recipient. In addition, the
Company consults with its clients as to utilization of the Web for
extensions of the client's internal information systems and enterprise
applications to geographically dispersed facilities, remote offices and
mobile employees. The Company seeks to design Web sites in a manner which
will enable its clients to achieve operational efficiencies and cost
reductions.
- Web Site Blueprint. The technical plan, or blueprint, prepared by the
Company for each client describes in detail the Web site objectives,
design strategy and tactics, reporting requirements, technical
specifications, review and testing processes, program management and
communication protocols, site promotion, future site enhancements and
project timeline. In particular, the Company focuses on its marketing
resources to design Web sites that will provide measurements of actual
performance relative to each client's desired measurable results. The
Company compiles these blueprints and attempts, by leveraging the
information and experiences gained from each project completed by the
Company, to further enhance the development processes it routinely
utilizes for formulation of client proposals and projects.
WEB SITE CREATION. The Company's process of creating interactive Web sites
combines up to five elements: graphic design; multimedia production; custom
programming; database development; and systems integration. The Company believes
that the Web sites it creates are unique and among only a small percentage of
Web sites that effectively utilize database integration technologies or
interactive database marketing techniques.
- Graphic Design. The Internet and the Web allow the Company to produce for
its clients a Web site that communicates with the site visitor using both
text and graphic design. The Company employs personnel skilled in
presenting text which is consistent with the client's overall marketing
strategy and in providing sophisticated art direction that is visually
stimulating and capable of capturing the target audience's attention.
- Multimedia Production. The Company develops Web sites utilizing still
photographs, full motion video, dynamically generated charts and graphs,
animation and sound. Any or all of these features may be used to appeal to
a client's target audience on a Web site. Although these features are used
routinely for marketing to parties external to the client, such features
may also be used as part of a client's internal communications strategy.
- Custom Programming. Developing Web sites which permit real time
one-on-one interaction with site visitors requires specialized computer
programming beyond HTML. The Company therefore has employed technical
personnel with specific expertise in custom programming. In addition to
HTML, Company personnel have expertise and develop custom programming
using applications such as Microsoft(R) Visual Basic(R), Microsoft Visual
Basic(R) Scripting Edition, Microsoft(R) Jscript(R) Scripting Edition,
Microsoft(R) Visual J++(TM), Microsoft(R) Visual C++(R), and Microsoft(R)
Visual SourceSafe(TM).
- Database Development. The Company employs technical personnel with
specific expertise in the development of complex relational databases.
These databases are developed using Microsoft(R) SQL Server(TM) and
operate in conjunction with server products including Microsoft(R)
Internet Information
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Server Integrated with Microsoft Windows NT(R), Microsoft Exchange Server,
Microsoft Merchant Server and StormCloud Development Corporation's WebDBC.
- Systems Integration. A key component of a Web site is its ability to be
integrated into a client's computer systems as currently existing and as
such systems change in the future. The Company has employed technical
personnel with expertise in analyzing and documenting clients' existing
systems and in designing Web sites with sufficient flexibility to
facilitate future modifications.
WEB SITE MAINTENANCE. Maintaining and updating a Web site serves to protect
a client's investment in its Web site. Such maintenance may include supporting,
augmenting and enhancing the information collection and analysis efforts
provided for in the Web site's blueprint. In some cases, certain maintenance
activities may be performed directly by the client due to features designed and
implemented by the Company when creating the Web site. The Company, pursuant to
written agreements in addition to the original Web site creation agreement, will
frequently provide ongoing marketing and business process consultation, Web site
content updates, refreshment of graphic and multimedia content, and database
management.
- Content Updates. Web sites often require event driven or regularly
scheduled modifications of site content. Examples of such updating
includes posting of new properties on a real estate company's Web site
(e.g., Windermere Services Corporation), replacement of outdated coupons
with coupons promoting different merchandise (e.g., Safeway Inc.) or
changes in employment listings on a company's Intranet human resources
Web site (e.g., Microsoft).
- Graphic and Multimedia Refreshes. Both content updates and graphic
refreshment are driven by the interactive nature of the Web site. As an
interactive media, the Web site provides a virtually instantaneous gauge
of the site's communications effectiveness. This feedback allows the
client to continuously modify the form and content of a Web site message
to improve its effectiveness.
- Database Management. Databases experiencing large volumes of original
input normally require periodic maintenance to ensure the integrity and
usefulness of the data. The Company performs such functions for certain
of its clients.
WEB SITE HOSTING. The Company also serves certain of its clients by hosting
the Web sites it has planned, created or maintained. In addition, the Company
provides hosting services for Web sites other than those it has planned, created
or maintained. The primary elements of Web site hosting are reporting and
Internet connectivity.
- Reporting. The Company serves certain of its clients by periodically
analyzing client's Web site traffic and reporting the results.
- Internet Connectivity. Every Web site must be made accessible to the
Internet in order to be viable. The Company serves as a host for certain
of its clients' Web sites. The Company provides the computers and/or the
connection to the Internet necessary to allow the client's Web site to be
accessed by users of the Internet.
COMPANY RESPONSE TO ONE CLIENT'S NEEDS
One example of the services performed by the Company is the initial project
undertaken for Twentieth Century Fox Home Entertainment, Inc. For this client,
the Company planned, created and maintains a brand-intensive, highly interactive
Web site supporting the release of the home video version of the film
Independence Day as it is distributed into retail outlets outside of the United
States. A diagram illustrating the features of this Web site appears on the
inside front cover of this Prospectus. The Company believes that the Web site
created for Twentieth Century Fox Home Entertainment, Inc. is representative of
the Company's ability to create sophisticated Web sites for its clients.
The objectives of Twentieth Century Fox Home Entertainment, Inc.'s
Independence Day Web site include generating public awareness of the video's
availability, stimulating store traffic, reinforcing the positioning and
branding of the movie, cross-promoting other movies, driving consumer traffic to
related promotional events and encouraging both word-of-mouth site referrals and
repeat site visits. Twentieth Century Fox Home Entertainment, Inc. desired a
highly interactive database to run the Web site as well as to
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provide timely feedback on the results of the various programs and events
promoted on the site. The complex database implemented by the Company for this
site enables analysis of the consumer profile information collected on the site,
site image statistics and consumer segmentation data.
The Company made extensive use of several programming applications to
create the custom features used to capture the attention of the site's target
audience. The Independence Day Web site contains three games for site visitors
to play. As of the date of this Prospectus, each game is paired with a promotion
or sweepstakes. The site was configured to allow online postcards to be sent
from a site visitor to anyone in the world with an electronic mail address. The
postcard recipient may then go to the site's "post office" and retrieve the
message which was sent. The site is available in multiple languages for various
international audiences.
The Independence Day Web site was designed to be an ongoing resource for
the client. The site's database is capable of handling the information related
to additional videos as they are released and promoted via the Web. The Company
anticipates being engaged to create additional sites for the client to take
advantage of this resource.
RELATIONSHIP WITH MICROSOFT
Since its formation in 1994, the Company has developed technical expertise
in planning, creating, maintaining and hosting Web sites for clients. To date,
the Company has developed such Web sites principally through the application of
Microsoft products and has developed intensive specialized training for its
production personnel in the use of Microsoft products. The Company is a beta
tester, and is sometimes an alpha tester, of new software products developed by
Microsoft and other software developers. As a result, Company personnel have
historically been regularly informed of the latest developments in interactive
technology.
Working with Microsoft as a Paid Vendor. The Company serves Microsoft as a
paid vendor, developing various components of both Internet and Intranet Web
sites for Microsoft. During fiscal 1996 and fiscal 1997, the Company created
over 30 Web sites for various Microsoft units including its Enterprise Customer
Unit, Organization Customer Unit, Human Resources Department, Product Groups
(including Exchange, Project, Publisher/Works, and Word) and The Microsoft
Network. Total services rendered by the Company to Microsoft accounted for 34%
and 19% of the Company's gross revenue for fiscal 1996 and fiscal 1997,
respectively.
Microsoft Sponsored Marketing Programs. The Company is an active
participant in two Microsoft sponsored marketing programs: the Microsoft
Solution Provider Partner program and the Microsoft Site Builder Network
program:
- Microsoft Solution Provider Partner Program. Microsoft Solution Provider
Partners are individual companies that provide consulting, integration,
customization, development, training, technical support or other services
utilizing Microsoft products. Through the Microsoft Solution Provider
Partner program, Microsoft works with companies to provide information,
tools and business development assistance to successfully implement
business solutions and provide services using the Microsoft Solutions
platform and technologies. The Microsoft Solution Provider Partner
program clearly identifies companies as having a special relationship
with Microsoft.
- Microsoft Site Builder Network Program. Participants in this program
receive national marketing materials, including a four color printed
brochure that promotes the participants and their services, a featured
client case study on the Microsoft Web site, and a listing on the
Microsoft Web site within a directory of site builders. In addition,
Microsoft technical support and training opportunities, including free
training at a Microsoft authorized Technical Education Center and special
participant only technical briefings, the latest development information
and tools and sales leads of businesses requesting assistance
implementing Microsoft technology are provided to participants in the
Microsoft Site Builder Network Program.
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The Company is a Level Three Microsoft Site Builder (the highest attainable
service level) and was the first entity to achieve this designation. The Company
believes it was the first site builder featured in a direct mail campaign
conducted by Microsoft. The Company has developed several significant client
relationships from this association.
Joint Marketing Presentations. In conjunction with both the Microsoft
Solution Provider Partner and the Microsoft Site Builder Network programs,
representatives of the Company have been invited to take part in several joint
marketing opportunities with Microsoft. These include:
- the Microsoft/Ernst & Young LLP "Small Business Summit 1996" held in San
Francisco, California in October 1996;
- the Microsoft/Onyx Software/fine.com Corporation seminar, "How to
Successfully Market Products and Services on the Web," at the Microsoft
Bellevue, Washington campus in January 1997;
- the Microsoft/fine.com Corporation/Polaris Group seminar, "Microsoft
Intranet Solutions," at the Microsoft Bellevue, Washington campus in
February 1997;
- as co-developer and presenter of a Microsoft/Hewlett Packard/fine.com
Corporation "Consumer Solutions Briefing" made available on CD ROM in
March 1997;
- the fine.com Corporation/Microsoft seminar, "Retailing on the Internet,"
held at the Microsoft Boston, Massachusetts offices in April 1997; and
- the Microsoft/fine.com Corporation/XcellNet/Successful
Franchising/Hewlett Packard seminar, "Franchise of the Future," held at
the Microsoft Redmond, Washington campus in April 1997.
