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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) Annual Report under Section 13 or 15(d) of the Securities
and Exchange Act of 1934 for the fiscal year ended January 31, 1999
- or-
( ) Transition Report under Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from ____ to ____
FINE.COM INTERNATIONAL CORP.
Name of small business issuer as specified in its charter
Commission File Number 0-22805
State of Washington 91-1657402
State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization Identification Number
1525 Fourth Avenue, Suite 800
Seattle, Washington 98101
Address of Principal Executive Offices
(206) 292-2888
Issuer Telephone Number
Securities registered under Section 12(b) Common Stock, no par value
of the Exchange Act:
Securities registered under Section 12(g) (None)
of the Exchange Act:
Check whether the registrant (1) Yes /X/ No / /
filed all reports required to be
filed by Section or 15(d) of the
Securities Exchange Act of 1934 during
the past 12 months (or for such shorter
period that the registrant was required
to file such reports), and (2) has been
subject to such filing requirements for
the past 90 days.
Check if disclosure of delinquent Yes / / No /X/
filers in response to Item 405 of
Regulation S-B is not contained in this
form, and no disclosure will be
contained, to the best of
Registrant's knowledge, in definitive
proxy or information statements
incorporated by reference in Part III
of this Form 10-KSB or any amendment
to this Form 10-KSB.
The registrant's revenues for its most recent
fiscal year were $6,133,275
As of April 21, 1999, there were 2,669,590 shares of the Registrant's common
stock issued and outstanding and the aggregate market value of such common stock
held by non-affiliates was approximately $3,124,759 based on a price of $2.13
per share, representing the average of the closing bid ($2.06) and closing ask
($2.19) prices on that date.
Transitional Small Business Disclosure Format (check one): Yes / / No /X/
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of this Annual Report, to the extent not
set forth herein, is incorporated herein by reference from the registrant's
definitive proxy statement relating to the Company's 1999 annual meeting of
stockholders, which definitive proxy statement will be filed with the Securities
and Exchange Commission within 120 days after the end of the fiscal year to
which this Annual Report relates.
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FINE.COM INTERNATIONAL CORP.
FORM 10-KSB
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I .......................................................................................... 1
ITEM 1. DESCRIPTION OF BUSINESS ........................................................... 1
Forward-Looking Statements ............................................................. 1
Overview ............................................................................... 1
Business Strategy ...................................................................... 2
The Internet and the Web ............................................................... 2
Web Sites .............................................................................. 3
Clients and Services ................................................................... 3
Competition ............................................................................ 5
Employees .............................................................................. 5
Factors Affecting the Company's Business, Operating Results and Financial Condition .... 6
ITEM 2. PROPERTIES ........................................................................ 9
ITEM 3. LEGAL PROCEEDINGS .................................................................10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............................10
PART II .........................................................................................10
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ..........10
Market Information .....................................................................10
Holders ................................................................................11
Dividends ..............................................................................11
Changes in Securities and Use of Proceeds ..............................................11
Recent Sales of Unregistered Securities ................................................11
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS .......................................12
Overview ...............................................................................12
Results of Operations for the Fiscal Years Ended January 31, 1999 and 1998 .............13
Liquidity and Capital Resources ........................................................14
Seasonality and Inflation ..............................................................15
Year 2000 Readiness Disclosure .........................................................15
ITEM 7. FINANCIAL STATEMENTS ..............................................................16
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE .................................................31
PART III ........................................................................................32
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K .................................................32
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
FORWARD-LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING STATEMENTS
REGARDING THE COMPANY, ITS BUSINESS, PROSPECTS AND RESULTS OF OPERATIONS AND
VIEWS WITH RESPECT TO FUTURE EVENTS AND PERFORMANCE. THESE FORWARD-LOOKING
STATEMENTS ARE SUBJECT TO RISKS AND UNCERTAINTIES POSED BY MANY FACTORS AND
EVENTS THAT COULD CAUSE THE COMPANY'S ACTUAL BUSINESS, PROSPECTS AND RESULTS
OF OPERATIONS TO DIFFER MATERIALLY FROM HISTORICAL RESULTS OR THOSE THAT MAY
BE ANTICIPATED BY SUCH FORWARD-LOOKING STATEMENTS. WORDS USED IN THIS REPORT
SUCH AS "ANTICIPATE," "BELIEVE," "EFFECT," "ESTIMATE," "EXPECT," "MAY,"
"WILL" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING
STATEMENTS BUT ARE NOT EXCLUSIVE MEANS OF IDENTIFYING SUCH STATEMENTS.
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO,
THOSE DISCUSSED HEREIN AS WELL AS THOSE DISCUSSED UNDER THE CAPTIONS "FACTORS
AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION"
AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS" AS WELL AS THOSE DISCUSSED ELSEWHERE IN THIS REPORT. READERS
ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING
STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS REPORT. THE COMPANY
UNDERTAKES NO OBLIGATION TO REVISE ANY FORWARD-LOOKING STATEMENTS IN ORDER TO
REFLECT EVENTS OR CIRCUMSTANCES THAT MAY SUBSEQUENTLY ARISE. IN ADDITION, THE
DISCLOSURES UNDER THE CAPTION "FACTORS AFFECTING THE COMPANY'S BUSINESS,
OPERATING RESULTS AND FINANCIAL CONDITION" CONSIST PRINCIPALLY OF A BRIEF
DISCUSSION OF RISKS THAT MAY AFFECT FUTURE RESULTS AND ARE, IN THEIR
ENTIRETY, FORWARD-LOOKING IN NATURE. READERS ARE URGED TO CAREFULLY REVIEW
AND CONSIDER THE VARIOUS DISCLOSURES MADE BY THE COMPANY IN THIS REPORT, AS
WELL AS THE COMPANY'S ANNUAL, PERIODIC AND CURRENT REPORTS FILED WITH THE
COMMISSION, AND THOSE DESCRIBED FROM TIME TO TIME IN THE COMPANY'S PRESS
RELEASES AND OTHER COMMUNICATIONS, WHICH ATTEMPT TO ADVISE INTERESTED PARTIES
OF THE RISKS AND FACTORS THAT MAY AFFECT THE COMPANY'S BUSINESS.
OVERVIEW
fine.com International Corp. (the "Company") provides strategic consulting,
technical development and graphic design services and solutions to allow its
clients to utilize Web-based interactive technologies. The Company's Web
application development process combines marketing expertise with
state-of-the-art interactive database compilation and dissemination
techniques and technologies.
The Company develops marketing-driven, interactive, database-oriented Web
applications for business clients who seek to establish a commercial presence
on, or conduct Internet commerce over, the Web. Corporate clients for whom
the Company has built and implemented such Internet, Extranet and Intranet
sites include: Amway Corporation, Fluke Corporation, Fuji Photo Film Co.
Ltd., General Electric Company, Intel Corporation, Japan Airlines Company,
Ltd., Mann Packing Company, Marriott International, Inc., Microsoft
Corporation, Mitsui and Co., Ltd., the Nasdaq-Amex Stock Market, Optiva
Corporation, Penford Corporation, Safeway Inc., Twentieth Century Fox Home
Entertainment, Inc., Wall Data, Inc., the State of Washington, Windermere
Services Company and WOWFactor.
The Company is a Solution Provider Partner (the highest attainable service
level currently offered by Microsoft) and was the first Web development
company to achieve this designation. The Company also believes it was the
first Web developer featured in a direct mail campaign conducted by
Microsoft. The Company has developed several significant client relationships
from this association.
1)
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BUSINESS STRATEGY
The Company specializes in producing complex, database driven and customer
relationship marketing-oriented Web applications. The Company believes that
such state-of-the-art Web applications--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 believes that successful Web sites require the effective
utilization of database integration technologies or interactive database
marketing techniques. The Company consults with each of its commercial Web
site clients, first to establish specific database driven relationship
marketing strategies, and then to develop 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 lifecycle. Through
such Web applications, the Company's clients obtain information-rich
databases for use in the clients' overall sales and marketing efforts.
The Company's Web application developers, layout artists and graphic
designers use third-party software (primarily Microsoft and UNIX),
third-party hardware and internally developed and customized software to
plan, develop and maintain Web applications for the Company's clients.
THE INTERNET AND THE WEB
The Internet is a worldwide electronic communications system, interconnecting
millions of personal computers and network servers. The structure of the
Internet allows for open communication between two or more parties at a low
cost. As a result, it is dramatically changing the way businesses conduct
commerce and people communicate.
The Internet uses the standard of inter-networking protocol software TCP/IP
to transmit information. Using TCP/IP as a foundation, hardware and software
developers have continuously invented new products and functions to enhance
the end-user experience. The result is an expansion of applications for the
Internet, which is drawing more people and businesses to use it as their
primary commerce and communications tool. Introduced in 1992, the World Wide
Web (the "Web") operates on the Internet and connects servers using Hypertext
Transfer Protocol ("HTTP"). This computer network makes it possible for users
to see text and images instead of computer code and for geographically
disperse users to simultaneously view information stored at a single location.
The Company believes that the Internet and the Web offer new and powerful
mediums for commercial organizations to communicate and conduct commerce with
their customers, vendors and internal associates. There are three primary
types of sites that are currently being developed: Internet, Extranet and
Intranet. Internet sites can be viewed by anyone on the Internet and may
contain informational pages or conduct e-commerce. Extranet sites are secured
and viewable only by selected individuals, through a password or personal
identification number. These sites are typically used as commerce and
communication tools between businesses and their suppliers or businesses and
their customers, if a membership is required. Intranet sites are also
secured, but are typically characterized as a communication tool between a
business and its internal associates. These sites are often used to provide
the latest company information, such as employee and benefit handbooks as
well as operating data. The Company believes that each of these above
mentioned types of sites provide efficient and low-cost alternatives to
current publishing and broadcasting models.
(2
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WEB SITES
A Web site is a compilation of computer documents at a specific address or
Universal Resource Locator (URL). Each document within a Web site is called a
page. A Web site may be static and contain only a few pages or it may be
dynamic with hundreds of pages and constantly changing information.
The Company believes that certain technological advances have increased the
acceptance of the Internet, including: faster and more efficient personal
computers and modems, the introduction of easy-to-use Web browsers, the
availability of informational, entertainment and commercial software
applications and improved security features. As a result, many business and
individual consumers are choosing to use it as their primary commerce and
communications tool.
CLIENTS AND SERVICES
The Company designs, develops and implements customized software applications
that allow its clients to gather and communicate business information through
the Internet. The Company believes that an online presence should function as
an integrated piece of an organization's overall marketing, commerce and
business strategy. The Company's services with respect to a particular
client's interactive Web site may fall within any combination of up to three
major areas: Web site planning, Web site development and Web site maintenance.
WEB SITE PLANNING. The Company's process of developing a Web site begins
with planning. Web site planning generally consists of: 1) high level
marketing and business process consultation called the Scope Analysis;
and 2) detailed specifications of a site's feature set and functionality
called the Blueprint.
1. SCOPE ANALYSIS. The Scope Analysis is the first step in the Planning Phase
and an integral part of the overall development process. In the Scope Analysis,
the client's business case is documented; goals, objectives and priorities are
outlined; the development team is identified; roles within the team are agreed
upon; and an initial architectural plan is presented. An essential component of
the Scope Analysis is the review or creation of the client's strategic plan for
its online endeavor. The Company engages in two principle forms of strategic
consultation.
- INTERNET MARKETING CONSULTATION. The Company believes that one of its
strengths is its knowledge and utilization of online marketing principles.
Web sites created by the Company are 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 during
development 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 online 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 that
will enable its clients to achieve operational efficiencies and cost
reductions.
2. 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
3)
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timeline. In particular, the Company focuses its resources to design Web
sites that will provide measurements of actual performance relative to each
client's desired measurable results.
WEB SITE DEVELOPMENT. The Company's process of developing interactive Web
sites combines six elements: graphic design; multimedia production; custom
programming; database development; legacy systems integration; and quality
assurance.
- GRAPHIC DESIGN. The visual nature of the Web allows 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 and
animation. 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 that permit real-time,
one-to-one interaction with site visitors requires specialized computer
programming beyond simple HTML development skills. To address these
programming needs, the Company employs a team of highly trained developers
and information designers with specific expertise in developing customized
Web applications, creating and testing the usability of Web applications
and providing information design evaluation and implementation services.
In addition to HTML development skills, Company personnel have expertise in
and regularly use such tools and technologies as Microsoft-Registered
Trademark- Visual Basic-Registered Trademark- programming language,
Microsoft Visual Basic-Registered Trademark- Scripting Edition,
Microsoft Internet Information Server-Registered Trademark- Active Server
Pages, Microsoft Component Object Model (COM) Middleware platform, W3C
Document Object Model (DOM) client scripting platform, Microsoft Visual
J++(a), Microsoft Visual C++-Registered Trademark-, Microsoft FrontPage
-Registered Trademark-, Microsoft Visual SourceSafe-Registered Trademark-,
Microsoft Visual InterDev-Registered Trademark-, Microsoft Certificate
Server-Registered Trademark-, Allaire ColdFusion-Registered Trademark-,
JavaScript, VBScript-Registered Trademark-, ActiveX-Registered Trademark-
components, Secure Sockets Layer (SSL) encryption, Virtual Private
Networks (VPNs), Sun's Java-Registered Trademark- programming language,
UNIX, PERL and CGI Scripting.
- DATABASE DEVELOPMENT. Sophisticated Web application development requires
the collection and manipulation of online database information. To meet
this need, the Company employs highly skilled personnel with specific
expertise in analyzing business information needs, creating complex data
models, mining databases for information that support business objectives
and implementing complex relational database designs using the
Microsoft-Registered Trademark- SQL Server-Registered Trademark-
Database Product. These database systems are designed to function in
conjunction with other server products including Microsoft Internet
Information Server-Registered Trademark- integrated with Microsoft Windows
NT-Registered Trademark-, Apache Web Server on Linux and Solaris, Microsoft
Exchange Server-Registered Trademark-, Microsoft Transaction
Server-Registered Trademark-, Microsoft Site Server-Registered Trademark-
Enterprise Edition (including Microsoft Commerce Server-Registered
Trademark- and the Microsoft Personalization Server-Registered Trademark-)
and UNIX.
- LEGACY SYSTEMS INTEGRATION. A key component of a Web site is its ability
to be integrated into a client's internal legacy information systems, both
as those systems exist currently and as they change over time. The Company
employs technical personnel with expertise in analyzing and documenting
clients' existing internal systems, defining and developing data feeds as
both output from, and input to, legacy systems and creating Web site
designs that are versatile enough to facilitate a changing information
landscape.