COMPETITION
The Internet-related interactive marketing industry is highly competitive.
The Company expects competition for its services to intensify in the future. Due
to the rapidly evolving nature of the Internet, competition also is
characterized by pressures to adopt and utilize new capabilities and
technologies to respond rapidly to evolving client requirements.
The Company faces competition from a number of competitors, some or all of
which may provide Web site planning, creation, maintenance or hosting services.
Direct competitors include: (1) prospective clients that perform Web site
development services in-house; (2) Web site service firms, such as K2 Design,
Free Range Media, Razorfish Inc., Eagle River Interactive, Red Sky Interactive,
Inc. and USWeb; (3) Internet-oriented advertising agencies such as The Leap
Group, CKS Group and The Martin Agency; (4) communications, telephone and
telecommunications companies such as UUNET Technologies and US West; and (5)
established online service companies, advertising agencies, direct Internet
access providers as well as specialized and integrated marketing communication
firms, all of which are entering the Web site planning, creation, maintenance or
hosting markets in varying degrees and are competing with the Company, and many
of which have announced plans to offer expanded Web site planning, creation,
maintenance and/or hosting services. Many of the Company's competitors or
potential competitors have longer operating histories, longer customer
relationships and significantly greater financial, management, technological,
development, sales, marketing and other resources than the Company. The Company
also competes on the basis of creative and technical talent, price, customer
service and responsiveness. There can be no assurance that the Company will be
able to compete effectively and its inability to do so would have a material
adverse impact on the Company.
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<PAGE> 33
PROPERTIES
The Company's offices currently occupy approximately 8,000 square feet of
an office building at 1118 Post Avenue, Seattle, Washington 98101 at an annual
rent of approximately $80,000. Such payments include the Company's allocable
share of certain real property taxes and building operating expenses. The
remaining lease term expires in April 2001. The Company anticipates that it will
need to lease additional space during either 1997 or 1998 as the Company adds
personnel and expands its infrastructure.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
EMPLOYEES
As of July 31, 1997, the Company had 27 full time employees. The Company
has no labor contracts or collective bargaining agreements. The Company
considers its relations with its employees to be good.
33
<PAGE> 34
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning directors,
executive officers and certain key employees of the Company. Each director holds
office until the first annual meeting of shareholders is held after his election
or until his successor is elected or appointed and qualified.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------- --- --------------------------------------------------
<S> <C> <C>
Daniel M. Fine 38 Chairman of the Board, President and Chief
Executive Officer
James P. Chamberlin 36 Chief Financial Officer and Director
Daniel G. Stull 35 Chief Operating Officer
Bill Flowers 35 Chief Technology Manager
Diana Bury 34 Manager of Internet Services
Robert L. Barker, Jr. 29 Manager of Intranet Services
Herbert L. Fine 66 Director
Frank Hadam 69 Director
Norman W. Lauchner 76 Director
Anthony C. Naughtin 41 Director
</TABLE>
Daniel M. Fine founded the Company in 1994 and since its inception has
served as its Chief Executive Officer and Chairman of the Board. From September
1991 through January 1994, Mr. Fine was a partner in Kobasic Fine Hadley, an
advertising agency, where he also served as vice president of marketing. Kobasic
Fine Hadley was created in 1990, after the merger of Kobasic Hadley, an
advertising agency, with Fine Advertising, an agency founded by Mr. Fine in
1987. From 1984 to 1986, Mr. Fine was an associate marketing/media manager with
the New York advertising agency of Levine, Huntley, Schmidt & Beaver. Mr. Fine
holds a B.A. from Washington State University. Mr. Fine is the son of Herbert
Fine, a Director, and Mr. Fine is related by marriage to Mr. Hadam, a Director.
James P. Chamberlin joined the Company in July 1995 as Chief Financial
Officer. Mr. Chamberlin has served as a Director of the Company since July 1996.
From March 1989 to July 1995, Mr. Chamberlin served as controller of Pinnacle
Productions International, Inc., a video special effects and post production
company. From September 1985 to March 1989, Mr. Chamberlin was on the audit
staff of Ernst & Young LLP in its Seattle, Washington office. Mr. Chamberlin
holds a B.A. from the University of Washington.
Daniel G. Stull joined the Company in March 1996 and has served as Chief
Operating Officer since January 1997. From October 1992 to March 1996, Mr. Stull
served LaserDirect, Inc., a database and direct marketing company, as chief
financial officer (from October 1992 to December 1993), vice president of
account services (from December 1993 to February 1995) and vice
president/account director (from March 1995 to March 1996). From June 1989 to
August 1992, Mr. Stull served as vice president and general manager of ADS
Distributing, Inc., a distributor of specialty construction materials selling
through a network of independent dealer/distributors in the United States and
Canada. From 1987 to 1989, Mr. Stull was on the audit staff of Ernst & Young LLP
in its Seattle, Washington office. Mr. Stull holds a B.A. and M.B.A. from the
University of Washington. Mr. Stull serves as a director of LaserDirect, Inc., a
privately held company.
Bill Flowers joined the Company in July 1996 and has served as Chief
Technology Manager since December 1996. From July 1992 to June 1996, Mr. Flowers
served as director of academic computing and user services at Seattle
University. From September 1991 to June 1992, Mr. Flowers was a technical
computer consultant at Seattle University. Mr. Flowers holds a B.A. from
Washington State University.
Diana Bury joined the Company in September 1996 as Manager of Internet
Services. From January 1996 to August 1996, Ms. Bury operated her own multimedia
consulting business. From April 1994 to January 1996, Ms. Bury served as
executive producer for Sanctuary Woods Multimedia, an entertainment and
educational multi-media CD-ROM production company. From March 1993 to April
1994, Ms. Bury served
34
<PAGE> 35
AT&T's Microelectronics Division as an Individual Software Vendor Marketing
Manager. From June 1990 to December 1992, Ms. Bury served as product marketing
manager for Pensoft Corporation, a software development corporation for
pen-based computers.
Robert L. Barker, Jr. joined the Company in January 1997 as Manager of
Intranet Services. From July 1995 to January 1997, Mr. Barker served
SolutionsIQ, a firm specializing in developing technical computer solutions,
where he worked principally on Web-based database applications. From November
1994 to July 1995, Mr. Barker was a product development manager for Intermation,
Inc., a records and document management software development corporation, where
he managed the development of a client/server document management system
product. From June 1993 to October 1994, Mr. Barker was a development lead for
Microsoft. From 1991 to June 1993, Mr. Barker was a development and design lead
for Analytical Technologies, Inc., an environmental analysis laboratory. Mr.
Barker holds a B.S. in Biochemistry/Molecular Biology from the University of
Maryland.
Herbert L. Fine has been a Director of the Company since October 1994.
Since January 1996, Mr. Fine has been a partner of FINE/EDGE, a marketing
consulting firm which has been retained to provide services to Toyota Motor
Sales, USA., Inc. From March 1991 to December 1995, Mr. Fine served as senior
vice president, chief operating officer and a director of Kogei America, Inc., a
sales promotion company. From 1974 to 1991, Mr. Fine served
Dancer-Fitzgerald-Sample Advertising as vice president and director of promotion
services. Mr. Fine holds a B.A. in Communication Arts from Michigan State
University. Mr. Herbert Fine is the father of Daniel M. Fine.
Frank Hadam has been a Director of the Company since October 1994. Mr.
Hadam retired in 1991. From 1986 to 1991, Mr. Hadam served as a communications
consultant to Bell Communications Research ("Bellcore"). Prior to that time, Mr.
Hadam served in various capacities at Michigan Bell, AT&T, Bell Labs, and
Bellcore where he worked on the design and implementation of international
private data networks. These analog and digital networks served both large
business customers and the U.S. government. His experience includes development
and manufacture of electronic switching systems, electronic tanden networks,
private virtual networks, software defined networks, T-1 transmission systems,
microwave transmission and fiber optics. Mr. Hadam holds a B.S. from Lyle
University. Mr. Hadam's daughter is married to Daniel M. Fine.
Norman W. Lauchner has been a Director of the Company since December 1996.
Since November 1994, Mr. Lauchner has served as Managing Director/Pacific region
of The Advertising Council, Inc., a non-profit corporation which is the nation's
largest provider of public service advertising. Mr. Lauchner retired in 1985.
From 1975 until 1985, Mr. Lauchner served as President of
Dancer-Fitzgerald-Sample's Southern California Division. From 1973 to 1975, Mr.
Lauchner served as Executive Vice President of Dancer-Fitzgerald-Sample, Inc.,
in New York, and from 1973 to 1983 he was a Director of DFS Holdings, Inc., the
agency's parent.
Anthony C. Naughtin has been a Director of the Company since December 1996.
Mr. Naughtin founded InterNAP Network Services LLC, a high performance
Internet/Intranet and data center outsourcing company, for which he has served
as president and chief executive officer since May 1996. From May 1995 to May
1996, Mr. Naughtin served as vice president of Commercial Network Services and a
director of ConnectSoft, Inc., a retail software and network services company.
From 1992 to May 1995, Mr. Naughtin served as director of sales for
NorthwestNet, Inc., a NSFNET/Internet company. Mr. Naughtin holds a B.A. from
the University of Iowa and a J.D. from Creighton School of Law.
AUDIT COMMITTEE
In April 1997, the Board of Directors established an Audit Committee. The
Audit Committee's functions include reviewing the Company's internal controls
and recommending to the Board of Directors the engagement of the Company's
independent accountants, reviewing with such accountants plans for and the
results of their examination of the Company's financial statements and
determining the independence of such accountants. The members of the Audit
Committee are Messrs. Hadam and Naughtin.
35
<PAGE> 36
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table. The following table sets forth certain
compensation paid to the Chief Executive Officer for fiscal 1997 (the "Named
Executive Officer"). During fiscal 1997, none of the Company's other executive
officers received compensation, including bonuses, in excess of $100,000.
<TABLE>
<CAPTION>
ANNUAL
NAME AND PRINCIPAL POSITION COMPENSATION(1)
-------------------------------------------------------------- ---------------
<S> <C>
Daniel M. Fine
(President and Chief Executive Officer)..................... $58,113
</TABLE>
- ---------------
(1) The amount listed consists entirely of salary. No bonus was paid to Mr. Fine
during fiscal 1997. The Company provides Mr. Fine certain personal benefits
including payments for a car allowance. Since the value of such benefits did
not exceed 10% of Mr. Fine's annual salary, the amount is omitted.
Employment Contracts. Daniel M. Fine and James P. Chamberlin have entered
into employment agreements with the Company, each of which will become effective
on the first day of the month following the closing of the Offering. Each
agreement is for a term of three years, and is subject to automatic renewal for
successive one year terms unless either the employee or the Company gives 90
days notice of an intention to not renew such agreement. In addition, Messrs.
Fine and Chamberlin are each party to the Company's standard assignment of
inventions and nondisclosure agreement which provides that each will endeavor to
protect all intellectual property rights of the Company and will not disclose
confidential Company information to outside parties during the term of their
respective employment agreements and for a period of 18 months thereafter.
Mr. Fine's employment agreement provides for an annual base salary of
$95,000, subject to annual review by the Board of Directors. A discretionary
bonus may be determined by the Board of Directors. Additionally, pursuant to a
non-competition covenant, Mr. Fine has agreed not to compete with the Company
for two years following the termination of his employment.
Mr. Chamberlin's employment agreement provides for an annual base salary of
$90,000, subject to annual review by the Board of Directors. A discretionary
bonus may be determined by the Board of Directors. Additionally, pursuant to a
non-competition covenant, Mr. Chamberlin has agreed not to compete with the
Company for two years following the termination of his employment.
Enforcement of non-competition covenants is a matter of state law. There
can be no assurance that a state court, or any other court of competent
jurisdiction, would enforce the non-competition covenants included respectively
in the employment agreements of either Mr. Fine or Mr. Chamberlin.
1997 Option Plan. In April 1997, the Company adopted the 1997 Option Plan
and reserved 200,000 shares of Common Stock for issuance thereunder. The purpose
of the 1997 Option Plan is to promote the success of the Company's business by
attracting the best available personnel for positions of substantial
responsibility, and to provide additional incentives to officers, directors,
employees, consultants and advisors of the Company. The 1997 Option Plan
provides for the grant of both incentive stock options (stock options that are
intended to qualify for favorable tax treatment under Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code")) and nonqualified stock
options. The 1997 Option Plan is not qualified under Section 401(a) of the Code
and is not subject to the Employee Retirement Income Security Act of 1974.
The 1997 Option Plan is administered by the Board of Directors which has
full power and authority to administer and interpret the 1997 Option Plan and to
adopt such rules and agreements for the administration of the 1997 Option Plan
as the Board of Directors deems necessary or advisable. The Board of Directors
has determined that the aggregate number of shares of Common Stock subject to
options that may be issued under the 1997 Plan, together with such shares
subject to options outstanding under the 1996 Plan and any warrants proposed to
be issued to promoters, employees or affiliates of the Company, will not exceed
fifteen percent of the total number of shares of Common Stock outstanding at the
completion of the Offering for a one-year period commencing on the effective
date of the Registration Statement of which this Prospectus forms a part.
Excluded for this purpose are all options and/or warrants issued or proposed to
be issued to underwriters, financial institutions, or in connection with
acquisitions, or to all security holders of the Company on a pro rata basis.
36
<PAGE> 37
The Board of Directors selects the participants to receive stock options
and determines the number of shares, the type of option and the exercise price
as well as the time or times at which options may be exercised and other terms
and conditions. For incentive stock options, the exercise price may not be less
than the fair market value of the Common Stock on the date of grant. For
nonqualified stock options, the exercise price may not be less than 85% of the
fair market value of the Common Stock on the date of grant. In no case, however,
may options (whether incentive stock options or nonqualified stock options) be
granted under the 1997 Option Plan at an exercise price which is less than the
initial public offering price of the shares of Common Stock offered hereby. In
the event of stock dividends, stock splits or similar changes in the Company's
capital structure, the 1997 Option Plan provides for appropriate adjustments in
the number of shares available for options and the number of shares subject to
and exercise prices of outstanding options.
The term of each option granted under the 1997 Option Plan may be no more
than ten years from the date of grant. Vested options granted to employees
expire 90 days following termination of employment (12 months, if termination of
employment is due to death or disability, but in no event later than the date of
expiration of the option). The Board of Directors has the authority to extend
the expiration dates of any outstanding option in circumstances it deems
appropriate, provided that it may not extend an option beyond the original term
of such option.
The exercise price of options is generally payable in cash. Additionally,
upon exercise of nonqualified stock options, the option holder must also pay to
the Company the amount of federal, state, and local taxes required to be
withheld by the Company. Under certain limited circumstances, shares of Common
Stock may be used for payment of the exercise price or satisfaction of
withholding obligations.
Notwithstanding any option vesting requirements, in the event of a merger,
reorganization, sale of substantially all of the assets of the Company, change
of control of the Company, liquidation, dissolution or other corporate
transaction wherein the Company is not the surviving corporation, an option
holder typically has the right to immediately exercise all of his or her
options, whether vested or unvested.
The options are assignable only (i) by will or by the laws of descent and
distribution; (ii) by a qualified domestic relations order; or (iii) in the case
of a nonqualified stock option, by gift to immediate family members of the
optionee, to partnerships of which the only partners are members of the
optionee's immediate family and trusts established solely for the benefit of
such immediate family members.
The 1997 Option Plan may be modified, amended or terminated by the Board of
Directors except with respect to options granted prior to such action.
Notwithstanding the foregoing, shareholder approval is required for any
amendment which increases the number of shares subject to the 1997 Option Plan
(other than in connection with the anti-dilution provisions described above or
the assumption or substitution of options in connection with certain mergers and
other similar events). The Board of Directors may delegate its power and
authority with respect to the 1997 Option Plan to a committee thereof.
1996 Option Plan. The Company has adopted the 1996 Option Plan, the purpose
of which is to attract, retain and motivate selected employees, officers and
consultants of the Company. A total of 107,157 shares of Common Stock have been
reserved for issuance and are subject to outstanding options under the 1996
Option Plan. The weighted average exercise price of all outstanding options
under the 1996 Option Plan at July 31, 1997 was $2.31 per share. No additional
shares can be reserved under the 1996 Option Plan.
Options granted under the 1996 Option Plan vest over a five-year period,
according to a schedule which provides that 5% of such options vest one year
after the date of grant, 15% vest after two years, 30% vest after three years,
50% vest after four years, and the option becomes 100% vested after five years.
No options under the 1996 Option Plan were granted prior to 1996. Vested options
granted under the 1996 Option Plan are generally exercisable for a period of 10
years from the date of grant, except that vested options terminate 60 days after
termination of employment (12 months, if termination of employment is due to
death or disability). Upon exercise, the exercise price may be paid in cash or,
at the discretion of the Option Plan Administrator (currently the Board of
Directors), in shares of Common Stock or by withholding from the optionee that
number of shares of Common Stock which on the date of exercise have a fair
market value equal to the exercise price of the option. Substantially all of the
options granted under the 1996 Option Plan qualify as incentive stock options.
37
<PAGE> 38
CERTAIN TRANSACTIONS
In October 1994, in connection with the initial capitalization of the
Company, the Company issued (after giving effect to subsequent recapitalization
events) 633,323 shares of Common Stock to Daniel M. Fine, President, Chief
Executive Officer and Chairman of the Board, and 211,109 shares of Common Stock
to each of Frank Hadam, Director and Herbert L. Fine, Director, resulting in net
proceeds to the Company in the amount of $75,000.
On January 31, 1997, the Company completed a private placement of 59,524
shares of Series A Preferred Stock, resulting in net proceeds to the Company in
the amount of $239,918. The terms of the Series A Preferred Stock provide that
the issued and outstanding shares of Series A Preferred Stock will automatically
convert on the effective date of the Registration Statement of which this
Prospectus forms a part into shares of Common Stock, at a one-to-one conversion
ratio, and all authority of the Company to issue preferred stock shall
terminate. See "Description of Securities." None of the holders of Series A
Preferred Stock were previously shareholders of the Company. Digit, Inc., a
wholly owned subsidiary of Mitsui & Co., Ltd., purchased 23,810 shares of Series
A Preferred Stock. No other investor purchased more than 10% of the total number
of such shares issued. Craig T. Kobayashi, a principal of Cairncross &
Hempelmann, P.S., counsel to the Company, purchased 5,952 shares of Series A
Preferred Stock on terms identical to those of the other investors.
In February 1997, principals of Cairncross & Hempelmann, P.S., counsel to
the Company, entered into an option agreement with Messrs. Daniel M. Fine, Frank
Hadam and Herbert L. Fine providing for the purchase from such shareholders of
up to 79,167 shares of Common Stock at any time between January 1, 1999 and
January 1, 2007 at a nominal price. Based upon information supplied to the
Company by such shareholders, the option was granted in consideration of prior
legal services rendered for the personal benefit of such shareholders.
InterNAP Network Services LLC, a company which Anthony C. Naughtin,
Director, founded and serves as president and chief executive officer, has
provided the Company with Internet network and Web server hosting services in
the past. Through July 31, 1997, the Company has paid to InterNAP Network
Services LLC approximately $30,000 for such services. The Company believes that
such services were provided on terms no less favorable to the Company than could
have been obtained from unaffiliated parties.