(4
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- QUALITY ASSURANCE. Large and complicated Web applications require a
significant effort to test. To this end, fine.com employs highly skilled
test and quality assurance personnel to develop test plans; perform
integration, systems and performance testing; and document system defects
in the Company's internally developed test management systems.
WEB SITE MAINTENANCE. Maintaining and updating a Web site serves to protect a
client's investment in its 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 with clients in addition to the original Web site development
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 AND GRAPHIC REFRESHES. Both content updates and graphic
refreshment are driven by the interactive nature of a Web site. As an
interactive media, a Web site provides a virtually instantaneous gauge of
its 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.
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 or maintenance services. Direct
competitors include: (1) prospective clients that perform Web site develop ment
services in-house; (2) Web site service firms, such as K2 Design Inc., iXL
Corporation, Free Range Media, Razorfish Inc., Red Sky Interactive, Inc., and
USWeb/CKS Corp.; (3) Internet-oriented advertising agencies such as The Leap
Group and THINK New Ideas, Inc.; and (4) 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, or maintenance markets in varying degrees and are
competing with the Company, and many of which have announced plans to offer
expanded Web site planning, development and/or maintenance 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.
EMPLOYEES
As of January 31, 1999, the Company had 69 full-time employees. The Company has
no labor contracts or collective bargaining agreements. The Company considers
its relations with its employees to be good.
5)
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FACTORS AFFECTING THE COMPANY'S BUSINESS, OPERATING RESULTS AND FINANCIAL
CONDITION
IN ADDITION TO THE OTHER INFORMATION IN THIS REPORT, THE FOLLOWING FACTORS
SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS BUSINESS. THIS
REPORT MAY CONTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. WHEN USED IN THIS REPORT, THE WORDS "ANTICIPATE," "BELIEVE,"
"EFFECT," "ESTIMATE," "EXPECT," "MAY," "WILL" AND SIMILAR EXPRESSIONS AS THEY
RELATE TO THE COMPANY OR ITS MANAGEMENT ARE INTENDED TO IDENTIFY SUCH
FORWARD-LOOKING STATEMENTS. THE COMPANY'S ACTUAL RESULTS, PERFORMANCE OR
ACHIEVEMENTS COULD DIFFER MATERIALLY FROM THE RESULTS EXPRESSED IN OR IMPLIED BY
THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT MIGHT CAUSE SUCH DIFFERENCES
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW AND IN "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AS
WELL AS THOSE DISCUSSED ELSEWHERE IN THIS REPORT.
RECENT OPERATING RESULTS AND LIQUIDITY. For the 1999 fiscal year, the Company
had losses of approximately $3.6 million. A portion of these losses were
attributable to certain charges taken in the third and fourth quarters for
office closure costs, write-offs for certain accounts receivable and
work-in-progress considered by management to be uncollectible or unbillable,
and cost overruns on fixed-fee projects. The Company believes that its cash
and cash equivalents will be sufficient to fund its operations through
January 31, 2000. The Company believes that it has taken appropriate action
to realign and strengthen the Company's operations, including a plan to
strategically grow sales, increase internal productivity and decrease its
overhead cost structure. However, there can be no assurances that the Company
will be able to achieve profitable operations. Further development and
establishment of the Company's business may require additional financing. The
Company believes that additional financing could be obtained from various
sources, including certain existing shareholders and other investors and
financial institutions not yet identified. In the event that additional
financing is delayed or not able to be obtained on satisfactory terms, if at
all, the Company may need to reduce its expenditures. There can be no
assurance that additional capital, on a debt or equity basis, will be
obtained or if obtained that it will be on economically viable terms.
UNCERTAINTIES REGARDING ADOPTION OF NEW MEDIA BY MARKETING COMMUNICATIONS
INDUSTRY; LIMITED OPERATING HISTORY. The market for information gathering and
dissemination through electronic media such as the Internet has only recently
begun to develop. This rapidly evolving market 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 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, 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.
RELIANCE ON MANAGEMENT AND KEY EMPLOYEES. The Company is dependent upon the
services of certain key 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, Chairman and Chief Executive Officer. The
Company has obtained $100,000 of key person insurance on the life of Mr.
Fine. In addition, the Company is dependent upon the services of qualified
and experienced marketing, technical and creative personnel. The Company
generally does not enter into employment agreements with such personnel, and
such personnel are employed on an at-will basis. 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 and
prospects than the Company. In particular, in the Seattle, Washington market,
there are an increasing number of software and/or Internet companies that
compete for the services of skilled developers and software designers. The
Company's future success is dependent on its ability to attract and retain
qualified personnel, and failure or inability to hire or retain key personnel
would have a material adverse affect on its financial prospects and operations.
(6
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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 and maintenance services
in-house. 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 and maintenance markets in varying degrees. Many of
the Company's competitors have announced plans to offer expanded Web site
planning, creation and/or maintenance 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.
PRICING OF SERVICES AND BIDDING ON WEB DEVELOPMENT PROJECTS. The Company
attempts to price its services and bid on Web development projects in a
manner which considers competitive factors, the value perceived by its
clients and its internal cost structure. Certain projects are contracted on a
time and materials basis where the Company bills for hours and costs incurred
by its staff on client projects. Other projects are priced and billed on a
fixed-fee basis or on a not-to-exceed ceiling in the contractual price. On
fixed-bid contracts the Company attempts to take into account estimated
direct and indirect costs associated with the project, associated allocations
of overhead and factors related to specific technology or process risks
associated with the complexity of the project. The Company believes that it
has refined its internal processes to appropriately estimate the costs of
performing on a fixed-fee basis. However, the 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 on a
particular project. Unforeseen costs or other factors may arise that could
materially delay the project or otherwise increase the Company's cost of
performance. In addition, for fixed-fee or other similar projects, there can
be no assurance that the Company's contractual revenues will exceed its
direct and indirect costs attributable to such projects.
RISK OF INTERNATIONAL OPERATIONS. A portion of the Company's revenues are
derived from its operations in Japan, through its relationship with Mitsui
and Co., Ltd. In order to be successful in doing business in another country
such as Japan, the Company is required to understand and adapt to different
societal, business and cultural expectations and needs. The Company's ability
to effectively manage its operations in Japan will depend, in part, on its
ability to respond to differing cultural expectations and to develop and
maintain relationships with its foreign clients. In addition, the Company's
operations may be affected by changes in economic, political and governmental
conditions in Japan or Asian Pacific countries.
LACK OF PROPRIETARY PROTECTION; INTELLECTUAL PROPERTY RIGHTS; RISK OF
INFRINGEMENT; POSSIBLE LITIGATION. The Company believes that its business is
not 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, proprietary information, know-how
and trade secrets. 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.
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The Company utilizes technology developed by third parties. The Company
believes that there are currently sufficient alternative sources of
third-party technology which are available to it, if any particular
third-party technology that it is currently using were to be discontinued or
otherwise become unavailable. However, 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. The Company's inability to obtain any
such licenses could have a material adverse effect on its business and
operations. 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 and management time, 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 that
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. The Company has obtained errors and
omissions insurance, although 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,
development and maintenance 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) are being developed and delays or inabilities to find solutions
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.
RISK OF CHANGING TECHNOLOGY. The services that the Company offers, and the
services that 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.
YEAR 2000 EXPOSURE. The "Year 2000" issue concerns the potential exposures
related to the automated generation of business and financial misinformation
resulting from the application of computer programs which have been written
using two digits, rather than four, to define the applicable year of business
transactions. The Company is in the process of completing its review of the
potential impact of Year 2000 issues on its internal and external systems and
does not antici-
(8
<PAGE>
pate any significant costs, problems or uncertainties associated with the
Year 2000 issue. The Company believes that its internally developed solutions
are Year 2000 compliant. However, there can be no assurance that the
Company's products do not contain undetected errors or defects associated
with Year 2000. In addition, despite the Company's testing and other
assurances, if any, the Company may receive from third-party providers of
software or technology incorporated into the Company's products, the
Company's products may contain undetected errors or defects associated with
Year 2000 date functions, which may result in material costs to the Company.
Failure of the Company or its software providers to adequately address the
Year 2000 issues could adversely affect the Company's business operations.
In addition, the Company develops customized Web applications for its
clients, some of which include date related data. The client and/or other
vendors further customize many of the Company's applications after its
involvement with the project has ended. While the Company believes that its
current products are Year 2000 compliant, there can be no assurance that some
of its previously completed applications continue to meet Year 2000
compliance standards. Also, due to the fact that the Company's applications
are owned and managed by its clients, there can be no assurance that the
applications have been tested to verify for Year 2000 compliance.
DEPENDENCE ON MICROSOFT. 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. Although the Company has developed expertise in UNIX systems
through its acquisition of Meta4 Digital Design, Inc., it is still primarily
dependent on its expertise with Microsoft software. Accordingly, any failure
of the Company to maintain its expertise in Microsoft systems or any negative
changes to Microsoft or its operating systems could have a material adverse
effect on the Company.
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.
FLUCTUATIONS IN MARKET PRICE. The market price of the Company's common stock,
like that of other Web site development companies, is highly volatile and is
subject to wide fluctuations in response to quarterly variations in operating
results, announcements of activities by competitors and other events and
factors. The Company's stock price may also be effected by broader market
trends unrelated to the Company's performance.
ITEM 2. PROPERTIES
The Company's headquarters currently occupy approximately 15,650 square feet of
an office building at 1525 Fourth Avenue, Seattle, Washington at a monthly rent
of approximately $22,105. Such payments include the Company's allocable share of
certain real property taxes and building operating expenses. The remaining lease
term expires on April 30, 2005. The Company leases approximately 7,100 square
feet of office space in Livingston, New Jersey for
9)
<PAGE>
its NorthEast operations. The Livingston lease has an expiration of March
2002 and has a monthly rent expense of approximately $11,538. The Company
also leases approximately 550 square feet of office space on a month-to-month
basis in Bethesda, Maryland for its Washington, D.C. office. The Bethesda
lease has a monthly rent expense of approximately $6,035.
The Company continues to lease approximately 8,000 square feet at its prior
headquarters at 1118 Post Avenue, Seattle, Washington at a monthly rent of
approximately $8,608. The remaining lease term expires in April 2001; however
the Company has sublet all of this space to a third party for the remainder
of the term of the lease. In addition, following the Company's acquisition of
Pacific Analysis and Computing Corporation in February 1998, the Company
assumed Pacific Analysis' office lease for approximately 3,355 square feet in
Bellevue, Washington at a monthly rent of approximately $5,462. The term of
such lease expires on October 31, 2002. The Company has sublet all of this
office space to a third party for the remainder of the term of the lease.
Sublease income from the above two leases approximates $13,500 per month. See
Note 6 in "Notes to Financial Statements" for a summary of future operating
lease commitments.
ITEM 3. LEGAL PROCEEDINGS
As of April 21, 1999, the Company was not involved in any legal proceedings.
However, as is typical for companies in the ordinary course of business, the
Company is from time to time the subject of lawsuits. Certain of such
proceedings may be covered under insurance policies or indemnification
agreements. Due to the inherent uncertainties of litigation, there is a risk
that the outcome of any future litigation could materially harm the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of the 1999 fiscal year.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
MARKET INFORMATION
The common stock is traded on The Nasdaq SmallCap Market under the symbol
"FDOT." The following table sets forth the high and low closing sale prices
for the common stock, beginning on August 12, 1997, the date which the
Company completed its initial public offering at a price of $6.50 per share,
as reported by The Nasdaq SmallCap Market.
(10
<PAGE>
<TABLE>
<CAPTION>
High Low
------------------------
<S> <C> <C>
Year ended January 31, 1998
Third Quarter (from August 12) .................. $8.88 $6.50
Fourth Quarter .................................. $7.25 $4.38
Year ended January 31, 1999
First Quarter ................................... $6.38 $4.50
Second Quarter .................................. $6.06 $3.50
Third Quarter ................................... $4.88 $1.38
Fourth Quarter .................................. $3.88 $1.88
</TABLE>
HOLDERS
As of April 21, 1999 there were 47 stockholders of record of the common
stock, although there were a larger number of beneficial owners.
DIVIDENDS
The Company has never declared or paid cash dividends on its common stock.
The Company intends to retain all future earnings to finance future growth
and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
CHANGES IN SECURITIES AND USE OF PROCEEDS
From August 12, 1997, the effective date of the Company's Registration
Statement on Form SB-2, as amended (file number 333-26855), relating to the
Company's initial public offering of the Company's common stock, through the
end of the Company's fiscal year ended January 31, 1999, the Company has
applied its net $6,228,000 proceeds as follows:
<TABLE>
<S> <C>
Net proceeds from IPO ................................................................... $ 6,228,000
Accounts receivable, work-in-process and other working capital requirements ............. (2,367,000)
Capital expenditures for fixed assets ................................................... (1,916,000)
Acquisition of Meta4 and other businesses ............................................... (450,000)
Repayment of indebtedness ............................................................... (545,000)
-----------
Unapplied proceeds held in money market funds at January 31, 1999 ....................... $ 950,000
-----------
-----------
</TABLE>
RECENT SALES OF UNREGISTERED SECURITIES
None.
11)
<PAGE>
ITEM 6. 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 appearing in this Annual Report.
OVERVIEW
The Company plans, develops and maintains Web sites for major national and
international corporate clients and others. In addition, the Company provides
consulting services to its clients as to the strategic uses of the Internet
to further their corporate goals and objectives. Such services relate to
e-commerce, Intranet and Extranet applications, and the intricacies of
utilizing the Internet on an international basis.
The Company generates the majority of its revenues from fees associated with
the planning and development of commercial Web applications for clients.
These fees are generally earned pursuant to fixed-fee, time and materials or
cost reimbursement contracts (with terms typically ranging from two to seven
months). Revenues generated from these contracts are recognized under the
percentage-of-completion method (based on the ratio of costs incurred to
total estimated project costs). 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. The 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 on a particular project.
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, development and
maintenance of interactive Web presentations, the Company enhances clients'
marketing campaigns and fosters the collection of demographic data which is
utilized by clients.
Through fiscal year 1998, the Company conducted all of its operations from
its headquarters in Seattle, Washington. In fiscal 1999, the Company began a
process of opening domestic and international offices, for the purposes of
both better serving existing clients as well as expanding the Company's
business in new markets. During the fiscal year, the Company opened and
subsequently closed regional offices in Santa Monica, California and London,
England, due to their inability to generate expected levels of revenues and
earnings. In connection with the closure of these offices, the Company
recorded closure costs and operating losses in fiscal 1999 of approximately
$755,000.
On July 31, 1998, the Company merged with Meta4, a non-public company, that
provides Internet-based business solutions in the north east and the Company
has maintained operations at the Meta4 offices in New Jersey. At January 31,
1999, the Company had 21 employees at its New Jersey office. The Company's
major clients serviced through the New Jersey office include General Electric
Company, Fuji Photo Film U.S.A., Inc., and WOWFactor. The Meta4 merger better
enabled the Company to provide service to the New York and New Jersey areas,
provide expertise in UNIX to complement the Company's historical Microsoft NT
expertise and provide additional resources to execute large operating system
projects. The merger was treated for accounting purposes as a
pooling-of-interests.
As of January 31, 1999, the Company had regional offices located in Bethesda,
Maryland and Livingston, New Jersey. The Company operates most of its
business and derives most of its revenues from its headquarters in Seattle,
Washington where it has 45 employees.
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<PAGE>
In November 1998 the Company began implementation of an operational
realignment focused on strategically growing sales, increasing its internal
productivity, decreasing its overhead cost structure, analyzing its existing
contracts and examining its receivable and asset base. As a result, the
Company has refocused its sales initiatives on the high-end, interactive Web
development market to leverage the skills and scale of its Internet
development teams. In addition, the Company has taken steps to improve
internal productivity and staff utilization levels and implemented a revised
organizational structure including the hiring of a new Executive Vice
President of Finance and Operations.
In connection with the realignment, the Company recorded certain charges to
earnings in the third and fourth quarters of fiscal 1999 of approximately
$628,000 and $358,000, respectively, consisting primarily of (a) severance
payments and salary adjustments of $120,000, (b) an increase of $220,000 to
the accounts receivable reserves for accounts considered by management to be
uncollectable or unrealizable (c) write-offs in the amount of $308,000 for
certain assets and work-in-progress considered by management to be
uncollectable or unbillable and (d) $338,000 attributable to incremental
office overhead and closure costs of the London office.
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JANUARY 31, 1999 AND 1998
GROSS REVENUE. Consolidated gross revenue for the fiscal year ended January
31, 1999 and 1998 was $6,133,000 and $6,023,000, respectively. The 2%
increase was due to a slight increase in the complexity of the projects
undertaken.
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 consolidated direct salaries and
costs were $4,164,000 and $3,902,000 for the fiscal year ended January 31,
1999 and 1998, respectively, representing a 7% increase from the prior
period. As a percentage of gross revenues, direct salaries and costs were 68%
for the fiscal year ended January 31, 1999, as compared to 65% for the prior
period. This increase in direct salaries and costs to fiscal 1999 from fiscal
1998 consisted primarily of an increase in amounts paid as direct salaries,
payroll taxes and benefits to $3,638,000 from $2,272,000 for the fiscal years
ended January 31, 1999 and 1998, respectively, due to an increase in the
number of employees and new offices opened by the Company during fiscal 1999.
In addition, direct salaries and costs included costs paid to independent
contractors of $120,000 and $890,000 respectively for fiscal year 1999 and
1998. This 87% decrease reflects reduced dependence on outside contractors as
internal staffing resources increased in fiscal year 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated selling, general
and administrative expenses were $5,776,000 and $2,243,000 for the fiscal
year ended January 31, 1999 and 1998, respectively. These expenses consisted
of sales and administrative salaries, office rent and related occupancy
costs, marketing and new business development costs, depreciation of fixed
assets, professional fees, telephone and related Internet connectivity fees,
computer network costs, office expenses and supplies. The amounts for the
fiscal year ended January 31, 1999, include (a) $450,000 of merger and
acquisition costs associated with the acquisition of Meta4 on July 31, 1998,
(b) additional charges of approximately $648,000 incurred in the third and
fourth quarters of fiscal 1999 relating to an operational realignment which
included severance payments, an increase to the accounts receivable reserve
and write-offs of certain assets and uncollectable or unbillable
work-in-progress and (c) charges of approximately $338,000 incurred in fiscal
1999 in connection with the incremental office overhead and closure costs of
the London office. As a percentage of gross revenues, the selling, general
and administrative expenses increased from 37% to 94% from fiscal 1998 to
fiscal 1999. The increase in selling, general and administrative expenses was
primarily a result of the charges in connection with the Company's
operational realignment and office closures. The Company believes that its
operational realignment and office closures should result in lower levels of
selling, general and administrative costs in future periods. The increase in
13)
<PAGE>
expense in fiscal 1999 from 1998 was also attributable to increased sales and
administrative salaries, marketing and new business development costs,
depreciation of fixed assets, professional fees and office rent and related
occupancy costs.
TAXES. During fiscal 1999, the Company recorded a tax benefit of $102,000,
which represented the tax benefit associated with the carryback of the
operating losses to previous years. No future income tax benefit has been
recorded for remaining deferred tax assets due to the uncertainties of
realization of these net operating loss carryforwards.
NET LOSS. The Company recognized a consolidated net loss of $3,566,000 for
the fiscal year ended January 31, 1999 as compared to a net loss of $55,000
for the same period in fiscal 1998. The decrease in profitability is due to
the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically funded its capital requirements through
borrowings from commercial lenders, proceeds from its initial public offering
and private placements of its capital stock. The Company had cash, cash
equivalents and marketable securities in the aggregate amount of $1,521,000
at January 31, 1999. The Company's working capital decreased $1,625,000 from
$3,309,000 at January 31, 1998 to $1,684,000 at January 31, 1999.
Operating activities for the fiscal year ended January 31, 1999 required net
cash in the amount of $3,430,000, primarily due to the net loss incurred and
increases in accounts receivable. Accounts receivable increased $856,000,
from $1,097,000 at January 31, 1998 to $1,953,000 at January 31, 1999. As
part of its operational realignment, the Company implemented a plan to
examine its assets and receivables and to increase collections of its
accounts receivable. Through April 15, 1999, the Company had collected
approximately $1,700,000 of the fiscal 1999 year-end accounts receivable
balance.
Net cash provided by investing activities of $2,962,000 during the fiscal
year ended January 31, 1999 was primarily due to the proceeds from the sale
of $3,948,000 of marketable securities offset by the purchase of certain
equipment and furniture, requiring cash expenditures in the amount of
$1,037,000. These equipment purchases were primarily for computer hardware
and software, furniture, fixtures and leasehold improvements to accommodate
an increase in Company personnel. Net cash provided from financing activities
was $417,000, which was primarily due to a short-term borrowing of $500,000
from the Company's Revolving Line of Credit.
At January 31, 1999, the Company had in place a Revolving Line of Credit with
its bank in the amount of $750,000, of which $500,000 had been drawn upon. At
fiscal 1999 year-end the Company was out of compliance with certain covenants
contained in its Revolving Line of Credit with its bank, including
requirements for minimum working capital, minimum tangible net worth and
excess losses in the fourth quarter. On April 2, 1999 the Company received a
waiver on its non-compliance with the bank covenants. The Company has
renegotiated terms with its bank and has received a commitment letter from
the bank to enter into a revised credit facility. The terms of the revised
credit facility provide for a line of credit in the amount of $750,000, to
expire on September 1, 1999. Amounts outstanding under the revised credit
facility will bear interest at the bank's prime rate plus 0.25% per annum (an
effective rate of 8% at April 22, 1999). The facility is secured by all
accounts receivable of the Company and such other property and assets of the
Company as the bank may require, and contains modified financial covenants
and restrictions, including a restriction on payment of dividends.
The Company believes that its existing cash and cash equivalent balances,
expected cash generated from operations and its revised credit facility will
be sufficient to fund its operations through fiscal 2000. The Company
believes that its cash and cash equivalents will be sufficient to fund its
operations through January 31, 2000. The Company believes that it has taken
appropriate action to realign and strengthen the Company's operations,
including a plan to strategically grow sales, increase internal productivity
and decrease its overhead cost structure. However, there can be no assurances
that the Company will be able to achieve profitable operations. Further
development and establishment of
(14
<PAGE>
the Company's business may require additional financing. The Company believes
that additional financing could be obtained from various sources, including
certain existing shareholders and other investors and financial institutions
not yet identified. In the event that additional financing is delayed or not
able to be obtained on satisfactory terms, if at all, the Company may need to
reduce its expenditures. There can be no assurance that additional capital,
on a debt or equity basis, will be obtained or if obtained that it will be on
economically viable terms.
SEASONALITY AND INFLATION
The Company does not believe that inflation or seasonality has had a
significant effect on the Company's operations to date.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year for dates
after December 31, 1999. This could result in system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or
engage in similar ordinary business activities. The Year 2000 problem is not
limited to information technology systems, but may also impact embedded
systems, such as those that control elevators, alarm systems and many other
devices.
The Company has examined all of its internal systems, both hardware and
software, that constitute core components of its operations, including both
computer systems and elements of the office environment. The Company believes
that its internal hardware and software systems will function properly with
respect to dates in the year 2000 and thereafter. Nonetheless, there can be
no assurance in this regard until such systems are operational in the year
2000. In the judgement of management, the Company's exposure from its
internal systems is minimal, the cost of recovery will be insignificant, and
its business will not be materially adversely impacted.
As a general matter, the Company builds its software on third-party products,
such as Microsoft's Windows NT and UNIX, which have been represented as Year
2000 compliant. Despite the Company's testing and other assurances, if any,
the Company may receive from third-party providers of software or technology
incorporated into the Company's products, the Company's products may contain
undetected errors or defects associated with Year 2000 date functions, which
may result in material costs to the Company. The Company does not
specifically warrant to clients that its work will be Year 2000 compliant,
although certain clients have requested and received such warranties. In such
cases, the Company does not warrant the compliance of third-party software;
rather, the Company warrants only that software created by the Company will
be Year 2000 compliant. In addition, the Company generally provides clients
with a limited 90-day warranty on its services and products, and the Company
believes that many clients provide further updates or additions to their Web
sites after delivery by the Company and the Company cannot assess the Year
2000 compliance of any such additions. However, even absent a specific Year
2000 warranty or other warranty, there is a risk that clients for whom the
Company has created or implemented software will attempt to hold the Company
liable for any damages that result in connection with Year 2000 problems.
The Company is also examining Year 2000 issues as they relate to third-party
vendors, suppliers and service providers with which it has a material
relationship. In the judgement of management, internally used third-party
tools, such as operating systems, databases and other design and development
applications, are materially Year 2000 compliant. Management believes that
any failures of these systems would have negligible impact on the Company's
operations.
Historical and estimated future costs of Year 2000 remediation are not
significant. The Company is in the process of establishing a contingency plan
and expects it to be in place prior to December 31, 1999.
15)
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
fine.com International Corp.