As of the date of this Prospectus, Daniel M. Fine owes the Company $41,446,
reflecting certain salary advances made to Mr. Fine, including advances in the
amount of $13,667 deemed made during the four months ended May 31, 1997. Mr.
Fine is currently making semi-monthly payments on the principal amount of that
portion of such debt outstanding on January 31, 1997. Additionally, during the
first four months of fiscal 1998, salary advances in the amount of $13,333 were
deemed made to Mr. Chamberlin. Each of Messrs. Fine and Chamberlin have executed
promissory notes in favor of the Company dated May 29, 1997, with regard to the
respective deemed salary advances paid during the four months ended May 31,
1997. The promissory notes bear interest at the rate of 9% per annum and become
due and payable in full on January 31, 1998.
Daniel M. Fine has personally guaranteed the obligations of the Company
arising under its real property lease, the New Revolving Line of Credit and the
Equipment Line of Credit.
Subsequent to the date of this Prospectus, the Company does not intend,
with the exception of customary travel and expense advances, to advance funds or
extend loans to any officer, director or holder of five percent or more of the
outstanding capital stock of the Company or any of their respective affiliates.
Additionally, the Company does not intend to enter into any other transaction
with any officer, director or holder of five percent or more of the outstanding
capital stock of the Company or any of their respective affiliates unless the
terms are no less favorable to the Company than those which would be available
from unaffiliated third parties and the transaction is first approved by a
majority of the Company's disinterested directors.
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<PAGE> 39
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock as of the date of this Prospectus, and
after the sale of the Common Stock offered hereby, by (i) each person who is
known by the Company to beneficially own 5% or more of the outstanding shares of
Common Stock, (ii) each director, (iii) the Named Executive Officer and (iv) the
Company's executive officers and directors as a group. The address of each such
person is in care of the Company, 1118 Post Avenue, Seattle, Washington 98101.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
BENEFICIALLY OWNED
NUMBER OF ---------------------
SHARES BENEFICIALLY BEFORE AFTER
BENEFICIAL OWNER OWNED(1) OFFERING OFFERING
------------------------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Daniel M. Fine............................. 633,323(2) 56.8% 28.6%
Frank Hadam................................ 211,109(3) 18.9 9.5
Herbert L. Fine............................ 211,109(3) 18.9 9.5
James P. Chamberlin........................ 3,320(4) * *
Anthony C. Naughtin........................ -- * *
Norman W. Lauchner......................... -- * *
All executive officers and directors as a
group (seven persons).................... 1,058,908(5) 94.7% 47.8%
</TABLE>
- ---------------
* Less than 1%
(1) This table is based on information supplied by executive officers, directors
and shareholders. Subject to applicable community property laws, each
shareholder named in the table has sole voting and investment power with
respect to the shares set forth opposite such shareholder's name.
(2) Of this amount, 47,499 shares are subject to an option granted by Mr. D.
Fine to principals of Cairncross and Hempelmann, P.S., counsel to the
Company. See "Certain Transactions."
(3) Of this amount, 15,834 shares are subject to an option granted by each of
Mr. Hadam and Mr. H. Fine to Cairncross and Hempelmann, P.S., counsel to the
Company. See "Certain Transactions."
(4) Consists of shares of Common Stock subject to stock options granted and
exercisable within 60 days of the date of this Prospectus and excludes
77,426 shares of Common Stock which are scheduled to vest more than 60 days
after the date of this Prospectus.
(5) The number of shares beneficially owned by all executive officers and
directors as a group includes 3,367 shares of Common Stock subject to stock
options granted and exercisable within 60 days of the date of this
Prospectus and excludes 103,790 shares of Common Stock which are scheduled
to vest more than 60 days after the date of this Prospectus.
DESCRIPTION OF SECURITIES
The following summary description of the Company's capital stock is not
intended to be complete and is subject to and qualified in its entirety by
reference to the Company's Articles of Incorporation, as amended, and the
Company's Bylaws, copies of each of which are filed as exhibits to the
Registration Statement of which this Prospectus forms a part.
GENERAL
Immediately prior to the date of this Prospectus, the Company had
authorized capital stock consisting of 9,000,000 shares of Common Stock, of
which 1,055,541 shares are issued and outstanding, and 1,000,000 shares of
Preferred Stock, of which 59,524 shares have been designated as Series A
Preferred Stock, all of which are issued and outstanding. Immediately prior to
the date of this Prospectus, there were three holders of record of Common Stock
and nine holders of record of shares of Series A Preferred Stock. Pursuant to
the terms of the Series A Preferred Stock, on the effective date of the
Registration Statement of which this Prospectus forms a part, the issued and
outstanding shares of Series A Preferred Stock will automatically convert 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 will automatically convert into additional
authorized shares of Common Stock and, as a result, the Company's
39
<PAGE> 40
authorized capital stock will, on such date, consist solely of 10,000,000 shares
of Common Stock. The Company has reserved 107,157 shares of Common Stock for
issuance under the 1996 Option Plan, all of which are subject to outstanding
options, and 200,000 shares of Common Stock for issuance pursuant to the 1997
Option Plan, none of which are subject to outstanding options.
COMMON STOCK
Holders of outstanding shares of Common Stock are entitled to one vote per
share on all matters submitted to a vote of the shareholders. Except as may be
required by applicable law, holders of outstanding shares of Common Stock vote
together as a single class. Holders of a majority of the outstanding shares of
Common Stock constitute a quorum at any meeting of shareholders and the vote by
the holders of a two-thirds of the outstanding shares of Common Stock is
required to effect certain fundamental corporate changes including liquidation,
merger or sale of substantially all of the Company's assets.
Holders of outstanding shares of Common Stock are entitled to receive
dividends, if, as, and when declared by the Board of Directors out of funds
legally available therefor. Upon liquidation of the Company, holders of
outstanding shares of Common Stock are entitled to share ratably in all assets
of the Company remaining after payment of liabilities. Holders of outstanding
shares of Common Stock have no preemptive rights or other rights to subscribe
for unissued or treasury shares or securities convertible into or exercisable or
exchangeable for shares of Common Stock. The outstanding shares of Common Stock
are, and the shares of Common Stock offered hereby when issued will be, duly
authorized and validly issued and, upon payment therefor, fully paid and
nonassessable.
ANTI-TAKEOVER LEGISLATION
The Company is subject to the Business Corporation Act of Washington
("RCW"), which contains provisions that have the effect of discouraging
nonnegotiated takeover attempts. RCW 23B.19 generally prohibits any "significant
business transaction" within five years of the date on which a person acquires
ten percent or more of the outstanding voting shares of a corporation, unless
the transaction first receives the approval of a majority of the disinterested
directors prior to the time the ten percent threshold is crossed.
RCW 23B.19 also imposes a fair price restriction on corporations. The
statute provides, subject to certain exceptions, that specified
change-of-control transactions between a corporation and an interested
shareholder (defined as a person or affiliated group beneficially owning 20% or
more of a corporation's outstanding voting stock) will be prohibited unless a
majority of disinterested directors determine the price offered by the
interested shareholder to be fair or unless two-thirds of the shareholders (not
including the interested shareholder) approve.
DIRECTOR AND OFFICER LIABILITY AND INDEMNIFICATION
The Company's Articles of Incorporation, as amended, provide that the
liability of the Company's directors is limited and that the Company will
indemnify its directors and officers to the fullest extent permitted by law.
Insofar as indemnification for liability arising under the Securities Act may be
provided to directors, officers and controlling persons of the Company pursuant
to those provisions, or otherwise, the Company has been advised that in the
opinion of the Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services LLC.
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<PAGE> 41
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offering, there has been no public market for the Common
Stock. Sales of a substantial amount of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market and
could impair the Company's ability to raise additional capital through the sale
of its equity securities in the future.
Upon completion of the Offering, the Company will have 2,215,065 shares of
Common Stock outstanding (2,380,065 shares, if the Underwriters' over-allotment
option is exercised in full), consisting of 1,100,000 shares of Common Stock
offered hereby (1,265,000 shares, if the Underwriters' over-allotment option is
exercised in full) and 1,115,065 restricted shares of Common Stock. In addition,
the Company will have reserved 107,157 shares of Common Stock for issuance upon
exercise of outstanding options granted under the 1996 Option Plan and 200,000
shares of Common Stock for issuance upon exercise of options which may be
granted under the 1997 Option Plan.
The shares of Common Stock offered hereby will be freely tradable without
restriction or further registration under the Securities Act by persons other
than affiliates of the Company. The restricted shares will be freely tradable if
subsequently registered under the Securities Act or to the extent permitted by
Rule 144 or some other exemption from registration under the Securities Act.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the date of acquisition of restricted shares from the Company or an
affiliate of the Company, the holder is entitled to sell, in the public market,
within any three month period, that number of shares of Common Stock which does
not exceed the greater of 1% of the total number of then outstanding shares of
Common Stock or the average weekly trading volume of shares of Common Stock
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Commission. Sales under Rule 144 are also subject to certain
requirements as to the manner of sale, notice and availability of current public
information about the Company. If two years have elapsed, a holder, other than
an affiliate of the Company, is entitled to sell restricted shares in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale requirements, public information requirements or notice requirements. Of
the restricted shares, 1,055,541 shares of Common Stock will be eligible for
sale under Rule 144 under the Securities Act 90 days after the date of this
Prospectus, and the remaining 59,524 shares will be eligible for sale under Rule
144 on January 31, 1998.