We have audited the accompanying consolidated balance sheets of fine.com
International Corp. as of January 31, 1999 and 1998, and the related
consolidated statements of operations, shareholders' equity and cash flows
for the years then ended. 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 consolidated financial position of fine.com
International Corp. at January 31, 1999 and 1998, and the consolidated
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Seattle, Washington
April 2, 1999, except for Note 5 as to
which the date is April 22, 1999
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<PAGE>
FINE.COM INTERNATIONAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
January 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .............................................. $ 1,521,301 $ 1,571,861
Marketable securities .................................................. -- 1,593,032
Accounts receivable, less allowances of
$108,000 in 1999 and $55,000 in 1998 ............................... 1,952,694 1,097,354
Costs and profits in excess of billings or uncompleted contracts ....... 14,292 191,841
Prepaid expenses and other ............................................. 68,830 157,780
Notes receivable from officer .......................................... 21,794 26,686
------------------------------
Total current assets ............................................... 3,578,911 4,638,554
Marketable securities ....................................................... -- 2,325,236
Equipment and furniture, net ................................................ 1,414,338 677,560
Other long-term assets ...................................................... 76,850 103,561
Deferred income tax assets .................................................. -- 220,318
------------------------------
Total assets ....................................................... $ 5,070,099 $ 7,965,229
------------------------------
------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Note payable to bank ................................................... $ 500,000 $ --
Accounts payable ....................................................... 427,420 395,267
Accrued expenses ....................................................... 332,963 48,581
Advance payments ....................................................... -- 70,500
Billings or uncompleted contracts in excess of costs and profits ....... 536,860 422,101
Contract loss reserve .................................................. 40,218 --
Deferred income tax liabilities ........................................ -- 322,337
Current portion of capital lease obligations ........................... 57,602 71,166
------------------------------
Total current liabilities .......................................... 1,895,063 1,329,952
Capital lease obligations, less current portion ........................ 52,228 70,436
Shareholders' equity:
Common stock, no par value:
10,000,000 shares authorized, 2,669,590 shares issued and
outstanding at January 31, 1999; and 2,633,720 shares issued
and outstanding at January 31, 1998 ........................... 6,906,409 6,737,929
Accumulated deficit .................................................... (3,783,601) (143,592)
Accumulated other comprehensive loss ................................... -- (29,496)
------------------------------
Total shareholders' equity ............................................. 3,122,808 6,564,841
------------------------------
Total liabilities and shareholders' equity ......................... $ 5,070,099 $ 7,965,229
------------------------------
------------------------------
</TABLE>
17)
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FINE.COM INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal Year
Ended January 31,
--------------------------
1999 1998
--------------------------
<S> <C> <C>
Gross revenue ............................................................... $ 6,133,275 $ 6,023,402
Direct salaries and costs ................................................... 4,163,513 3,901,570
--------------------------
Gross profit ................................................................ 1,969,762 2,121,832
Selling, general and administrative expenses ................................ 5,776,428 2,243,480
--------------------------
Operating loss .............................................................. (3,806,666) (121,648)
Other income (expense):
Interest income ........................................................ 168,125 176,535
Interest expense ....................................................... (29,301) (63,725)
--------------------------
Loss before income taxes .................................................... (3,667,842) (8,838)
Provision (benefit) for income taxes ........................................ (102,019) 46,567
--------------------------
Net loss .................................................................... $(3,565,823) $ (55,405)
--------------------------
--------------------------
Basic and diluted net loss per share ........................................ $ (1.34) $ (0.03)
--------------------------
--------------------------
Shares used in computation of basic and diluted net loss per share .......... 2,668,411 1,921,577
--------------------------
--------------------------
</TABLE>
(18
<PAGE>
FINE.COM INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Convertible Preferred Other
Stock - Series A Common Stock Comprehensive Total
--------------------------------------------------- Accumulated Income Shareholders'
Shares Amount Shares Amount Deficit (Loss) Equity
- - ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 1, 1997 59,524 $239,918 1,309,196 $269,969 $(88,187) $ - $ 421,700
Conversion of Series A
convertible preferred
stock into common stock (59,524) (239,918) 59,524 239,918 - - -
Issuance of shares in initial
public offering, net of
offering costs of $1,994,458 - - 1,265,000 6,228,042 - - 6,228,042
Unrealized loss on
marketable securities - - - - - (29,496) (29,496)
Net loss - - - - (55,405) - (55,405)
------------
Comprehensive loss (84,901)
--------------------------------------------------------------------------------------------------
Balance at January 31, 1998 - - 2,633,720 6,737,929 (143,592) (29,496) 6,564,841
Acquisition of Pacific Analysis
and Computing - - 35,870 143,480 - - 143,480
Adjustment for Meta4 net
loss for the one month
ended July 31, 1998 - - - - (74,186) - (74,186)
Stock-based compensation
expense - - - 25,000 - - 25,000
Unrealized gain on marketable
securities - - - - - 29,496 29,496
Net loss - - - - (3,565,823) - (3,565,823)
------------
Comprehensive loss (3,536,327)
--------------------------------------------------------------------------------------------------
Balance at January 31, 1999 $ - - 2,669,590 $6,906,409 $(3,783,601) $ - $ 3,122,808
--------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------
</TABLE>
19)
<PAGE>
FINE.COM INTERNATIONAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal Year
Ended January 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss .................................................................... $(3,565,823) $ (55,405)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................................... 345,476 181,332
Deferred income taxes .................................................. (102,019) 46,567
Loss on disposal of property and equipment ............................. 101,075 --
Noncash stock-based compensation expense ............................... 25,000 --
Net changes in operating assets and liabilities:
Accounts receivable ................................................ (855,340) (321,130)
Costs and profits in excess of billings ............................ 177,549 (174,021)
Prepaid expenses and other assets .................................. 43,244 (163,193)
Deferred offering costs ............................................ -- 25,114
Accounts payable ................................................... 32,153 (3,181)
Accrued expenses ................................................... 284,382 20,311
Advance payments ................................................... (70,500) 70,500
Billings in excess of costs and profits ............................ 114,759 232,640
Contract loss reserve .............................................. 40,218 --
----------------------------
Net cash used in operating activities ....................................... (3,429,826) (140,466)
Cash Flows from Investing Activities:
Purchases of marketable securities .......................................... -- (3,962,198)
Sales of marketable securities .............................................. 3,947,764 --
Purchases of equipment and furniture ........................................ (1,036,611) (529,574)
Other assets ................................................................ 50,711 (60,724)
----------------------------
Net cash provided by (used in) investing activities ......................... 2,961,864 (4,552,496)
Cash Flows from Financing Activities:
Proceeds from issuance of common stock, net of issuance costs ............... -- 6,228,042
Increase (decrease) in notes payable to bank ................................ 500,000 (140,286)
Payments on capital lease obligations ....................................... (87,490) (70,887)
Increase (decrease) in note receivable from officer ......................... 4,892 3,749
Decrease in note payable to director ........................................ -- (15,000)
----------------------------
Net cash provided by financing activities ................................... 417,402 6,005,618
----------------------------
Net increase (decrease) in cash and cash equivalents ........................ (50,560) 1,312,656
Cash and cash equivalents at beginning of period ............................ 1,571,861 259,205
----------------------------
Cash and cash equivalents at end of period .................................. $ 1,521,301 $ 1,571,861
----------------------------
----------------------------
Supplemental Cash Flow Information:
Interest paid ............................................................... $ 29,301 $ 63,725
Equipment acquired through capitalized lease obligations .................... 55,718 59,206
Acquisition of Pacific Analysis and Computing, in February 1998,
in exchange for 35,870 shares of common stock .......................... 143,480 --
</TABLE>
(20
<PAGE>
FINE.COM INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
fine.com International Corp. ("fine.com" or the "Company"), was incorporated in
the State of Washington on October 15, 1994. The Company plans, develops,
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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
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. 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 is recognized in the period the estimated loss
is 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. The
following is a detail of customers which accounted for greater than 10% of gross
revenue in the respective fiscal years:
<TABLE>
<CAPTION>
Fiscal Year
Ended January 31,
---------------------
1999 1998
---------------------
<S> <C> <C>
Customer A 19% 29%
Customer B 19 8
Customer C 6 10
</TABLE>
21)
<PAGE>
CASH AND CASH EQUIVALENTS
The Company considers highly liquid investments with an original maturity of
three months or less to be cash equivalents. Excess cash is primarily invested
in treasury bills, securities of government agencies, and commercial paper. Cash
equivalents are carried at amortized cost, which approximates fair market value.
MARKETABLE SECURITIES
Marketable securities, which consist primarily of U.S. Government agency
securities, are carried at market value. Market values are determined based on
quoted prices. Marketable securities are classified in the balance sheet as
current and non-current based on maturity dates and the Company's expectation of
sales and redemptions in the following year.
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.
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. The FASB has proposed certain amendments
to APB No. 25 which would require, among other things, (a) variable plan
accounting for stock options which have been repriced, and (b) that stock
options granted to outside directors would be treated similar to those granted
to an outside consultant.
ADVERTISING Advertising costs are expensed as incurred. Advertising expense
was $171,158 and $37,474 in the fiscal years ended January 31, 1999 and 1998,
respectively.
EARNINGS (LOSS) PER SHARE
Basic earnings per share is computed by dividing net income (loss) available to
common shareholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share reflects the potential dilution of
securities by including other common stock equivalents, including stock options,
warrants, and convertible preferred stock, in the weighted average number of
common shares outstanding for a period, if dilutive. For fiscal years ended
January 31, 1999 and 1998, all such potentially dilutive securities were not
included in earnings per share since they were antidilutive.
(22
<PAGE>
OTHER COMPREHENSIVE INCOME (LOSS)
In June 1997, the FASB issued SFAS No. 130, REPORTING COMPREHENSIVE INCOME,
which establishes standards for reporting and display of comprehensive income
and its components in the financial statements. The only item of other
comprehensive income (loss) which the Company currently reports is unrealized
gain (loss) on marketable securities.
BUSINESS SEGMENTS
In June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN
ENTERPRISE AND RELATED INFORMATION, which establishes standards for reporting
information about operating segments in annual financial statements. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Information related to segment
disclosures is contained in Note 11.
DERIVATIVES
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVES AND
HEDGING ACTIVITIES, which establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. Because the Company has never used nor currently intends to use
derivatives, management does not anticipate the adoption of this new standard
will have a significant effect on earnings or the financial position of the
Company.
LIQUIDITY
For the fiscal year ended January 31, 1999, the Company incurred a net loss of
$3,566,000. At January 31, 1999, the Company had cash and cash equivalents of
$1,521,000 and working capital of $1,684,000. The Company believes that its cash
and cash equivalents will be sufficient to fund its operations through January
31, 2000. The Company believes that it has taken appropriate action to realign
and strengthen the Company's operations, including a plan to strategically grow
sales, increase internal productivity and decrease its overhead cost structure.
However, there can be no assurances that the Company will be able to achieve
profitable operations. Further development and establishment of the Company's
business may require additional financing. The Company believes that additional
financing could be obtained from various sources, including certain existing
shareholders and other investors and financial institutions not yet identified.
In the event that additional financing is delayed or not able to be obtained on
satisfactory terms, if at all, the Company may need to reduce its expenditures.
There can be no assurance that additional capital on a debt or equity basis will
be obtained, or if obtained that it will be on economically viable terms.
2. BUSINESS COMBINATIONS
ACQUISITION OF PACIFIC ANALYSIS AND COMPUTING CORPORATION
On February 13, 1998, Pacific Analysis and Computing Corporation ("Pacific
Analysis") merged with and into the Company. The Company issued 35,870 shares of
its common stock valued at $143,480 in exchange for all outstanding Pacific
Analysis shares. The transaction was a tax-free reorganization and was accounted
for under the purchase method of accounting. The purchase price was allocated to
assets acquired and liabilities assumed based on their fair value at the date of
acquisition as follows: (a) net current assets $27,850, (b) property and
equipment $85,630, and (c) goodwill $30,000. The goodwill is being amortized
over five years. Pro forma revenue and results of operations for the fiscal
year ended January 31, 1998 do not significantly vary from the amounts reported
in the historical financial statements.
23)
<PAGE>
MERGER WITH META4 DIGITAL DESIGN, INC.
On July 31, 1998, Meta4 Digital Design, Inc. ("Meta4") was merged with and into
a wholly-owned subsidiary of the Company through the issuance of 253,655 shares
of Company common stock, which were exchanged for all of the outstanding shares
of Meta4. The merger qualified as a tax-free reorganization and was accounted
for as a pooling-of-interests. Accordingly, the Company's financial statements
have been restated to include the results of Meta4 for all periods presented.
Meta4 reported results on a calendar year basis. Accordingly, the restated
financial statements combine the December 31, 1997 financial statements of Meta4
with the January 31, 1998 financial statements of the Company. In addition, the
below table for fiscal 1999, combines Meta4 through June 30, 1998 with fine.com
through July 31, 1998. Net sales and the net loss of Meta4 for the one-month
period ended July 31, 1998 were $98,632 and ($74,186), respectively, with the
net loss reflected as an adjustment to retained earnings as of July 31, 1998.
Beginning August 1, 1999, results of operations for the merged entities are
combined for the same quarterly periods.
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, 1999
--------------------------------------------------------------------
fine.com Meta4 Adjustments(1) Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue
February 1, 1998 to July 31, 1998 $ 1,925,470 $ 802,939 $ - $ 2,728,409
August 1, 1998 to January 31, 1999 2,376,272 1,028,594 - 3,404,866
--------------------------------------------------------------------
$ 4,301,742 $ 1,831,533 $ - $ 6,133,275
--------------------------------------------------------------------
--------------------------------------------------------------------
Net income (loss)
February 1, 1998 to July 31, 1998 $ (1,460,653) $ (193,524) $ 11,221 $ (1,642,956)
August 1, 1998 to January 31, 1999 (1,545,051) (377,816) - (1,922,867)
--------------------------------------------------------------------
$ (3,005,704) $ (571,340) $ 11,221 $ (3,565,823)
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Fiscal Year Ended January 31, 1998
--------------------------------------------------------------------
fine.com Meta4 Adjustments(1) Total
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue................................. $ 3,448,084 $ 2,575,318 $ - $ 6,023,402
Net income (loss)....................... $ 80,682 $ (165,955) $ 29,868 $ (55,405)
</TABLE>
(1) There were no transactions between fine.com and Meta4 during any period
prior to the merger. Pro forma adjustments have been made to the historical
statements of operations to reflect the reversal of certain fees earned and
interest expense incurred by Meta4 related to transactions with one of its
shareholders. In addition, the impact of conforming accounting policies is
not material.
3. MARKETABLE SECURITIES
Management determines the appropriate classification of debt securities at the
time of purchase and reevaluates such designation as of each balance sheet date.
Management has classified the Company's marketable securities as
available-for-sale, in accordance with the provisions of SFAS No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Accordingly
the securities are carried at fair value, with unrealized holding gains and
losses, net income taxes, excluded from net income and recorded as an adjustment
to shareholder's equity. Interest, dividends and realized gains and losses are
included in net income.
(24
<PAGE>
The following is a summary of marketable securities at January 31, 1998, all of
which were classified as available-for-sale:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 1,621,144 $ - $ (28,112) $ 1,593,032
Due after one year 2,341,815 5,147 (21,726) 2,325,236
--------------------------------------------------------------------
$ 3,962,959 $ 5,147 $ (49,838) $ 3,918,268
--------------------------------------------------------------------
--------------------------------------------------------------------
</TABLE>
4. EQUIPMENT AND FURNITURE
Equipment and furniture consists of the following:
<TABLE>
<CAPTION>
January 31,
------------------------------
1999 1998
------------------------------
<S> <C> <C>
Computer equipment...................................................... $ 1,137,418 $ 758,027
Office furniture and equipment.......................................... 305,629 176,923
Leasehold improvements.................................................. 664,405 84,273
------------------------------
2,107,452 1,019,223
Accumulated depreciation and amortization............................... (693,114) (341,663)
------------------------------
$ 1,414,338 $ 677,560
------------------------------
------------------------------
</TABLE>
5. NOTE PAYABLE TO BANK
At January 31, 1999, the Company had in place a Revolving Line of Credit with
its bank in the amount of $750,000, of which $500,000 had been drawn upon.
Amounts outstanding under the credit facility at year-end bore interest at the
bank's prime rate plus 0.25% per annum (an effective rate of 8% at January 31,
1999). At fiscal 1999 year-end the Company was out of compliance with certain
covenants contained in its Revolving Line of Credit with its bank, including
requirements for minimum working capital, minimum tangible net worth and excess
losses in the fourth quarter. On April 2, 1999 the Company received a waiver on
its non-compliance with the bank covenants. The Company has renegotiated terms
with its bank and has received a commitment letter from the bank to enter into a
revised credit facility. The terms of the revised credit facility provide for a
line of credit in the amount of $750,000, to expire on September 1, 1999.
Amounts outstanding under the revised credit facility will continue to bear
interest at the bank's prime rate plus 0.25% per annum (an effective rate of 8%
at April 22, 1999). The facility is secured by all accounts receivable of the
Company and such other property and assets of the Company as the bank may
require, and contains modified financial covenants and restrictions, including a
restriction on payment of dividends.
6. LEASE COMMITMENTS
The Company leases certain equipment and facilities under capital and operating
leases. The operating leases contain annual escalation clauses based on
inflation. The Company sublets a portion of its office space and offsets rent
expense through sublease billings. Net rent expense under the operating leases
amounted to $506,152 and $255,466 in fiscal 1999 and 1998, respectively.