The Company and all of its existing directors, officers, shareholders and
optionees have entered into lock-up agreements with the Representative which
provide that such persons will not, directly or indirectly, offer, sell,
announce an intention to sell, contract to sell, pledge, hypothecate, grant any
option to purchase or otherwise dispose of, and the Company has agreed not to
file with the Commission a registration statement under the Securities Act
relating to, any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for shares of Common Stock for a period of 18 months
following the date of this Prospectus without the prior written consent of the
Representative. At the request of the Company, the Representative has agreed
that, for a period of one year commencing on the effective date of the
Registration Statement of which this Prospectus forms a part, it will not
consent to the disposition of any shares of Common Stock held by existing
shareholders who obtained such Common Stock upon conversion of all of the
outstanding shares of Series A Preferred Stock on the effective date of the
Registration Statement of which this Prospectus forms a part. Additionally, in
accordance with the policy statements promulgated by the North American
Securities Administrators Association, Inc., the Company's President and two
members of its board of directors have entered into promotional share escrow
agreements pursuant to which such persons have agreed for a period of two years
after the completion of the Offering not to transfer or dispose of an aggregate
of 1,055,541 shares of Common Stock beneficially owned by such persons prior to
the Offering.
41
<PAGE> 42
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") among the Company and the Underwriters named
below (the "Underwriters"), each of the Underwriters has severally agreed to
purchase from the Company, and the Company has agreed to sell to the
Underwriters, the number of shares of Common Stock set forth below opposite each
such Underwriter's name, at the initial public offering price per share less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------- ---------
<S> <C>
Coleman and Company Securities, Inc................................ 440,000
H.J. Meyers & Co., Inc. ........................................... 330,000
Oscar Gruss & Son Incorporated..................................... 165,000
National Securities Corp. ......................................... 165,000
---------
Total.................................................... 1,100,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of such shares are subject to
certain conditions precedent and that the several Underwriters will purchase all
of such shares, if any of such shares are purchased.
The Representative has advised the Company that the Underwriters propose
initially to offer the shares of Common Stock offered hereby directly to the
public at the initial public offering price per share set forth on the cover
page of this Prospectus and to certain dealers at such price less a concession
not in excess of $0.325 per share. The Underwriters may allow, and such dealers
may reallow, a concession not in excess of $0.15 per share to certain other
dealers. After the Offering, the public offering price, concession and
re-allowance may be changed.
The Representative has informed the Company that the Underwriters do not
intend to sell any shares of Common Stock offered hereby to accounts over which
the Underwriters exercise discretionary authority.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate of 165,000 additional shares of Common Stock at the initial public
offering price per share less the underwriting discounts and commissions set
forth on the cover page of the Prospectus. The Underwriters may exercise this
option only to cover over-allotments, if any, made in connection with the sale
of the shares of Common Stock offered hereby. To the extent that the
Underwriters exercise this option, each Underwriter will be obligated, subject
to certain conditions, to purchase the number of the additional shares of Common
Stock proportionate to such Underwriters' initial commitment reflected in the
preceding table.
The Company has agreed to pay the Representative a non-accountable expense
allowance equal to three percent of the gross proceeds of the Offering, of which
$25,000 has already been paid, to cover certain of the underwriting costs and
due diligence expenses relating to the Offering.
The Company has agreed to permit the Representative to have an observer
attend meetings of the Board of Directors for a period of three years from the
effective date of the Registration Statement of which this Prospectus forms a
part. The Representative's observer will be reimbursed for all out-of-pocket
expenses incurred in connection with the observer's attendance at meetings of
the Board of Directors and will receive compensation equal to the compensation
payable by the Company to its outside directors for attendance at meetings of
the Board of Directors, provided, however, that the per meeting fees payable to
the Representative's observer shall not be less than $1,500 and that there shall
be a minimum of four meetings per year. Additionally, the Representative has
been retained as the Company's investment banking advisor for a 24
42
<PAGE> 43
month period that commenced in December 1996 and, for such services, the Company
has agreed to pay the Representative a monthly fee of $3,000, with all payments
for the remaining term being paid at the closing of the Offering.
The Company and the Underwriters have agreed to indemnify each other
against, or to contribute to losses arising out of, certain civil liabilities in
connection with the Offering, including liabilities under the Securities Act.
The Company and the Underwriters are each aware that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
The Representative, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase shares so long as the stabilizing bids do not exceed a specified
maximum. Syndicate covering transactions involve purchases of shares in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Representative, on behalf of the
Underwriters, to reclaim a selling concession from a syndicate member when the
shares originally sold by such syndicate member are purchased in a syndicate
covering transaction to cover syndicate short positions. Such over-allotment,
stabilizing transactions, syndicate covering transactions and penalty bids may
cause the price of the Common Stock to be higher than it would otherwise be in
the absence of such transactions. These transactions may be effected on the
Nasdaq SmallCap Market or otherwise and, if commenced, may be discontinued at
any time.
The Company and all of its existing current officers, directors,
shareholders and optionees have agreed not to, directly or indirectly, offer,
sell, announce an intention to sell, contract to sell, pledge, hypothecate,
grant any option to purchase or otherwise dispose of, and the Company has agreed
not to file with the Commission a registration statement under the Securities
Act relating to, any shares of Common Stock or any securities convertible into
or exchangeable or exercisable for shares of Common Stock without the prior
written consent of the Representative for a period of 18 months after the date
of this Prospectus. In addition, at the request of the Company, the
Representative has agreed that, for a period of one year commencing on the
effective date of the Registration Statement of which this Prospectus forms a
part, it will not consent to the disposition of any shares of Common Stock held
by existing shareholders who obtained such Common Stock upon conversion of all
of the outstanding shares of Series A Preferred Stock on the effective date of
the Registration Statement of which this Prospectus forms a part.
The Common Stock has been approved for quotation on the Nasdaq SmallCap
Market under the symbol "FDOT."
Prior to the Offering, there has been no public trading market for the
Common Stock. The public offering price of the shares of Common Stock offered
hereby was determined by negotiation between the Company and the Representative.
Factors considered in determining the initial public offering price, in addition
to prevailing market conditions, included the history of and prospects for the
industry in which the Company operates, an assessment of the Company's
management, the prospects of the Company, its capital structure and such other
factors as were deemed relevant.
In connection with the Offering, the Company has agreed to sell the
Representative's Warrants to the Representative for a nominal price. The
Representative's Warrants entitle the Representative to purchase shares in an
amount equal to 10% of the total number of shares sold in the Offering
(excluding shares subject to the Underwriters' over-allotment option). The
shares subject to the Representative's Warrants will be in all respects
identical to the shares offered hereby to the public. The Representative's
Warrants will be limited to a term of five years from the date of this
Prospectus and will be exercisable for a four year period commencing 12 months
after the date of this Prospectus, at a per share exercise price equal to 135%
of the initial public offering price per share set forth on the cover page of
this Prospectus. The Representative's Warrants may not be sold, assigned,
transferred, pledged or hypothecated for a period of 12 months from the date of
this Prospectus except to the Representative or its officers. Pursuant to the
terms of the Underwriting Agreement, the Company is registering the shares
issuable upon exercise of the Representative's Warrants under the Registration
Statement of which this Prospectus forms a part. The Company has agreed to file,
at its expense, during the period beginning one year from the date of this
Prospectus and ending five years after such date, on
43
<PAGE> 44
no more than one occasion at the request of the holders of a majority of the
Representative's Warrants and the underlying shares, and to use its best efforts
to cause to become effective, a post-effective amendment to the Registration
Statement of which this Prospectus forms a part or a new registration statement
under the Securities Act as required to permit the public sale of the shares
issued or issuable upon exercise of the Representative's Warrants. In addition,
the Company has agreed to give advance notice to holders of the Representative's
Warrants of its intention to file certain registration statements commencing one
year and ending five years after the date this Prospectus and, in such case,
holders of such Representative's Warrants or underlying shares shall have the
right to require the Company to include all or part of the shares underlying the
Representative's Warrants in such registration statement at the Company's
expense. For the term of the Representative's Warrants, the holders thereof are
given the opportunity to profit from a rise in the market price of the Common
Stock, which may result in a dilution of the interest of other shareholders. As
a result, the Company may find it more difficult to raise additional equity
capital if it should be needed for the business of the Company while the
Representative's Warrants are outstanding. The holders of the Representative's
Warrants might be expected to exercise them at a time when the Company would, in
all likelihood, be able to obtain additional equity capital on terms more
favorable to the Company than those provided by the Representative's Warrants.
Any profit realized on the sale of the shares issuable upon the exercise of the
Representative's Warrants may be deemed additional underwriting compensation.
The preceding description includes a summary of the principal terms of the
Underwriting Agreement and the Representative's Warrant Agreement and does not
purport to be complete. Reference is made to the copy of the Underwriting
Agreement and the Representative's Warrant Agreement filed as an exhibit to the
Registration Statement of which this Prospectus forms a part and each statement
herein is qualified in all respects by such reference.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed on
for the Company by Cairncross & Hempelmann, P.S., Seattle, Washington.
Principals of Cairncross & Hempelmann hold an option granted by affiliates of
the Company to purchase 79,167 shares of Common Stock. A principal of Cairncross
& Hempelmann individually owns 5,952 shares of Common Stock.
Certain legal matters related to the Offering will be passed on for the
Underwriters by Kelley Drye & Warren LLP, New York, New York.
EXPERTS
The Financial Statements and notes thereto at January 31, 1996 and 1997,
and for each of the two years in the period ended January 31, 1997, appearing in
this Prospectus and the Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein, and are included in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
SB-2 under the Securities Act with respect to the shares of Common Stock offered
hereby (together with the exhibits and schedules thereto, the "Registration
Statement"). This Prospectus, filed as a part of such Registration Statement,
does not contain all the information set forth in the Registration Statement,
certain portions of which have been omitted in accordance with the rules and
regulations of the Commission. For further information with respect to the
Company and the shares of Common Stock offered hereby, reference is made to the
Registration Statement. Statements made in this Prospectus as to the contents of
any contract or document are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement and each such statement is qualified in
its entirety by such reference. The Registration Statement, including the
exhibits and schedules thereto, may be inspected without charge at the principal
office of the Commission at Room 1024, Judiciary Plaza Building, 450 Fifth
Street, N.W., Washington D.C. 20549, and the regional offices of the Commission
at Seven World Trade Center, Suite 1300, New York, New York 10048, and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511. Copies of such material may be obtained at prescribed rates from the
Public Reference Section of the Commission at Room 1024, Judiciary Plaza
Building, 450 Fifth Street,
44
<PAGE> 45
N.W. Washington D.C. 20549. The Commission maintains a Web site that contains
registration statements, reports, proxy statements and other information
regarding registrants (including the Company), that file electronically with the
Commission. The address of the Commission's Web site is http://www.sec.gov.
As a result of the Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). So long as the Company is subject to the informational
reporting requirements of the Exchange Act, the Company will provide its
shareholders with annual reports containing audited financial statements and
interim quarterly reports containing unaudited financial information.
45
<PAGE> 46
[This page intentionally left blank]
<PAGE> 47
FINE.COM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors..................................... F-2
Balance Sheets........................................................................ F-3
Statements of Income.................................................................. F-4
Statements of Shareholders' Equity.................................................... F-5
Statements of Cash Flows.............................................................. F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 48
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
fine.com Corporation
We have audited the accompanying balance sheets of fine.com Corporation as of
January 31, 1996 and 1997, and the related statements of income, shareholders'
equity and cash flows for each of the two years in the period ended January 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of fine.com Corporation at January
31, 1996 and 1997, and the results of its operations and its cash flows for each
of the two years in the period ended January 31, 1997, in conformity with
generally accepted accounting principles.
ERNST & YOUNG LLP
Seattle, Washington
April 1, 1997, except for Note 8,
as to which date is May 9, 1997
F-2
<PAGE> 49
FINE.COM CORPORATION
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JANUARY 31,
------------------- APRIL 30,
1996 1997 1997
-------- -------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash........................................................ $ 15,668 $198,317 $ 20,558
Accounts receivable, less allowance for doubtful accounts of
$5,000 in 1996 and 1997 and $6,000 at April 30, 1997..... 63,855 476,766 673,972
Work-in-process............................................. -- -- 87,652
Income taxes refundable..................................... -- 784 784
Prepaid expenses and other.................................. -- 9,409 19,064
Notes receivable from officers.............................. 23,913 30,435 49,273
-------- -------- ----------
Total current assets..................................... 103,436 715,711 851,303
Deferred offering costs....................................... -- 41,116 212,787
Deferred income tax asset..................................... -- 30,883 41,863
Equipment and furniture, net.................................. 46,166 80,827 153,299
-------- -------- ----------
Total assets........................................ $149,602 $868,537 $1,259,252
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank........................................ $ -- $ 90,286 $ 295,286
Accounts payable............................................ 51,917 117,459 230,503
Current taxes payable....................................... 1,277 -- --
Accrued offering costs...................................... -- 16,002 55,000
Accrued expenses............................................ 618 28,046 37,998
Deferred revenue............................................ -- 36,722 --
Note payable to director.................................... -- 15,000 --
Deferred income tax liabilities............................. 4,059 100,769 134,119
Capitalized lease obligations............................... -- 9,699 8,368
-------- -------- ----------
Total current liabilities................................ 57,871 413,983 761,274
Deferred income tax liabilities............................... 1,369 -- --
Commitments
Shareholders' equity:
Convertible preferred stock, no par value:
Authorized shares -- 1,000,000
Series A preferred stock:
Designated shares -- 59,524
Issued and outstanding shares -- 59,524 at January 31,
1997, and April 30, 1997, aggregate liquidation
preference -- $250,000.............................. -- 239,918 239,918
Common stock, no par value:
Authorized shares -- 9,000,000
Issued and outstanding shares -- 1,055,541 at January 31,
1996 and 1997 and April 30, 1997....................... 75,000 75,000 75,000
Retained earnings........................................ 15,362 139,636 183,060
-------- -------- ----------
Total shareholders' equity............................... 90,362 454,554 497,978
-------- -------- ----------
Total liabilities and shareholders' equity.......... $149,602 $868,537 $1,259,252
======== ======== ==========
</TABLE>
See accompanying notes.
F-3
<PAGE> 50
FINE.COM CORPORATION
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
------------------------ -------------------------
1996 1997 1996 1997
--------- ---------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Gross revenue.............................. $ 531,800 $1,485,869 $ 225,737 $ 811,433
Direct salaries and costs.................. 258,532 774,242 128,929 553,942
--------- ---------- --------- ---------
Gross profit............................... 273,268 711,627 96,808 257,491
Selling, general and administrative
expenses................................. 225,517 514,059 89,932 184,159
--------- ---------- --------- ---------
Operating income........................... 47,751 197,568 6,876 73,332
Interest expense........................... 2,721 8,840 980 7,538
--------- ---------- --------- ---------
Income before income taxes................. 45,030 188,728 5,896 65,794
Provision for income taxes................. 14,948 64,454 2,005 22,370
--------- ---------- --------- ---------
Net income................................. $ 30,082 $ 124,274 $ 3,891 $ 43,424
========= ========== ========= =========
Net income per share....................... $ 0.03 $ 0.11 $ -- $ 0.04
========= ========== ========= =========
Shares used in computation of net income
per share................................ 1,155,126 1,155,126 1,155,126 1,155,126
========= ========== ========= =========
</TABLE>
See accompanying notes.
F-4
<PAGE> 51
FINE.COM CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK -- SERIES A COMMON STOCK COMMON STOCK RETAINED TOTAL
----------------- -------------------- SUBSCRIPTION EARNINGS SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT RECEIVABLE (DEFICIT) EQUITY
------ -------- --------- -------- ------------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1,
1995.................. -- $ -- 1,055,541 $ 75,000 $(25,000) $(14,720) $ 35,280
Payment of common
stock subscription
receivable......... -- -- -- -- 25,000 -- 25,000
Net income............ -- -- -- -- -- 30,082 30,082
------ -------- --------- -------- -------- -------- --------
Balance at January 31,
1996.................. -- -- 1,055,541 75,000 -- 15,362 90,362
Sale of Series A
Preferred Stock,
net of offering
costs of $10,082... 59,524 239,918 -- -- -- -- 239,918
Net income............ -- -- -- -- -- 124,274 124,274
------ -------- --------- -------- -------- -------- --------
Balance at January 31,
1997.................. 59,524 239,918 1,055,541 75,000 -- 139,636 454,554
Net income
(unaudited)........ -- -- -- -- -- 43,424 43,424
------ -------- --------- -------- -------- -------- --------
Balance at April 30,
1997
(unaudited)........... 59,524 $239,918 1,055,541 $ 75,000 $ -- $183,060 $497,978
====== ======== ========= ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 52
FINE.COM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
---------------------- ----------------------
1996 1997 1996 1997
-------- --------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income...................................... $ 30,082 $ 124,274 $ 3,891 $ 43,424
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................. 25,475 29,791 7,448 14,785
Deferred income taxes......................... 13,728 64,458 2,005 22,370
Changes in operating assets and liabilities:
Increase in accounts receivable............... (44,638) (412,911) (35,916) (197,206)
Increase in work in process................... -- -- -- (87,652)
Decrease (increase) in current income taxes... 1,277 (2,061) -- --
Increase in prepaid expenses and other........ -- (9,409) (1,777) (9,655)
Increase in deferred offering costs........... -- (25,114) -- (132,673)
Increase (decrease) in accounts payable....... 2,531 65,542 (5,623) 113,044
Increase in accrued expenses.................. 618 27,428 30 9,952
Increase (decrease) in deferred revenue....... -- 36,722 25,000 (36,722)
-------- --------- -------- ---------
Net cash provided by (used in) operating
activities.................................... 29,073 (101,280) (4,942) (260,333)
CASH FLOWS FROM INVESTING ACTIVITY
Purchase of equipment and furniture............. (29,409) (50,372) (8,915) (87,257)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable to bank............... -- 90,286 30,000 205,000
Payments on capital lease obligations........... -- (4,381) -- (1,331)
Note receivable from officer.................... (18,065) (6,522) (10,712) (18,838)
Note payable to director........................ -- 15,000 15,000 (15,000)
Cash received on collection of common stock
subscription receivable....................... 25,000 -- -- --
Net cash received from sale of preferred
stock......................................... -- 239,918 -- --
-------- --------- -------- ---------
Net cash provided by financing activities....... 6,935 334,301 34,288 169,831
-------- --------- -------- ---------
Net increase (decrease) in cash................. 6,599 182,649 20,431 (177,759)
Cash at beginning of period..................... 9,069 15,668 15,668 198,317
-------- --------- -------- ---------
Cash at end of period........................... $ 15,668 $ 198,317 $ 36,099 $ 20,558
======== ========= ======== =========
SUPPLEMENTAL CASH FLOW INFORMATION
Income taxes paid............................... $ -- $ 2,000 $ -- $ --
======== ========= ======== =========
Interest paid................................... $ 2,721 $ 8,840 $ 980 $ 7,538
======== ========= ======== =========
Equipment acquired through capitalized lease
obligations................................... $ -- $ 14,080 $ -- $ --
======== ========= ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 53
FINE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AS OF APRIL 30, 1997 AND FOR THE THREE MONTHS ENDED
APRIL 30, 1996 AND 1997 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
fine.com Corporation (the "Company") was incorporated in the State of
Washington on October 15, 1994. The Company plans, creates, maintains and hosts
World Wide Web ("Web") sites for major national and international corporate
clients and others, utilizing marketing expertise and state of the art
interactive database compilation and dissemination techniques and technologies.
UNAUDITED INTERIM FINANCIAL INFORMATION
The financial information as of April 30, 1997 and for the three months
ended April 30, 1996 and 1997 is unaudited, but includes all adjustments that
the Company considers necessary for a fair presentation of the financial
position at such dates and the operations and cash flows for the periods then
ended. Operating results for the three months ended April 30, 1997 are not
necessarily indicative of results that may be expected for the entire year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company accounts for long-term contracts under the
percentage-of-completion method, generally measured on the attainment of
specific contract milestones. Estimated contract earnings are reviewed
periodically as work progresses. If such estimates indicate a loss would be
incurred on the contract, the estimated amount of such loss would be recognized
in the period the estimated loss was determined. All other revenue is recorded
on the basis of time and material for the performance of services.