25)
<PAGE>
Future minimum lease payments for operating and capital leases at January 31,
1999 are as follows:
<TABLE>
<CAPTION>
Operating Leases
---------------------------------------------------------- Capital
Leases Sublease Net Leases
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
2000............................. $ 598,095 $ (162,661) $ 435,434 $ 73,092
2001............................. 584,143 (171,703) 412,440 31,103
2002............................. 489,588 (73,467) 416,121 23,257
2003............................. 297,542 - 297,542 9,590
2004............................. 283,439 - 283,439 -
Thereafter....................... 402,116 - 402,116 -
-----------------------------------------------------------------------
$ 2,654,923 $ (407,831) $ 2,247,092 137,042
-----------------------------------------------------------
-----------------------------------------------------------
Less amount representing
interest............................................................................. (27,212)
-------------
Present value of minimum capital
lease obligations.................................................................... 109,830
Less current portion................................................................... (57,602)
-------------
Capital lease obligations,
less current portion................................................................... $ 52,228
-------------
-------------
</TABLE>
7. INCOME TAXES
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31,
--------------------------------
1999 1998
--------------------------------
<S> <C> <C>
Current................................................................. $ - $ -
Deferred................................................................ (102,019) 46,567
-------------------------------
$ (102,019) $ 46,567
-------------------------------
-------------------------------
</TABLE>
The provision (benefit) 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
January 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Computed tax at federal statutory rate of 34%........................... $ (1,247,066) $ (3,005)
Increase in valuation allowance......................................... 1,106,020 -
Subchapter S losses not benefited....................................... 61,983 46,270
Other items, net........................................................ (22,956) 3,302
-------------------------------
$ (102,019) $ 46,567
</TABLE>
(26
<PAGE>
The Company has elected to use the cash method of accounting for income tax
purposes because it currently qualifies 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 tax table 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.
Meta4 elected to be taxed as a subchapter S corporation prior to the business
combination with fine.com. Accordingly, Meta4 did not record any income tax
benefit because the individual shareholders received the benefit for Meta4's
taxable losses.
Significant components of the Company's net deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
January 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward .................................... $ 1,311,030 $ 224,720
Other .............................................................. 34,640 14,434
-------------------------------
1,345,670 239,154
Deferred tax liabilities:
Accrual to cash basis adjustments .................................. (239,650) (336,771)
Other .............................................................. - (4,402)
-------------------------------
(239,650) (341,173)
Valuation allowance .................................................... (1,106,020) -
-------------------------------
Net deferred tax assets (liabilities) .................................. $ - $ (102,019)
-------------------------------
-------------------------------
</TABLE>
At January 31, 1999, the Company had net operating loss carryforwards of
approximately $3,856,000 which begin to expire in 2011. Utilization of these
carryforwards depends on the recognition of future taxable income. The Company's
ability to utilize net operating loss carryforwards may be limited in the event
that a change in ownership, as defined in the Internal Revenue Code, occurs in
the future. To the extent that any single-year loss is not utilized to the full
amount of the limitation, such unused loss is carried forward to subsequent
years until the earlier of its utilization or the expiration of the relevant
carryforward period.
8. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
On January 31, 1997, the Company completed a private placement for the issuance
and sale of 59,524 shares of Series A Preferred Stock of the Company for
$250,000 less offering costs of $10,082. Upon the effectiveness of the Company's
Registration Statement relating to the Company's initial public offering of the
common stock, all outstanding shares of the Series A Preferred Stock
automatically converted into shares of common stock, at a one-to-one conversion
ratio. In addition, upon the effective date of the Registration Statement, the
authority of the Company to issue preferred stock terminated and the number of
authorized shares of preferred stock were converted into additional authorized
shares of common stock.
(27
<PAGE>
INITIAL PUBLIC OFFERING
On August 11, 1997, the Company's Registration Statement for its initial public
offering was declared effective by the Securities and Exchange Commission and
the Company issued 1,100,000 shares of common stock to the public at the initial
public offering price of $6.50 per share. On August 25, 1997, pursuant to the
exercise of an over-allotment option granted to the underwriters in the
Company's public offering, the Company issued an additional 165,000 shares of
common stock at a price of $6.50 per share. Proceeds to the Company, net of
offering expenses of $1,994,458, amounted to $6,228,042.
In connection with the initial public offering, the Company agreed to sell
warrants to the underwriters for $110. The underwriters' warrants entitle them
to purchase 110,000 shares at $8.775 per share. The warrants are limited to a
term of five years beginning August 11, 1997, and are exercisable for a four
year period commencing August 11, 1998.
STOCK OPTION PLANS
In February 1996, the Board of Directors approved the 1996 Incentive Stock
Option Plan (the "1996 Plan") and reserved 227,258 shares of common stock for
issuance thereunder. In April 1997, the Company adopted the 1997 Option Plan
(the "1997 Plan") and reserved 200,000 shares of common stock for issuance
thereunder. The Plans provide for the grant of both incentive stock options and
nonqualified stock options to officers, employees, and consultants. A committee
of the Board of Directors determines the terms and conditions of options granted
under the Plans, 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. Pursuant to the terms of the
Underwriting Agreement with the Company's underwriters in the initial public
offering, the Company agreed to grant options under the stock option plans at
not less than the IPO price per share of $6.50 for a period of 18 months
following the effective date of the Registration Statement. In addition,
pursuant to the terms of the Underwriting Agreement, the Company was restricted
for a period of 18 months from the effective date of the Registration Statement
from granting options under the 1996 Plan in excess of 124,707. Options expire
between five and ten years from the date of grant. Options under the 1996 and
1997 Plans, excluding options to directors which vest upon grant, and subject to
the maintenance of a continuous relationship from the date of grant, 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. Options which are granted under the
Plans and are subsequently cancelled, revert back to the option pool.
Effective February 26, 1999, the Company implemented a number of changes to its
stock option plans. These changes included: (a) the repricing of all stock
options granted after the IPO under either the 1996 Plan or 1997 Plan which were
held by current employees (but not officers and directors) of the Company to an
exercise price of $2.50, the fair market price at the date of the repricing, (b)
amendments to the existing stock option vesting schedules to provide for vesting
at a rate of 25% per year over four years relating back to the date of original
grant for all employees (excluding directors and officers) and all future option
grants, and (c) the implementation of a new Employee Bonus Plan which provides
for the issuance of up to 126,435 nonqualified stock options to employees or
consultants (but not officers and directors). In connection with the above stock
option plan changes: (a) 7,216 pre-IPO stock options were not repriced and
remained exercisable at $1.76 per share, (b) 99,000 employee options outstanding
were repriced to an exercise price of $2.50 per share, (c) 126,435 employee
options were granted at $2.50 per share under
(28
<PAGE>
the new Employee Bonus Plan in order to more equitably allocate options among
employees based on their respective positions with the Company and (d)
106,311 currently outstanding stock options to officers and directors were
not repriced and remained at $6.50 per share.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------------------------------
Weighted-
Shares Average
Available for Number of Exercise
Grant Shares Prices
----------------------------------------------
<S> <C> <C> <C>
Balance at February 1, 1997........................... 102,551 124,707 $ 1.76
1997 Plan introduction................................ 200,000 - -
Granted in fiscal 1998................................ (90,793) 90,793 $ 6.50
Cancelled in fiscal 1998.............................. 31,642 (31,642) $ 4.11
-------------------------------
Balance at January 31, 1998........................... 243,400 183,858 $ 3.89
Granted in fiscal 1999................................ (186,250) 186,250 $ 6.50
Cancelled in fiscal 1999.............................. 116,595 (116,595) $ 4.47
-------------------------------
Balance at January 31, 1999........................... 173,745 253,513 $ 5.55
-------------------------------
-------------------------------
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options at January 31, 1999:
<TABLE>
<CAPTION>
--------------------------------- -------------------------------
Outstanding Exercisable
Weighted- Weighted-
Average Average
Exercise Number of Remaining Number of Exercise
Prices Options Contractual Life Options Prices
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1.76 50,977 7.33 years 47,456 $1.76
------------- ------------
$6.50 202,536 9.34 years 46,861 $6.50
------------- ------------
253,513 8.94 years 94,317
</TABLE>
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
The Company has reserved shares of common stock as of January 31, 1999 as
follows:
<TABLE>
<S> <C>
Stock options.......................................... 427,258
Common stock warrants.................................. 110,000
------------
537,258
------------
------------
</TABLE>
The above table excludes an additional 126,435 shares of common stock which were
reserved for future issuance pursuant to the new Employee Bonus Plan, of which
stock options for all 126,435 shares were granted on February 26, 1999.
29)
<PAGE>
PRO FORMA DISCLOSURE UNDER SFAS NO. 123
Pro forma information regarding earnings per share 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 that Statement. The value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Expected dividend yield............................................... 0% 0%
Expected stock price volatility....................................... 0.878 - 01.401 0.437 - 0.676
Risk-free interest rate............................................... 4.5% - 5.7% 5.7% - 6.5%
Expected life of options.............................................. 5 years 5 years
</TABLE>
For purposes of pro forma disclosures, the estimated weighted average value of
the options granted of $3.12 and $2.32 per share during 1999 and 1998,
respectively, is amortized to expense over the options' vesting period. The
effects of applying the Statement for providing pro forma disclosure are not
indicative of future amounts until the new rules are applied to all outstanding
nonvested awards. The Company's pro forma information is as follows:
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
Net loss-as reported.................................................... $(3,565,823) $ (55,405)
Net loss-pro forma...................................................... $(3,713,149) $ (84,405)
Diluted loss per share-as reported...................................... $ (1.34) $ (0.03)
Diluted loss per share-pro forma........................................ $ (1.39) $ (0.04)
</TABLE>
During fiscal 1999, the Company recorded a noncash stock-based compensation
charge of $25,000 related to the modification of stock options in connection
with the termination benefits to an employee.
9. TRANSACTIONS WITH OFFICERS AND DIRECTORS
At January 31, 1999 and 1998, the Company had a note receivable from an officer
which was non-interest bearing.
10. EMPLOYEE BENEFIT PLAN
The Company has a 401(k) savings plan covering substantially all of its
employees. Eligible employees may contribute through payroll deductions. The
Company matches employees' contributions at the discretion of the Company's
Board of Directors. To date, the Company has not matched employee contributions
to the 401(k) savings plan.
(30
<PAGE>
11. BUSINESS SEGMENTS
The Company markets its services through direct and indirect channels throughout
the world. Information regarding revenues in different geographic regions is as
follows:
<TABLE>
<CAPTION>
Fiscal Year
Ended January 31,
-------------------------------
1999 1998
-------------------------------
<S> <C> <C>
North America........................................................... $ 5,892,129 $ 6,023,402
Rest of world........................................................... 241,146 -
-------------------------------
Total revenues.......................................................... $ 6,133,275 $ 6,023,402
-------------------------------
-------------------------------
</TABLE>
The Company reports operating results based on geographic areas which are
primarily its PacWest (headquarters) and NorthEast (Meta4) office locations. The
"Other" segment below includes the operations of its MidAtlantic office as well
as offices which were closed during fiscal 1999. A summary of key financial data
by segment is as follows:
<TABLE>
<CAPTION>
PacWest NorthEast Other Total
------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fiscal Year Ended January 31, 1999:
Revenues $ 3,655,798 $ 1,831,533 $ 645,944 $ 6,133,275
Operating loss (2,432,664) (544,312) (829,690) (3,806,666)
Interest, net 164,766 (27,028) 1,086 138,824
Depreciation and amortization 225,088 105,541 14,847 345,476
Purchases of property and equipment 878,735 91,963 65,913 1,036,611
Long-lived assets 1,228,981 262,207 - 1,491,188
Total assets 4,454,846 548,178 67,075 5,070,099
Fiscal Year Ended January 31, 1998:
Revenues $ 3,448,084 $ 2,575,318 $ - $ 6,023,402
Operating loss (12,898) (108,750) - (121,648)
Interest, net 140,147 (27,337) - 112,810
Depreciation and amortization 88,286 93,046 - 181,332
Purchases of property and equipment 443,180 86,394 - 529,574
Long-lived assets 496,145 284,976 - 781,121
Total assets 7,351,508 613,721 - 7,965,229
</TABLE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
31)
<PAGE>
PART III
The information called for by Items 9 through 12 of Part III is included in the
Registrant's Proxy Statement and is incorporated herein by reference. The
information appears in the Proxy Statement under the captions "Election of
Directors," "Security Ownership of Directors, Executive Officers and Certain
Beneficial Owners," "Executive Compensation" and "Certain Transactions."
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
3.1* Articles of Incorporation, as amended
3.1A** Amendment to Articles of Incorporation filed April 2, 1998
3.2* Bylaws
4.1+ Specimen Common Stock Certificate
4.2* Form of Representative's Warrant (included as Exhibit A to
Representative's Warrant Agreement filed as Exhibit 10.12)
10.1* Incentive Stock Option Plan
10.2* 1997 Stock Option Plan
10.3 Employee Bonus Plan
10.4* Employment Agreement dated May 9, 1997 with Daniel M. Fine
10.4A+ First Amendment to Employment Agreement with Daniel M. Fine
10.5+ Employment Agreement dated November 24, 1998 with Timothy J. Carroll
10.6+ Employment Agreement dated July 31, 1998 with Kathy L. Berni
10.7 Employment Agreement dated February 13, 1998 with Bill Poole
10.8A Commitment Letter dated April 22, 1999 with U.S. Bank of Washington
10.8B* Commercial Security Agreement dated March 31, 1997 for $750,000
revolving line of credit
10.9A* Office Lease Agreement dated February 28, 1996 with Grand Pacific
Limited Partnership (former corporate headquarters)
10.9B* Personal Guaranty of Daniel M. Fine dated February 29, 1997
10.9C* First Amendment to Office Lease Agreement dated March 1997
10.9D* Sublease Agreement dated September 15, 1997 with Data Base Designs, Inc.
10.10A* Lease Agreement dated November 19, 1997 with Third Avenue
Associates (current corporate headquarters)
10.10B* Amendment No. 1 to Lease Agreement, dated December 29, 1997
10.10C* Personal Guaranty of Daniel M. Fine for Office Lease, dated November 20, 1997
10.11A* Agreement dated August 31, 1995 between Pacific Analysis and Computer Corporation and
Amber Jack Ltd.
10.11B* Sublease Agreement dated July 31, 1997 with Haralson & Co., P.C.
10.12* Form of Representative's Warrant Agreement
10.13*** Agreement and Plan of Merger (exclusive of schedules and exhibits) dated as of July 29, 1998
with Meta4 Digital Design, Inc.
</TABLE>
(32
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NUMBER DESCRIPTION
<S> <C>
21.1+ List of Subsidiaries of fine.com International Corp.
27.1 Financial Data Schedule
</TABLE>
----------------------------------------------
* Incorporated herein by reference from Item 27 of the Company's Form
SB-2 (No. 333-26855).
** Incorporated herein by reference from exhibit to Form 8-K filed
April 13, 1998.
*** Incorporated herein by reference from exhibit to Form 8-K filed August
13, 1998.
+ Incorporated herein by reference from exhibit filed with the Company's
Form 10-QSB for the quarter ended July 31, 1998.
++ Incorporated herein by reference from exhibit filed with the Company's
Form 10-QSB for the quarter ended October 31, 1998.
B. REPORTS ON FORM 8-K
No reports were filed by the Company during the fiscal quarter ended January 31,
1999.
33)
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized on April 28, 1999.
fine.com International Corp.
By: /s/ Daniel M. Fine
---------------------------------
Daniel M. Fine, Chairman and
Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on April 28, 1999.
/s/ Daniel M. Fine /s/ Timothy J. Carroll
- - ------------------------------ -----------------------------------
Daniel M. Fine Timothy J. Carroll
Chairman, Chief Executive Executive Vice President of Finance
Officer and Director and Operations (principal financial
(principal executive officer) and accounting officer)
/s/ Herbert L. Fine /s/ Frank Hadam
- - ------------------------------ -----------------------------------
Herbert L. Fine Frank Hadam
Director Director
/s/ Anthony C. Naughtin
- - ------------------------------
Anthony C. Naughtin
Director
(34
<PAGE>
FINE.COM INTERNATIONAL CORP.
EMPLOYEE BONUS PLAN
SECTION 1. PURPOSE. The purpose of this Employee Bonus Plan (the "Plan")
is to enable fine.com International Corp. (the "Company") to provide incentive
and equity bonus compensation in the form of nonqualified stock options to
existing employees and/or consultants of the Company to enable the Company to
attract and retain the services of people with training, experience and ability.
SECTION 2. STOCK SUBJECT TO PLAN. The stock subject to this Plan shall
be the Company's common stock, no par value per share (the "Common Stock"),
presently authorized but unissued. The aggregate amount of Common Stock
reserved for issuance or delivery upon exercise of all options granted under
this Plan shall not exceed 126,435 shares of Common Stock, subject to adjustment
pursuant to Section 9 below. If any option granted under this Plan shall expire
or terminate for any reason without having been exercised in full, the
unpurchased shares subject thereto shall be returned to the Plan and become
available for future grant under the Plan.
SECTION 3. ADMINISTRATION. The Plan shall be administered by the Board
of Directors of the Company or any committee of the Board of Directors delegated
such authority pursuant to Section 3.2 (the "Plan Administrator"), in accordance
with the following terms and conditions:
3.1 GENERAL AUTHORITY. Subject to the express provisions of the Plan,
the Plan Administrator shall have the authority, in its sole discretion, to
determine all matters relating to options granted under the Plan, including,
without limitation, the selection of individuals to be granted options, the
number of shares to be subject to each option, the fair market value of the
shares and the exercise price, the term, whether such options shall be
immediately exercisable or shall become exercisable in increments over time, and
all other terms and conditions thereof, and to make all other determinations
necessary or advisable in the administration of the Plan. Grants under this
Plan to persons eligible need not be identical in any respect, even when made
simultaneously. The Plan Administrator may from time to time adopt, amend and
rescind rules and regulations relating to the administration of the Plan. The
interpretation and construction by the Plan Administrator of any terms or
provisions of this Plan or any option issued hereunder, or of any rule or
regulation promulgated in connection herewith, shall be conclusive and binding
on all interested parties. The Plan Administrator may grant only nonqualified
stock options (stock options that do not qualify as incentive stock options in
Section 422(b) of the Internal Revenue Code of 1986, as amended (the "Code"))
pursuant to this Plan.
3.2 DELEGATION TO A COMMITTEE. The Board of Directors, if it so
determines, may delegate to one or more committees of the Board of Directors
(each consisting of not less than two members of the Board of Directors) any or
all authority for the administration of the Plan, subject to such terms and
conditions the Board of Directors may prescribe. If, and so long as, the
Company has a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Board of
Directors in determining the membership of any such committee shall, with
respect to option grants to any persons subject to or likely to become subject
to Section 16 of the Exchange Act, give due consideration to the provisions
regarding (a) "outside directors" as contemplated by Section 162(m) of the Code
and (b) "nonemployee directors" as contemplated by Rule 16b-3 under the Exchange
Act. Thereafter references to the Plan Administrator in this Plan shall be
deemed to be references to such committee to the extent such authority is so
delegated.
3.3 REPLACEMENT OF OPTIONS. Without limiting the authority granted to
the Plan Administrator under Section 3.1, the Plan Administrator, in its sole
discretion, shall have the authority, among other things, to (a) grant options
subject to the condition that options previously granted at a higher or lower
exercise price under the Plan be canceled or exchanged in connection with such
grant (the number of shares covered by the new options, the exercise price, the
term and the other terms and conditions of the new option, shall be determined
in accordance with the Plan and may be different from the provisions of the
canceled or exchanged options), and (b) amend or modify outstanding and
unexercised options, with the consent of the holder of the option, to, among
other things, reduce the exercise price per share, establish the exercise price
at the then-current fair market value of the Common Stock or accelerate or defer
the exercise date, vesting schedule or expiration date of any option.
<PAGE>
SECTION 4. ELIGIBILITY. Options may be granted only to persons who, at
the time the option is granted, are employees or consultants of the Company or
any of its then-existing parent or subsidiary corporations (hereafter a "Parent"
or "Subsidiary"). Any person to whom an option is granted under this Plan shall
be referred to hereinafter as "Optionee." Any Optionee may receive one or more
grants of options as the Plan Administrator shall from time to time determine,
and such determinations may be different as to different Optionees and may vary
as to different grants. An "employee" shall be any person, excluding Company
officers and directors, employed by the Company or any Parent or Subsidiary,
with the status of employment determined based upon such minimum number of hours
or periods worked as shall be determined by the Board of Directors in its
discretion, subject to any requirements of the Code.
SECTION 5. TERMS AND CONDITIONS OF OPTIONS. Options granted under this
Plan shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Plan Administrator shall deem
advisable and which are not inconsistent with this Plan. Options granted
hereunder shall be nonqualified stock option. Notwithstanding the foregoing,
all such options shall include or incorporate by reference the following terms
and conditions:
5.1 NUMBER OF SHARES AND EXERCISE PRICE. The maximum number of shares
that may be purchased pursuant to the exercise of each option and the price per
share at which such option is exercisable (the "exercise price") shall be as
established by the Plan Administrator. The exercise price of Nonqualified Stock
Options may be less than, equal to or greater than the fair market value per
share of the Common Stock at the time the option is granted.
a. LIMITATION ON NUMBER OF SHARES UNDERLYING OPTIONS. Subject to
adjustment from time to time as provided in Section 9 below, the Plan
Administrator shall not grant options to any person in any one fiscal year of
the Company in an amount that exceeds, in the aggregate, 100,000 shares of
Common Stock. This limitation shall be applied in a manner consistent with the
requirements of, and only to the extent required for compliance with, the
exclusion from the limitation on deductibility of compensation under Section
162(m) of the Code.
b. DETERMINATION OF FAIR MARKET VALUE. For the purposes of this
Plan, fair market value of Common Stock, as of any date, shall be determined as
follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
National Market tier of The Nasdaq Stock Market ("Nasdaq"), its fair
market value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported), as quoted on such system or
exchange, or the system or exchange with the greatest volume of trading in
Common Stock, for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source
as the Plan Administrator deems reliable;
(ii) If the Common Stock is quoted on the Nasdaq system (but not on
the National Market tier thereof) or regularly quoted by a recognized
securities dealer but selling prices are not reported, its fair market
value shall be the closing trading price of the Common Stock on the date
of grant, as reported in The Wall Street Journal or such other source as
the Plan Administrator deems reliable; or
(iii) In the absence of an established market for the Common Stock,
the fair market value thereof shall be determined in good faith by the
Plan Administrator.
5.2 DURATION OF OPTIONS. Subject to the restrictions contained in
Section 9, the term of each option shall be established by the Plan
Administrator and, if not so established, shall be ten years from the date it is
granted.
5.3 EXERCISABILITY. Each option shall prescribe the installments or
vesting schedule, if any, under which an option granted under the Plan shall
become exercisable. In the absence of a defined vesting schedule in an option
agreement, the option covered by such agreement shall vest annually over four
years from the date of grant, at the rate of 25 percent per year on each
anniversary of the date of grant. The Plan Administrator, in its absolute
<PAGE>
discretion, may waive or accelerate any vesting requirement contained in
outstanding and unexercised options. Only whole shares shall be issued pursuant
to the exercise of any option.
SECTION 6. RESTRICTIONS ON TRANSFERABILITY
6.1 Options granted under this Plan and the rights and privileges
conferred hereby shall not be subject to execution, attachment or similar
process and may not be assigned, alienated, pledged, sold, or transferred in any
manner (whether by operation of law or otherwise) other than by will or by the
laws of descent and distribution.
6.2 Notwithstanding Section 6.1 above, an Optionee may transfer such
option either (a) pursuant to a "domestic relations order" as defined in Section
414 of the Code or Section 206 of the Employment Retirement Income Security Act,
or the rules thereunder, or (b) by transfer without the receipt of consideration
by an Optionee, subject to such rules as the Plan Administrator may adopt to
preserve the purposes of the Plan (including limiting such transfers to
transfers by Optionees who are directors or senior executives), to
(i) a member of his or her Immediate Family or, in the case of an
Optionee that is a corporation, partnership or limited liability company,
holders of equity ownership interest of Optionee;
(ii) a trust solely for the benefit of the Optionee and/or his or
her Immediate Family, or
(iii) a partnership, corporation or limited liability company whose
only partners, shareholders or members are the Optionee and/or (y) his or
her Immediate Family members or (z) holders of equity ownership interest
of Optionee (in the case of an Optionee that is a corporation, partnership
or limited liability company).
(each transferee described in 6.2(a) and (b) is hereafter referred to as a
"Permitted Transferee"), provided that the Plan Administrator is notified in
advance in writing of the terms and conditions of any proposed transfer
described in (a) or (b) and it determines that the proposed transfer complies
with the requirements of the Plan and the applicable option agreement. For this
purpose, "Immediate Family" means, with respect to a particular Optionee, the
Optionee's spouse, children and grandchildren (including adopted and
stepchildren and grandchildren).
6.3 Upon any attempt to transfer, assign, pledge, hypothecate or
otherwise dispose of an option granted under the Plan or any right or privilege
conferred hereunder contrary to the provisions of the Plan, or upon the sale,
levy or any attachment or similar process upon the rights and privileges
conferred by an option granted under the Plan, the option shall thereupon
terminate and become null and void.
6.4 The terms of options granted under this Plan and transferred in
accordance with this Section 6 shall apply to the beneficiaries, executors and
administrators of the Optionee and of the Permitted Transferees of the Optionee
(including the beneficiaries, executors and administrators of the Permitted
Transferees), including the right to agree to any amendment of the applicable
option agreement, except that Permitted Transferees shall not transfer any
option other than by will or by the laws of descent and distribution.
6.5 Options granted under this Plan, or options transferred in
accordance with this Section 6, are exerciseable during Optionee's lifetime only
by Optionee or Permitted Transferee, as applicable (or his or her attorney in
fact or guardian). In the event of the death of an Optionee or Permitted
Transferee, options may be exercised by such Optionee's or Permitted
Transferee's executor or administrator. In no event shall the Company issue
shares of Common Stock upon exercise of an option unless Optionee or Permitted
Transferee makes sufficient payment, as determined by the Company, to meet
withholding tax obligations on such exercise or other arrangements satisfactory
to the Plan Administrator to provide for such payment.
SECTION 7. EXERCISE OF OPTIONS. Options shall be exercised in accordance
with the following terms and conditions:
<PAGE>
7.1 PROCEDURE. Options shall be deemed exercised upon delivery to the
Company of written notice of the number of shares with respect to which the
option is exercised and payment in full of the exercise price for the shares
being purchased.
7.2 PAYMENT. Payment of the exercise price shall be made in full within
five business days of the notice of exercise of the option and shall be in cash
or bank-certified, cashier's or personal check. If the Company's Common Stock
is registered under Section 12 of the Exchange Act, then, to the extent
permitted by applicable laws and regulations (including, but not limited to,
federal tax and securities laws and regulations) and unless the Plan
Administrator determines otherwise, an option also may be exercised by
(a) delivery of shares of Common Stock of the Company (which shares, if tendered
by an affiliate of the Company, shall have been held by the Optionee for at
least six months) having a fair market value equal to the exercise price, such
fair market value to be determined in good faith by the Plan Administrator (such
payment in stock may occur in the context of a single exercise of an option or
successive and simultaneous exercises, sometimes referred to as "pyramiding,"
which provides that, rather than physically exchanging certificates for a series
of exercises, bookkeeping entries will be made pursuant to which the Optionee is
permitted to retain his existing stock certificate and a new stock certificate
is issued for the net shares), or (b) delivery of a properly executed exercise
notice together with irrevocable instructions to (i) a broker to promptly
deliver to the Company the amount of sale or loan proceeds to pay the exercise
price and any withholding tax obligations that may arise in connection with such
exercise, and (ii) the Company to deliver the certificates for such purchased
shares directly to such broker, all in accordance with the requirements of the
Federal Reserve Board. In addition, the exercise price for shares purchased
under an option may be paid, either singly or in combination with one or more of
the alternative forms of payment authorized by this Section 7.2 or such other
consideration as the Plan Administrator may permit.
7.3 RIGHTS AS SHAREHOLDER. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such shares, no right
to vote or receive dividends or any other rights as a shareholder shall exist
with respect to the shares acquired on exercise, notwithstanding the exercise of
the option. The Company shall issue (or cause to be issued) such stock
certificate promptly upon exercise of the option and payment of the exercise
price. No adjustment will be made for a dividend or other right for which the
record date is prior to the date the stock certificate is issued, except as
provided in Section 9 of this Plan.