RISKS AND UNCERTAINTIES
Financial instruments which potentially subject the Company to a
concentration of credit risk consist principally of accounts receivable. The
Company's customer base is dispersed across many different geographic areas
throughout the United States in a variety of industries. The Company does not
require collateral or other security to support credit sales, but provides an
allowance for bad debts based on historical experience and specific
identification. One customer accounted for 34% and 19% of the Company's gross
revenue in the fiscal years ended January 31, 1996 ("fiscal 1996") and 1997
("fiscal 1997"), respectively. In addition, two customers accounted for 11% and
14% of the Company's gross revenue during fiscal 1997. Except as noted above,
there were no other customers which accounted for greater than 10% of gross
revenue in fiscal 1996.
EQUIPMENT AND FURNITURE
Equipment and furniture are recorded at cost less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to seven years. Leasehold improvements are amortized over
the lesser of the lease term or estimated useful life. Repairs and maintenance
that do not improve or extend the lives of the respective assets are expensed in
the period incurred.
F-7
<PAGE> 54
FINE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities,
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. Valuation allowances are
established when necessary to reduce deferred tax assets to the amounts expected
to be realized.
STOCK-BASED COMPENSATION
The Company has elected to apply the disclosure only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Accordingly, the Company accounts for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Compensation cost for stock options is
measured as the excess, if any, of the fair value of the Company's common stock
at the date of grant over the stock option exercise price.
ADVERTISING
Advertising costs are expensed as incurred. Advertising expense was $5,438
and $20,805 in the fiscal years ended January 31, 1996 and 1997, respectively,
and $371 and $7,026 for the three months ended April 30, 1996 and 1997,
respectively.
NET INCOME PER SHARE
Net income per share is computed based on the weighted average number of
common shares outstanding. In accordance with the Securities and Exchange
Commission requirements, common and common equivalent shares issued during the
12-month period prior to the filing of 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 and the initial public
offering price of $6.50 per share. Common equivalent shares consist of the
common shares issuable upon the conversion of the convertible preferred stock
and shares issuable upon the exercise of stock options.
2. EQUIPMENT AND FURNITURE
Equipment and furniture consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
-------------------- APRIL 30,
1996 1997 1997
------- -------- ---------
<S> <C> <C> <C>
Equipment........................................... $75,169 $129,765 $ 186,234
Office furniture and equipment...................... 3,191 13,047 43,835
------- -------- --------
78,360 142,812 230,069
Accumulated depreciation and amortization........... 32,194 61,985 76,770
------- -------- --------
$46,166 $ 80,827 $ 153,299
======= ======== ========
</TABLE>
Fixed assets include $14,080 of assets capitalized under capital lease
obligations less accumulated amortization of $2,755 at January 31, 1997 and
$3,928 at April 30, 1997, respectively.
F-8
<PAGE> 55
FINE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NOTE PAYABLE TO BANK
The Company has 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 is 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 "Revolving Line of Credit") and a line of credit in the
maximum amount of $400,000 (the "Equipment Line of Credit"). The Revolving Line
of Credit expires on March 31, 1998, provides for interest at the bank's prime
rate plus 2% (effective rate of 10.25% at April 30, 1997) and is secured by all
accounts receivable and the personal guarantee of the Company's President and
Chief Executive Officer. At April 30, 1997, $295,286 was outstanding under the
Revolving Line of Credit. The Equipment Line of Credit expires on December 31,
2000, provides for interest at the bank's prime rate plus 2.25% 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.
4. LEASE COMMITMENTS
The Company leases certain equipment and facilities under capital and
operating leases. The operating lease contains an annual escalation clause based
on inflation and a five-year lease term.
The Company sublets a portion of its office space and offsets rent expense
through sublease billings. Net rent expense under the operating lease amounted
to $15,996 and $60,230 in fiscal 1996 and 1997, respectively, and $10,925 and
$12,406 for the three months ended April 30, 1996 and 1997, respectively.
Future minimum lease payments under noncancelable leases with terms in
excess of one year at January 31, 1997 are as follows:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1998............................................................ $ 71,128
1999............................................................ 83,734
2000............................................................ 87,913
2001............................................................ 85,945
2002............................................................ 16,808
--------
$ 345,528
========
</TABLE>
5. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
------------------- --------------------
1996 1997 1996 1997
------- ------- ------ ---------
<S> <C> <C> <C> <C>
Current.............................. $ 1,220 $ (4) $ -- $ --
Deferred............................. 13,728 64,458 2,005 22,370
------- ------- ------ -------
$14,948 $64,454 $2,005 $ 22,370
======= ======= ====== =======
</TABLE>
F-9
<PAGE> 56
FINE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
The provision for income taxes differs from the amount computed by applying
the federal statutory income tax rate to income before taxes as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
JANUARY 31, APRIL 30,
------------------- --------------------
1996 1997 1996 1997
------- ------- ------ ---------
<S> <C> <C> <C> <C>
Computed tax at federal statutory
rate............................... $15,310 $64,168 $2,005 $ 22,370
Other items, net..................... (362) 286 -- --
------- ------- ------ --------
$14,948 $64,454 $2,005 $ 22,370
======= ======= ====== ========
</TABLE>
The Company has elected to use the cash method of accounting for income tax
purposes because they currently qualify for the small business exception. This
exception allows corporate taxpayers to use the cash method of accounting if
their gross receipts over the three immediately preceding taxable years do not
exceed $5,000,000 and they meet certain other requirements. The Company will
convert to the accrual method for income tax purposes when they no longer
satisfy the criteria for this exception. Deferred taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for income tax
purposes.
Significant components of the Company's net deferred income tax liabilities
are as follows:
<TABLE>
<CAPTION>
JANUARY 31,
------------------- APRIL 30,
1996 1997 1997
------- --------- ---------
<S> <C> <C> <C>
Deferred tax liabilities:
Tax over book depreciation.................. $(1,369) $ (3,354) $ (3,644)
Accrual to cash basis adjustments........... (4,059) (100,769) (134,119)
------- --------- ---------
(5,428) (104,123) (137,763)
Deferred tax asset:
Net operating loss carryforward............. -- 34,237 45,507
------- --------- ---------
$(5,428) $ (69,886) $ (92,256)
======= ========= =========
</TABLE>
At January 31, 1997 and April 30, 1997, the Company had net operating loss
carryforwards of $92,097 and $133,844, respectively, which begin to expire in
2011. Utilization of net operating loss carryforwards may be subject to certain
limitations under Section 382 of the Internal Revenue Code of 1986, as amended.
6. 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. The terms and conditions of the
Series A Preferred Stock provide that upon the effectiveness of a registration
statement relating to an initial public offering of the Company's Common Stock
all outstanding shares of the Series A Preferred Stock will automatically
convert into shares of common stock, at a one-to-one conversion ratio. The
Series A Preferred Stock also has preferential rights in the event of any
distribution of assets upon liquidation of the Company, which preferential
rights are determined as a fixed amount per share of Series A Preferred Stock,
plus any declared but unpaid dividends. The Company's Articles of Incorporation,
as amended, further provide that, upon the effective date of such registration
statement, the authority of the Company to issue preferred stock shall terminate
and the number of shares of preferred stock theretofore authorized shall be
deemed additional authorized shares of common stock.
F-10
<PAGE> 57
FINE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
On February 4, 1996, the Board of Directors approved the fine.com
Corporation 1996 Incentive Stock Option Plan (the "Plan") that provides for the
issuance of nonqualified and incentive stock options to officers, employees, and
consultants. A committee of the Board of Directors determines the terms and
conditions of options granted under the plan, including the exercise price. The
exercise price for incentive stock options shall not be less than the fair
market value of common stock at the date of grant unless the incentive stock
option is granted to a person who owns greater than 10% of the Company for which
the exercise price shall not be less than 110% of the fair market value at the
date of grant. The exercise price of nonqualified stock options shall not be
less than 85% of the fair market value of the common stock at the date of grant.
Options expire between 5 and 10 years from the date of grant. Subject to the
maintenance of a continuous relationship from the date of grant, options vest
according to a schedule which provides that 5% of the total number of shares
granted will vest after one year, 15% will vest after two years, 30% after three
years, 50% is vested after four years, and the option grant is fully vested
after five years from the date of grant.
At January 31, 1997, a total of 107,157 shares of common stock have been
reserved for issuance for outstanding options and 4,028 shares were exercisable.
The weighted-average exercise price for stock options outstanding at January 31,
1997 was $2.05 per share with a weighted-average remaining contractual life of
9.5 years.
The following table summarizes the Company's stock option activity:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at February 1, 1996....................... -- $ --
Granted in fiscal 1997.......................... 107,157 2.05
-------
Balance at January 31, 1997....................... 107,157 2.05
Canceled during the three months ended April 30,
1997 (unaudited)............................. (6,298) 2.05
-------
Balance at April 30, 1997 (unaudited)............. 100,859 2.05
=======
</TABLE>
Pro forma information regarding net income is required by SFAS No. 123, and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of SFAS No. 123. The fair value for these
options was estimated at the date of grant using the minimum value option
pricing model with the following weighted-average assumptions for fiscal year
1997: dividend yield of zero; average risk-free interest rate of 6.5%; and a
weighted-average expected life of the option term of seven years. As a result of
the Company being privately held, expected volatility is not applicable. These
assumptions are highly subjective. For purposes of the proforma disclosures, the
estimated fair value of the options ($0.75 per share) is amortized to expense
over the estimated options' vesting period.