7.4 FEDERAL WITHHOLDING TAX REQUIREMENTS. Upon exercise of an option,
the Optionee shall, upon notification of the amount due and prior to or
concurrently with the delivery of the certificates representing the shares, pay
to the Company amounts necessary to satisfy applicable federal, state and local
withholding tax requirements or shall otherwise make arrangements satisfactory
to the Company for such requirements. If permitted by the Plan Administrator,
such arrangements may include payment of the appropriate withholding tax in
shares of stock of the Company having a fair market value equal to such
withholding tax, either through delivery of shares held by the Optionee or by
reduction in the number of shares to be delivered to the Optionee upon exercise
of such option.
SECTION 8. TERMINATION OF EMPLOYMENT, DISABILITY AND DEATH
8.1 GENERAL. If the employment or other relationship of the Optionee
with the Company, a Parent or a Subsidiary shall terminate by retirement or for
any reason other than death or disability as hereinafter provided, the option
may be exercised by the Optionee, or its Permitted Transferee, at any time prior
to the expiration of three months after the date of such termination of
relationship (unless by its terms the option sooner terminates or expires), but
only if and to the extent the Optionee was entitled to exercise the option at
the date of such termination.
8.2 DISABILITY. If the employment or other relationship of the Optionee
with the Company, a Parent or a Subsidiary is terminated because of the
Optionee's disability (as herein defined), the option may be exercised by the
Optionee, or its Permitted Transferee, at any time prior to the expiration of
one year after the date of such termination (unless by its terms the option
sooner terminates or expires), but only if and to the extent the Optionee, or
its Permitted Transferee, was entitled to exercise the option at the date of
such termination. For purposes of this section, an Optionee will be considered
to be disabled if the Optionee is unable to engage in any substantial gainful
<PAGE>
activity by reason of any medically determinable mental or physical impairment
which can be expected to result in death or which has lasted or can be expected
to last for a continuous period of not less than 12 months.
8.3 DEATH. In the event of the death of an Optionee while in the employ
of the Company, a Parent or a Subsidiary, the option shall be exercisable on or
prior to the expiration of one year after the date of such death (unless by its
terms the option sooner terminates and expires), but only if and to the extent
the Optionee was entitled to exercise the option at the date of such death and
only by the Optionee's personal representative if then subject to administration
as part of the Optionee's estate, or by the person or persons to whom such
Optionee's rights under the option shall have passed by the Optionee's will or
by the applicable laws of descent and distribution or by Optionee's Permitted
Transferee.
8.4 WAIVER OR EXTENSION OF TIME PERIODS. The Plan Administrator shall
have the authority, prior to or within the times specified in this Section 8 for
the exercise of any such option, to extend such time period or waive in its
entirety any such time period to the extent that such time period expires prior
to the expiration of the term of such option. In addition, the Plan
Administrator may modify or eliminate the time periods specified in this Section
8 with respect to particular option grants. However, no option may be exercised
after the expiration of ten years from the date such option is granted.
8.5 TERMINATION OF OPTIONS. To the extent that the option of any
deceased Optionee or of any Optionee whose employment or relationship with the
Company is terminated shall not have been exercised within the limited periods
prescribed in this Section 8, all further rights to purchase shares pursuant to
such option shall cease and terminate at the expiration of such period.
SECTION 9. OPTION ADJUSTMENTS
9.1 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. The aggregate number
and class of shares on which options may be granted under this Plan, the number
and class of shares covered by each outstanding option and the exercise price
per share thereof (but not the total price), and all such options, shall each be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a stock split, reverse
stock split, stock dividend, combination or reclassification or any like capital
adjustment, or any other increase or decrease in the number of shares of Common
Stock of the Company without the receipt of consideration by the Company.
9.2 EFFECT OF CERTAIN TRANSACTIONS. Except as otherwise provided in the
option agreement, in the event of a merger, consolidation, disposition of all or
substantially all of the assets, separation, reorganization or liquidation of
the Company, as a result of which the shareholders of the Company receive cash,
stock or other property in exchange for their shares of Common Stock (each, a
"Corporate Transaction"), all outstanding and unexercised options granted under
this Plan shall automatically terminate immediately upon such Corporate
Transaction; provided, however, that optionees shall have the right to exercise
any vested options at any time up to such Corporate Transaction.
9.3 FURTHER ADJUSTMENT OF OPTIONS. The Plan Administrator shall have
the discretion, exercisable at any time before a sale, merger, consolidation,
reorganization, liquidation or change in control of the Company, as defined by
the Plan Administrator, to take such further action as it determines to be
necessary or advisable, and fair and equitable to Optionees, with respect to
options. Such authorized action may include (but shall not be limited to)
establishing, amending or waiving the type, terms, conditions or duration of, or
restrictions on, options so as to provide for earlier, later, extended or
additional time for exercise and other modifications, and the Plan Administrator
may take such actions with respect to all Optionees, to certain categories of
Optionees or only to individual Optionees. The Plan Administrator may take such
action before or after granting options to which the action relates and before
or after any public announcement with respect to such, sale, merger,
consolidation, reorganization, liquidation or change in control that is the
reason for such action.
9.4 FRACTIONAL SHARES. In the event of any adjustment in the number of
shares covered by any option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
<PAGE>
9.5 DETERMINATION OF PLAN ADMINISTRATOR TO BE FINAL. All adjustments
made pursuant to this Section 9 shall be made by the Plan Administrator and its
determination as to what adjustments shall be made, and the extent thereof,
shall be final, binding and conclusive.
SECTION 10. SECURITIES REGULATIONS
10.1 COMPLIANCE. Shares shall not be issued with respect to an option
granted under this Plan unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, and the requirements of any stock
exchange, national market system, over the counter system, or any electronic
bulletin board, upon which the shares may then be listed, quoted or traded, and
shall further be subject to the approval of counsel for the Company with respect
to such compliance. Inability of the Company to obtain from any regulatory body
having jurisdiction the authority deemed by the Company's counsel to be
necessary for the lawful issuance and sale of any shares hereunder shall relieve
the Company of any liability in respect of the nonissuance or sale of such
shares as to which such requisite authority shall not have been obtained.
10.2 REPRESENTATIONS BY OPTIONEE. As a condition to the exercise of an
option, the Company may require the Optionee to represent and warrant at the
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares,
if, in the opinion of counsel for the Company, such representation is required
by any relevant provision of the laws referred to in Section 10.1 above. At the
option of the Company, a stop transfer order against any shares of stock may be
placed on the official stock books and records of the Company, and a legend
indicating that the stock may not be pledged, sold or otherwise transferred
unless an opinion of counsel was provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on the stock certificate in order to assure exemption
from registration. The Plan Administrator may also require such other action or
agreement by the Optionees as may from time to time be necessary to comply with
the federal and state securities laws. This provision shall not obligate the
Company to undertake registration of options or stock hereunder.
SECTION 11. EMPLOYMENT RIGHTS. Nothing in this Plan or any option or
right granted pursuant hereto shall confer upon any Optionee any right to be
continued in the employment of the Company, a Parent or any Subsidiary of the
Company, or to remain a consultant thereto, or to interfere in anyway with the
right of the Company, a Parent or any Subsidiary, in its sole discretion, to
terminate such Optionee's employment at any time or to remove the Optionee as a
consultant at any time.
SECTION 12. AMENDMENT AND TERMINATION
12.1 ACTION BY SHAREHOLDERS. The Plan may be terminated, modified or
amended by the shareholders of the Company.
12.2 ACTION BY BOARD OF DIRECTORS. The Board of Directors may also
terminate the Plan, or modify or amend the Plan in such respects as it shall
deem advisable in order to conform to any changes in law or regulation
applicable thereto, or in other respects; provided, however, that, the Board of
Directors may not, without approval by the shareholders of the Company amend the
Plan for which shareholder approved is required under any applicable law or
regulation. No termination, suspension or amendment of the Plan may, without
the consent of each Optionee to whom any option shall previously have been
granted, adversely affect the rights of such Optionees under such options.
12.3 AUTOMATIC TERMINATION. Unless the Plan shall have been terminated
as herein provided, this Plan shall terminate ten years from the date on which
the Plan is adopted by the Board of Directors. No option may be granted after
such termination, or during any suspension of this Plan. The amendment or
termination of this Plan shall not, without the consent of the Optionee, alter
or impair any rights or obligations under any option previously granted under
this Plan.
<PAGE>
SECTION 13. EFFECTIVE DATE OF THE PLAN. This Plan shall become effective
on the date of its adoption by the Board of Directors of the Company and options
may be granted immediately thereafter.
ADOPTED BY THE BOARD OF DIRECTORS ON MARCH 12, 1999.
<PAGE>
EMPLOYMENT AGREEMENT
BETWEEN
FINE.COM CORPORATION AND WILLIAM G. POOLE, JR.
The purpose of this Agreement is to confirm the terms of the employment
relationship between fine.com Corporation ("Employer"), and William G. Poole,
Jr. ("Employee").
1. TERM OF AGREEMENT. Employer and Employee agree that the Employee will be
employed by Employer beginning February 13, 1998, until February 13, 2001,
unless employment is sooner terminated as provided herein.
2. POSITION AND DUTIES. Employer and Employee agree that Employee will be
employed as Director of Maintenance, and that, in this capacity, Employee's
responsibilities will include, but are not limited to:
Oversight of the Employer's Maintenance Department which is responsible for
refreshing client sites with new content at the client's request; creation of
systems and tools to facilitate the process of updating Web sites; work with
other departments in maintaining up to date Web sites while maintaining the
integrity of such sites; hiring and training personnel in the Maintenance
Department; and assistance with client requests.
It is understood that from time to time Employee may be assigned other duties in
addition to those described above and that Employee's responsibilities may be
modified or expanded at any time by Employer in order to accommodate the needs
of Employer.
2.1 In addition to his employment responsibilities, Employee agrees to
assume whatever corporate office Employer's Board of Directors may designate
from time to time, subject to Employee's reasonable satisfaction that the
indemnification of officers of Employer as provided for in Employer's articles
of incorporation and bylaws at the time of such designation are at least as
protective as such indemnification as is provided in Employer's articles of
incorporation and bylaws as of the date hereof.
2.2 Employee agrees to devote his full-time efforts to his duties with
Employer and further agrees that Employee will not directly or indirectly engage
or participate in any activities while employed with Employer that would
conflict with the best interests of Employer.
2.3 Employee's obligation to devote his full-time, attention and energy to
the business of Employer shall not be construed as preventing Employee from
investing his assets so long as any such investment will not require any
services on the part of Employee in the operation of the affairs of the
company(ies) or business(es) in which such investment(s) is (are) made.
3. EMPLOYER'S REIMBURSEMENTS. Employer agrees to reimburse Employee for all
reasonable business expenses incurred by Employee while on Employer's business,
in accordance with Employer's polices as may be in effect from time to time.
Employee shall maintain such records as will be necessary to enable Employer to
properly deduct such items as business expenses when computing Employer's
federal income tax.
4. COMPENSATION.
4.1 SALARY. For all services rendered by Employee under this Agreement,
Employer shall pay Employee an annual salary of $85,000 for the first year
hereunder, $90,000 for the second year, and $95,000 for the third and final year
of the term hereof. Employee shall be paid this salary in equal periodic
installments consistent with Company's normal payroll procedures, minus all
lawful and agreed upon payroll deductions.
4.2 OPTION GRANT. Employee shall also be granted, upon the commencement
of his employment and subject to approval or ratification of Employer's Board of
Directors, a stock option to purchase 3,000 shares of Common Stock of Employer
(the "Option Grant"). The exercise price, vesting schedule and other terms and
-1-
<PAGE>
provisions of the Option Grant shall be as reflected in Employer's standard form
Stock Option Agreement and the terms and provisions of Employer's then current
Stock Option Plan for employees.
5. OTHER AGREEMENTS.
5.1 CONFIDENTIAL INFORMATION AND ASSIGNMENTS OF INVENTION AGREEMENT.
Concurrent with the execution and delivery of this Agreement, Employee agrees to
enter into and deliver to Employer Employer's standard Confidential Information
and Assignment of Inventions Agreement.
5.2 COVENANT NOT TO COMPETE. In view of the unique value to Employer of
Employee's services, during his employment with Employer, and for a period of
twenty four (24) months after termination of his employment, Employee will not
directly or indirectly: (a) as principal, owner, employee, or agent, engage in
any business involving Internet, Intranet or Extranet based products and
services using relational database techniques and database compilation
techniques for companies located in the United States; (b) solicit for
employment or employ any employee of Employer; and (c) solicit business from
clients of Employer; provided, however, that Subsections (a) and (b) of this
Section 5.2 shall be of no force or effect if that certain merger transaction
between Employer and Pacific Analysis, Inc., effective on or about the date
hereof, is rescinded by agreement of the parties or by court order.
6. FRINGE BENEFITS. Employer and Employee agree that during the term of this
Agreement, Employee shall be entitled to participate in all fringe benefits and
incentive compensation plans as may be authorized and adopted from time to time
by the Employer for the benefit of employees generally and for which Employee is
eligible. It is understood and agreed that, as of the date hereof, Employee
shall, for purposes of such fringe benefits and incentive compensation plans,
except as otherwise required by law, be deemed to have been employed by Employer
for 39 months.
7. VACATION. Employee shall be entitled to 17 days paid vacation per calendar
year. Such time shall be accounted for pursuant and subject to Employer's
vacation policies of general applicability.
8. CONFIDENTIAL INFORMATION. It is understood and agreed that as a result of
Employee's employment hereunder, Employee will be acquiring and making use of
confidential information about Employer's business as well as financial
information. Employee agrees that he will respect the confidences of Employer
and will not at any time during or within one (1) year following the period of
his employment hereunder, directly or indirectly divulge or disclose for any
purpose whatsoever or use for his own benefit, any confidential information that
has been obtained by or disclosed to Employee as a result of his employment
hereunder. "Confidential information" as used herein does not include
information that is in the public domain and information received by Employee
from third parties who have the right to disseminate the information. The
covenant of this Section 8 is in addition to and in no way qualifies or limits
the terms of the Confidential Information and Assignment of Inventions Agreement
referred to in Section 5 above.
9. TERMINATION. This Agreement shall be terminated upon the occurrence of any
one of the following events:
9.1 Death of Employee.
9.2 If Employee shall have been incapacitated from illness, accident or
other disability and unable to perform his normal duties hereunder for a
cumulative period of three (3) months in any period of six (6) consecutive
months, upon Employer or Employee giving the other party not less than thirty
(30) days' written notice. In the event of such termination, Employee shall be
entitled to all benefits due Employee under any accident, sickness, disability,
health or hospitalization plan or insurance policy of Employer, if any, then in
effect.