Because option grants are expected to be made each year and as a result of
the options vesting over time, the above pro forma disclosure is not
representative of pro forma effects of reported results in future years. The pro
forma effect on fiscal year 1997 net income would have reduced net income of
$124,274 as reported to pro forma net income of $112,274. Additionally, the pro
forma effect on fiscal 1997 net income per share would not have changed.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
F-11
<PAGE> 58
FINE.COM CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SHAREHOLDERS' EQUITY (CONTINUED)
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At January 31, 1997, common stock reserved for future issuance was as
follows:
<TABLE>
<S> <C>
Conversion of Series A Preferred Stock............................. 59,524
1996 Incentive Stock Option Plan................................... 107,157
--------
166,681
========
</TABLE>
7. TRANSACTIONS WITH OFFICERS AND DIRECTORS
NOTES PAYABLE AND RECEIVABLE
At January 31, 1997, the Company had a note receivable from an officer
which was non-interest bearing. Additionally, the Company had a note payable to
a director bearing interest at 9%; this note was repaid in March 1997.
EMPLOYMENT AGREEMENTS(UNAUDITED)
During the first four months of fiscal 1998, salary advances in the amount
of $13,667 and $13,333 were deemed made to Messrs. D. Fine and Chamberlin,
respectively. Each of Messrs. Fine and Chamberlin have executed promissory notes
in favor of the Company, dated May 29, 1997, with regard to the respective
deemed salary advances paid during the four months ended May 31, 1997. The
promissory notes bear interest at the rate of 9% per annum and become due and
payable in full on January 31, 1998.
8. SUBSEQUENT EVENTS
On April 14, 1997, the Board of Directors authorized the Company to file a
registration statement with the Securities and Exchange 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 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 are issued and outstanding, and 1,000,000
shares of preferred stock, of which 59,524 shares have been designated as Series
A Preferred Stock, all of which are issued and outstanding. On the effective
date of the Registration Statement relating to the initial public offering of
the Company's common stock, the issued and outstanding shares of Series A
Preferred Stock will automatically convert 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
will automatically convert into additional authorized shares of common stock
and, as a result, the Company's authorized capital stock will, on such date,
consist solely of 10,000,000 shares of common stock. In April 1997, the Company
adopted the 1997 Option Plan and reserved 200,000 shares of Common Stock for
issuance thereunder. The 1997 Option Plan provides for the grant of both
incentive stock options and nonqualified stock options.
F-12
<PAGE> 59
INSIDE BACK COVER
[PICTURE OF A COMPANY CLIENT WEB PAGE ACCOMPANIED BY TEXT, "ANATOMY OF THE
SAFEWAY SITE. The metaphor of a refrigerator door was used for the homepage of
Safeway.com to make navigation intuitive for the primary target market. Visitors
are invited to check out the Recipe of the Day, download Cyber-Saver coupons,
create a shopping list or find out more about Safeway by clicking on icons
designed to look like refrigerator magnets. Visitors are encouraged to return to
the site daily to check out the Recipe of the Day. Recipes feature Safeway-brand
ingredients, are nutritious and are easy to make. Visitors are notified if there
is a Cyber-Saver coupon available on a particular ingredient and, by clicking on
an ingredient, they are able to add it to their shopping list. The Safeway
shopping list is designed to give visitors an easy to use tool to assist them in
their grocery shopping. The list can be customized based on frequently purchased
grocery items and also notifies visitors of Cyber-Saver coupons available on a
item they add to their list. Another benefit of visiting the Safeway site is the
on-going opportunity to save on groceries. Every week, ten Cyber-Saver coupons
are available by region on Safeway.com. Visitors are able to click on any of the
ten coupons they are interested in and print them out for saving on specific
items" and BOXED AREA HIGHLIGHTING THE UNIFORM RESOURCE LOCATOR OF THE COMPANY
CLIENT WEB PAGE INCLUDING TEXT "www.safeway.com"]
INSIDE FRONT COVER
[PICTURE OF A COMPANY CLIENT WEB PAGE ACCOMPANIED BY TEXT, "Anatomy of the
Microsoft Developer Store site. The Microsoft Developer Store uses a 'store'
theme throughout the Web site. The five areas of the store include Product
Shelf, Express Checkout, Featured Product, Customer Service and Store Directory.
While shopping, visitors are presented with product boxes on a shelf, leveraging
the familiarity of Microsoft packaging. Shoppers select products by simply
clicking on the appropriate box. Once a product is selected, shoppers view
detailed product information, including prices, feature comparisons and system
requirements. Cross-sell promotional messages are also displayed in this
section. As shoppers select products, they are added to the shopping basket.
Depending on what type of product is added, shoppers are presented with various
'point of purchase' promotions, including helpful did you know messages," and
BOXED AREA HIGHLIGHTING THE UNIFORM RESOURCE LOCATOR OF THE COMPANY CLIENT WEB
PAGE including text, "www.developerstore.com"]
INSIDE FRONT COVER
[PICTURE OF A COMPANY CLIENT WEB PAGE ACCOMPANIED BY TEXT, "ANATOMY OF THE
20TH CENTURY FOX HOME VIDEO SITE.] In keeping with the ID4 theme, visitors are
prompted to select a country to "defend" which will take them to a
country-specific home page and a site that contains localized content and, in
some cases, a different language. This page also contains a mouse-over effect
that will pop up facts about a country when the mouse is dragged over the
related flag. To highlight the international aspect of this site, once a visitor
has selected a country, the visitor is taken to a home page which incorporates a
prominent landmark from that country on the verge of being destroyed by the
alien ship. In addition, the visitor can view a countdown by days, hours and
minutes as to when the ID4 video will be released in that country. For visitors
interested in gaining intimate, behind-the-scenes knowledge of the movie, the
Operations section provides multi-media clips, interviews with stars of the
movie, storyboards and production sketches. The Video Vault was built to allow
easy incorporation into future Fox International sites. It contains a selection
of other Fox videos and search capabilities allowing visitors to search for a
title based on specific genre, actor or director. By having visitors register
for games, to send postcards and to help select X files packaging, the Web site
is able to capture specific demographic information. Management reports are then
generated that provide Fox with meaningful marketing data for future
decision-making" and BOXED AREA HIGHLIGHTING THE UNIFORM RESOURCE LOCATOR OF THE
COMPANY CLIENT WEB PAGE INCLUDING TEXT "www.foxinternational.com"]
<PAGE> 60
PAGE 21
[PICTURE OF AN INTERNET TIMELINE, ACCOMPANIED BY TEXT, "1969 Department of
Defense commissions ARPANET; 1982 TCP/IP becomes standard; 1986 NSFNET, the
beginning of the Internet backbone, is created; 1991 commercial use of the
Internet begins to expand; 1992 The World Wide Web is introduced; 1995 US
Internet traffic carried by commercial access providers; April 1997 Reports
estimate that publicly accessible sites exceed 1 million."]
Source: Robert Zakon, Hobbes' Internet Timeline v 2.5, INTERNET SOCIETY
(1996).
PAGE 22
[FLOW CHART WITH PICTURES ILLUSTRATING HOW A CONSUMER WOULD ACCESS THE WEB,
ACCOMPANIED BY TEXT:
"The manner in which data traverses the Web depends upon its origination,
its destination and the agreements between companies that transmit the data. The
following illustrates how a typical consumer might access the web site that the
Company created, maintains and hosts for its client Windermere Service Company.
(1) For example, a consumer might access the Web via an ISP or online service
which provides the consumer with a connection to the Internet. Once connected,
the consumer selects a desired web page address or Uniform Resource Locator
(URL) such as www.windermere.com. This is essentially a request for information
which is divided into packets, each bearing the address of the desired
destination. (2) The computers of the ISP or online service send these packets
into the Internet. Most of these computers connect via regional hubs. The
consumer's request for information has several possible routes to reach the
computer hosting the Windermere Services Company Web site, depending on which of
these computers are involved. (3) The packets requesting information arrive at
the Windermere Services Company Web site hosted at a computer housed at the
offices of the Company in Seattle, Washington, and the desired information on
the page is divided into packets. These packets are returned to the user via the
same network of ISP's (but not necessarily by the same route). (4) This process
may be repeated as long as the consumer and the host of the Windermere Services
Company Web site remain connected to the Internet."]
PAGE 27
[CHART OF "CLIENT OVERVIEW AND SERVICES PROVIDED BY COMPANY," LISTING
CLIENTS AND SERVICES PROVIDED.
Clients receiving services are Microsoft Exchange Community, 20th Century Fox
Home Entertainment, Inc., Windermere Services Co., Optiva Corp., and The Dewolfe
Co. Services provided to these clients are Web Site Planning which includes
Marketing Consultation and Delivery of Blueprint; Web Site Creation which
includes Graphic Design, Multimedia Production, Custom Programming, Database
Development and Systems Integration; Web Site Maintenance which includes Content
Updates, Graphic Refreshes and Database Management; and Web Site Hosting which
includes Reporting and Internet connectivity.]
PAGE 28
[CHART OF "CLIENT OVERVIEW AND SERVICES PROVIDED BY COMPANY," LISTING
CLIENTS AND SERVICES PROVIDED.
Clients receiving services are Microsoft Developers Store, Cognisoft, Intel
Worldwide, Microsoft Human Resources/Jobs, Cairnstone, and Mann Packing Co.
Services provided to these clients are Web Site Planning which includes
Marketing Consultation and Delivery of Blueprint; Web Site Creation which
includes Graphic Design, Multimedia Production, Custom Programming, Database
Development and Systems Integration; Web Site Maintenance which includes Content
Updates, Graphic Refreshes and Database Management; and Web Site Hosting which
includes Reporting and Internet Connectivity.]
<PAGE> 61
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS TO WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 11
Dividend Policy........................ 12
Dilution............................... 12
Capitalization......................... 13
Selected Financial Data................ 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business............................... 20
Management............................. 34
Certain Transactions................... 38
Principal Shareholders................. 39
Description of Securities.............. 39
Shares Eligible for Future Sale........ 41
Underwriting........................... 42
Legal Matters.......................... 44
Experts................................ 44
Available Information.................. 44
Index to Financial Statements.......... F-1
</TABLE>
------------------------
UNTIL SEPTEMBER 5, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE RE-
QUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
1,100,000 Shares
[FINE.COM CORPORATION LOGO]
Common Stock
------------------------
PROSPECTUS
------------------------
COLEMAN AND COMPANY
SECURITIES, INC.
August 11, 1997
======================================================