9.3 Expiration of this Agreement or any renewal or extension thereof.
9.4 By Employee, upon Employer receiving ninety (90) days' notice as
provided in Section 11.3 of this Agreement.
-2-
<PAGE>
9.5 By Employer for cause. For purposes of this subsection, "cause"
includes the following:
(a) Breach by Employee of any material provision of this Agreement,
which breach is not cured within thirty (30) days notice as provided
in Section 11.3 of this Agreement (or, where such breach is not
curable within 30 days, Mr. Poole has not taken adequate steps to
commence cure within a reasonable time) ;
(b) Material violation by Employee of any statutory or common law
duty of loyalty to Employer; or
(c) Personal or professional conduct of Employee, which, in the
reasonable and good faith judgment of Employer, after a thorough
investigation, injures or tends to injure the reputation of Employer
or otherwise adversely affects the interests of Employer. Such
conduct may include, but is not limited to, dishonesty, chronic
absenteeism, alcoholism, drug addiction, and conviction of a felony or
misdemeanor involving moral turpitude.
9.6 Upon the cessation of business by Employer; provided, however, that
the confidentiality provisions contained in Section 8 of this Agreement and the
provisions of the Confidential Information and Assignment of Inventions
Agreement referred to in Section 5 above shall continue in full force and effect
according to its terms, until Employer or its successor(s) in interest liquidate
as a going concern.
9.7 Upon the voluntary retirement of Employee.
10. EFFECT OF TERMINATION. Upon termination of Employee's employment, Employer
agrees to pay Employee all salary or other remuneration which is due and owing
to Employee as of the date of termination, less legal deductions or offsets
Employee may owe to Employer for such items as salary advances or loans.
Employee agrees that his signature on this Agreement constitutes his
authorization for all such deductions. Employee agrees to return all of
Employer's property of any kind which may be in Employee's possession. In the
event of termination of this Agreement, the terms and provisions of this
Agreement shall also terminate, with the exception of the confidentiality
provision contained in Section 8 and the provisions of the Noncompetition
Agreement and the Confidential Information and Assignment of Inventions
Agreement referred to in Section 5 above. Such provisions shall continue in
full force and effect according to their terms.
11. CONSTRUCTION OF AGREEMENT.
11.1 ESSENTIAL TERMS AND MODIFICATION OF AGREEMENT. It is understood and
agreed that the terms and conditions described in this Agreement and the
agreements expressly referenced herein constitute the essential terms and
conditions of the employment arrangement between Employer and Employee, all of
which have been voluntarily agreed upon. Employer and Employee agree that there
are no other essential terms or conditions of the employment relationship that
are not described or referenced within this Agreement, and that any change in
the essential terms and conditions of this Agreement or any such referenced
agreement will be written down in a supplemental agreement which shall be signed
by both Employer and Employee before it is effective.
11.2 SEVERABILITY. If any term, covenant, condition or provision of this
Agreement or the application thereof to any person or circumstance shall, at any
time, or to any extent, be determined invalid or unenforceable, the remaining
provisions hereof shall not be affected thereby and shall be deemed valid and
fully enforceable to the extent permitted by law.
11.3 NOTICES. Any notice hereunder shall be sufficient if in writing and
delivered to the party or sent by certified mail, return receipt requested and
addressed as follows:
-3-
<PAGE>
(a) If to Employer: fine.com Corporation
1118 Post Avenue
Seattle, WA 98101-2915
Attn: Jim Chamberlin, CFO
(b) If to Employee: William G. Poole, Jr.
1840 Killarney Way S.E.
Bellevue, WA 98004
Either party may change the address herein specified by giving to the other,
written notice of such change.
11.4 GOVERNING LAW. This Agreement is made and shall be construed and
performed under the laws of the State of Washington.
11.5 WAIVER OF AGREEMENT. The waiver by Employer of a breach of any
provision of this Agreement by Employee shall not operate or be construed as a
waiver by Employer of any subsequent breach by Employee.
11.6 CAPTIONS. The captions and headings of the Sections of this Agreement
are for convenience and reference only and are not to be used to interpret or
define the provisions hereof.
11.7 ASSIGNMENT AND SUCCESSORS. The rights and obligations of Employer
under this Agreement shall inure to the benefit of and be binding upon the
successors and assigns of Employer. The rights and obligations of Employee
hereunder are nonassignable. Employer may assign its rights and obligations to
any entity in which Employer or a company affiliated to Employer, has a majority
ownership interest.
DATED this 13th day of February, 1998.
EMPLOYEE: EMPLOYER:
William G. Poole, Jr. fine.com Corporation
/s/ William G. Poole, Jr. /s/ Daniel M. Fine
- - --------------------------- --------------------------
William G. Poole, Jr. By Daniel M. Fine
Its: CEO and President
-4-
<PAGE>
[LOGO]
SEAN P. BRENNAN
VICE PRESIDENT
CORPORATE BANKING
1420 Fifth Avenue, 11th Floor
Post Office Box 720 (WWH-733)
Seattle, Washington 98111-0720
206\344-5529
206\344-2332 FAX
April 22, 1999
Fine.Com International Corp.
1525 Fourth Avenue
Suite 800
Seattle, WA 98101
Attention: Daniel Fine, CEO
Tim Carroll, EVP Finance
Dear Gentlemen:
I am pleased to confirm U.S. Bank has agreed to extend a Revolving
Credit Facility to Fine.Com International subject to, but not limited
to, the following terms and conditions.
---------------------------------------------
FACILITY NO. 1 - REVOLVING LINE OF CREDIT
---------------------------------------------
BORROWER: Fine.Com International Corp.
AMOUNT: $750,000
TYPE OF FACILITY: Revolving Line of Credit - fund cash flow cycle
USE OF PROCEEDS: Advances under the line of credit shall be used to
fund ongoing operating requirements.
INTEREST RATE: PRIME RATE OPTION
U.S. Bank Prime plus 0.25 percent per annum.
All rates are calculated on a 360 day basis for
actual days outstanding.
LOAN FEES: Upfront commitment fee - $2,500.00
<PAGE>
FINE.COM INTERNATIONAL
APRIL 22, 1999
PAGE 2
REPAYMENT
AND EXPIRY: Borrower shall pay U.S. Bank an amount equal to all
accrued interest on the revolving line on the 1st
day of each month during the term thereof. The line
will mature on 9/1/99, at which time all outstanding
principal, accrued interest, and other charges shall
be paid in full.
COLLATERAL: U.S. Bank shall obtain a first priority security
interest in all of Borrowers accounts receivable and
deposit accounts.
BORROWING BASE: The aggregate outstanding principal amount of
advances under the revolver shall not exceed an
amount equal to the sum of 75% of eligible accounts
receivable, 0-90 days DOI.
GUARANTOR: None
TERMS AND CONDITIONS
CONDITIONS
PRECEDENT: USB's extension of this financial accommodation is
subject to the fulfillment of a number of
conditions. Such conditions include, but are not
necessarily limited to, the following:
1) CREDIT DOCUMENTS. At closing, Borrower shall
execute such documents as U.S. Bank, in its
discretion, deems necessary in order to document the
Facilities and render itself secure. The credit
documents will contain terms and conditions in
addition to those set forth herein. Among the
documents to be executed at closing will be a loan
agreement, promissory note, authorizing resolutions,
security agreements, and financing statements.
2) Receipt of $2,500.00 upfront commitment fee.
REPORTING
REQUIREMENTS: Among the reporting requirements that will be set
forth in the credit documents, will be the following:
<PAGE>
FINE.COM INTERNATIONAL
APRIL 22, 1999
PAGE 3
a) Monthly financial statements, including a
balance sheet and statement of income, to be
received within 30 days of the end of each month.
b) Monthly financial reports which shall
include an accounts payable and accounts receivable
aging, to be received within 20 days of the end of
each month.
c) In the event an outstanding balance exists
under the credit facility, monthly borrowing base
certificate are due within twenty days after the end
of each month by which Borrower calculates and
certifies that the aggregate outstanding principal
amount of advances under the revolving line of
credit does not exceed an amount equal to the sum of
75% of eligible Accounts Receivable.
d) An annual unqualified audit of Borrower's
financial statements (including statement of cash
flows) to be received within 90 days of the end of
the Borrower's fiscal year end, which audit shall
verify compliance with provisions of the credit
documents, and shall be delivered to U.S. Bank
together with the auditor's management letter.
e) Monthly certifications as to compliance
with all terms and conditions of the credit
documents, to be delivered within 30 days of the end
of each month, a statement that no default or event
of default under the credit agreement existed during
such month, and a calculation of all financial
covenants set forth in the credit agreement. In
addition, the Borrower shall confirm month end cash
and cash equivalent balances domiciled with U.S.
Bank's Investment Department.
f) Monthly operating reports covering such
information as may be reasonably requested by U.S.
Bank within 30 days of the end of each month.
g) Fiscal year budgets to be submitted by
within 60 days after fiscal year end to include
monthly profit and loss statements, balance sheet,
statement of cash flows and capital expenditure
budget.
<PAGE>
FINE.COM INTERNATIONAL
APRIL 22, 1999
PAGE 4
FINANCIAL
COVENANTS: 1) Borrower shall maintain a minimum Working
Capital of $1,400,000, measured monthly (All cash
held with U.S. Bank's Investment Department shall be
included in the working capital calculation).
2) Borrower shall maintain a minimum Tangible Net
Worth of $2,850,000 measured monthly.
3) Net losses exceeding $300M in any one fiscal
quarter shall constitute a technical default,
initial testing commencing with first quarter ending
4/30/99.
4) Borrower shall not: a) loan, invest in or
advance money or assets, b) purchase, create or
acquire any interest in any other enterprise or
entity, or c) incur any obligation as surety or
guarantor other than in ordinary course of business.
5) Except for trade debt incurred in the normal
course of business and indebtedness to U.S. Bank
contemplated by this commitment, Borrower shall not
incur or assume indebtedness for borrowed money,
including capital leases without written consent of
U.S. Bank.
MISCELLANEOUS: 1) DEPOSITORY ACCOUNTS. All depository and
investment accounts shall be domiciled at U.S. Bank
as a condition of the Revolving Credit Facility.
2) PRIME RATE. U.S. Bank's Prime Rate is that
rate of interest announced or published by U.S. Bank
from time to time as its "Prime Rate," but is not
necessarily the lowest or best rate charged to any
classification of U.S. Bank customers. The Prime
Rate is a floating rate, changes in which shall be
effective on the day announced or published by U.S.
Bank. The credit documents shall provide for default
interest rates and late fees.
3) APPLICABLE LAW. Washington law shall apply to
this transaction.
<PAGE>
FINE.COM INTERNATIONAL
APRIL 22, 1999
PAGE 5
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND
CREDIT, OR TO FORBEAR FROM ENFORCING REPAYMENT OF A DEBT ARE
NOT ENFORCEABLE UNDER WASHINGTON LAW.
U.S. BANK NATIONAL ASSOCIATION
BY /s/ Sean P. Brennan
- - ----------------------------------
TITLE Vice President
- - ----------------------------------
PLEASE SIGNIFY YOUR ACCEPTANCE BY SIGNING BELOW.
ACCEPTED BY
FINE.COM INTERNATIONAL CORPORATION
BY /s/ Tim Carroll
- - ----------------------------------
TITLE /s/ Tim Carroll EVP
- - ----------------------------------
DATE 4/22/99
- - ----------------------------------
<PAGE>
[LOGO]
SEAN P. BRENNAN
VICE PRESIDENT
CORPORATE BANKING
1420 Fifth Avenue, 11th Floor
Post Office Box 720 (WWC-733)
Seattle, Washington 98111-0720
206\344-5529
206\344-2332 FAX
April 22, 1999
Fine.Com International Corp.
1525 Fourth Avenue
Suite 800
Seattle, WA 98101
Attention: Daniel Fine, CEO
Tim Carroll, EVP Finance
Dear Gentlemen:
We are in receipt of Fine.Com International's (FCI) January 31, 1999
fourth quarter ended and fiscal year end financial statements. Continued
operating losses and expenses associated with the closure of FCI's
subsidiary in the United Kingdom resulted in non-compliance with certain
financial covenants governing our credit relationship. This letter
formally recognizes that FCI was in technical default with certain terms
and conditions defined in the Loan Agreement executed on 1/4/99.
Non-compliance with financial covenants include:
Minimum Working Capital - $2,050M
Actual Working Capital as of 1/31/99 - $1,684M
Minimum Tangible Net Worth - $3,425M
Actual Tangible Net Worth as of 1/31/99 - $3,123M
Effective April 2, 1999 U.S. Bank waives the defaults and recasts
certain financial covenants governing the Revolving Credit Commitment
as defined in the April 22, 1999 Commitment Letter.
Sincerely,
/s/ Sean P. Brennan
Sean P. Brennan
Vice President
ACKNOWLEDGED BY
FINE.COM INTERNATIONAL CORPORATION
BY /s/ Tim Carroll
----------------------------------
TITLE /s/ Tim Carroll EVP
----------------------------------
DATE 4/22/99
----------------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JAN-31-1999 JAN-31-1998
<PERIOD-START> FEB-01-1998 FEB-01-1997
<PERIOD-END> JAN-31-1999 JAN-31-1998
<CASH> 1,521,301 1,571,861
<SECURITIES> 0 1,593,032
<RECEIVABLES> 2,060,694 1,152,354
<ALLOWANCES> 108,000 55,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 3,578,911 4,638,554
<PP&E> 2,107,452 1,019,223
<DEPRECIATION> 693,114 341,663
<TOTAL-ASSETS> 5,070,099 7,965,229
<CURRENT-LIABILITIES> 1,895,063 1,329,952
<BONDS> 0 0
0 0
0 0
<COMMON> 6,906,409 6,737,929
<OTHER-SE> (3,783,601) (173,088)
<TOTAL-LIABILITY-AND-EQUITY> 5,070,099 7,965,229
<SALES> 6,133,275 6,023,402
<TOTAL-REVENUES> 6,133,275 6,023,402
<CGS> 4,163,513 3,901,570
<TOTAL-COSTS> 4,163,513 3,901,570
<OTHER-EXPENSES> 5,776,428 2,243,480
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 29,301 63,725
<INCOME-PRETAX> (3,667,842) (8,838)
<INCOME-TAX> (102,019) 46,567
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,565,823) (55,405)
<EPS-PRIMARY> (1.34) (0.03)
<EPS-DILUTED> (1.34) (0.03)
</TABLE>
