<PAGE> 1
Filed Pursuant to Rule 424(b)(4)
Registration No. 333-12219
1,000,000 SHARES
[HOMECOM COMMUNICATIONS LOGO]
COMMON STOCK
---------------------
All of the shares of Common Stock offered hereby are being issued and sold
by HomeCom Communications, Inc. (the "Company"). Prior to this offering, there
has been no public market for the Common Stock of the Company. See
"Underwriting" for a discussion of the factors considered in determining the
initial public offering price. Up to 116,000 shares of Common Stock are being
offered to existing stockholders, employees, officers and directors of the
Company at the initial public offering price. See "Underwriting." The Common
Stock has been approved for listing on The Nasdaq SmallCap(TM) Market under the
trading symbol "HCOM."
---------------------
SEE "RISK FACTORS" COMMENCING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS(1) COMPANY(2)
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share......................... $6.00 $0.48 $5.52
- -------------------------------------------------------------------------------------------------------------
Total(3).......................... $6,000,000 $480,000 $5,520,000
=============================================================================================================
</TABLE>
(1) Excludes (i) a non-accountable expense allowance payable to the Underwriter
equal to 2% of the gross proceeds of this offering and (ii) warrants to be
issued to the Underwriter to purchase up to 100,000 shares of Common Stock.
In addition, the Company has agreed to indemnify the Underwriter against
certain civil liabilities, including liabilities under the Securities Act
of 1933, as amended. See "Underwriting."
(2) Before deducting expenses of the offering (including the non-accountable
expense allowance) estimated at $797,500.
(3) The Underwriter has been granted a 30-day option to purchase up to an
additional 150,000 shares of Common Stock from the Company, solely to cover
over-allotments, if any, on the same terms and conditions as the shares
offered hereby. If the Underwriter exercises such option in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $6,900,000, $552,000 and $6,348,000, respectively. See
"Underwriting."
The shares of Common Stock are offered by the Underwriter when, as and if
delivered to and accepted by the Underwriter, subject to its right to reject
orders in whole or in part and to certain other conditions. It is expected that
delivery of the certificates representing the shares of Common Stock will be
made on or about May 12, 1997 at the offices of Ladenburg Thalmann & Co. Inc.,
New York, New York.
LADENBURG THALMANN & CO. INC.
The date of this Prospectus is May 6, 1997.
<PAGE> 2
[OUTSIDE LEFT FLAP OF FOLDOUT]
HomeCom's logo appears across the top of the page, consisting of the word
"HomeCom" in reverse bold print with the word "Communications" spelled out in
normal text underneath. Adjacent to the Company's name is a sphere with a line
that increases in thickness and wraps around the sphere ending in an arrowhead
across the front of the sphere.
The page is divided into two parts, (i) the left two-thirds of the page,
and (ii) the right one-third of the page.
At the top of the left two-thirds are the captions "Software products" and
"The 'Personal Internet Banker' Application."
DESCRIPTION OF PHOTOGRAPH:
To the upper left below the caption are two computer screens showing
examples of HomeCom's Personal Internet Banker application, each consisting of a
computer screen window with graphical text and menu buttons appearing throughout
the body of the page. The text and menu options offer a variety of information
and interactive choices for the user of the Personal Internet Banker software.
The first page contains the text "Welcome to your Personal Internet Banker" and
indicates the availability of "worldwide 24-hour access to your finances." This
screen also prompts entry of a user number and a password. The second screen
indicates several Personal Internet Banker reminders, including account numbers;
indicates certain information with respect to the individual's banking
information and portfolio; and indicates several windows in which CD interest
rates of the bank are displayed. The picture prompts graphical user menu choices
for utilizing additional features in the application, including account
inquiries, payments, transfer fund requests, loan requests, portfolio, email and
others.
Below the pictures are the following quotations:
-- The intelligent agent technology of the Personal Internet Banker
utilizes a software agent that can answer the consumer's personal
finance questions
-- Consummate a variety of financial transactions, including buying
stocks, accessing checking account balances, processing a home loan,
and buying insurance online
-- Financial institutions could deploy this application to market
financial products and services to their customer base with precision
one-to-one marketing as the Personal Internet Banker can store the
financial history and preferences of the consumer
In the center of the left two-thirds of the page is the caption "HomeCom's
Post On The Fly(TM) Conference Highlights."
DESCRIPTION OF PHOTOGRAPH:
To the bottom left and right of the caption are two computer screens
showing examples of HomeCom's Post On The Fly(TM) Conference Web pages, each
consisting of a computer screen window with graphical text and menu buttons
appearing throughout the body of the Web page. The text and menu options offer a
variety of information and interactive choices for the Web site user.
Under the illustrations is the following text:
-- Conferences are fully searchable on conference title, conference
description, subject, author and text
-- Upload and attach any type of file to any posted text
-- Conferences can be moderated manually by the conference
administrator, or automatically by the software, or unmoderated
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<PAGE> 3
-- The 'private conference' option keeps your sensitive posts secure
using complex Triple DES encryption
-- Full Web-based administration allows online creation, modification,
and deletion of conferences, messages, users and subadministrators
On the top of the right one-third of the page is the heading "Custom
applications."
The right one-third of this page indicates information with respect to the
Company's Custom Applications.
DESCRIPTION OF PHOTOGRAPH:
Under the heading is an illustration of a computer screen showing a Web
site for Real Estate Loan Services, consisting of a computer screen window with
various menu options relating to the Real Estate Loan Services Automated Order
and Delivery Service program.
DESCRIPTION OF DIAGRAM:
Immediately beneath the illustration is a schematic drawing of a HomeCom
product ordering application solution using names, circles and arrows to show
the relationship between real estate professionals and customer product orders,
the Company's Web Server application and various service providers.
Under the diagram is the caption "Norwest." Beneath the caption is the
following text: "Using a Sybase System database, HomeCom Communications built a
complex Internet-based service called "The Automated Order and Delivery Service
for Real Estate Loan Services." RELS, a national real estate organization, is a
subsidiary of Norwest Corporation, the nation's largest mortgage origination
firm."
DESCRIPTION OF PHOTOGRAPH:
Immediately beneath the text is an illustration of a Web page for Norwest
Insurance Inc. which includes the Norwest logo and the slogan "Leverage Our
Technology And Expertise."
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER
SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
---------------------
ii
<PAGE> 4
[INSIDE LEFT FLAP OF FOLDOUT]
The page is divided into three parts, (i) the left two-thirds of the page,
(ii) the top three quarters of the right one third, and (iii) the bottom quarter
of the right one-third. In the middle of the left two-thirds of the page is the
large caption "Web site creation." On the top of the left two-thirds of the page
is the caption "Synovus," and on the bottom is the caption T-HQ Games."
Under the caption "Synovus" is the text "Electronic annual reports are only
a small fragment of what has become one of the most interactive financial sites
on the Internet."
DESCRIPTION OF PHOTOGRAPH:
Immediately to the left of the caption "Synovus" is an illustration of a
Synovus Financial Corp. Web page. The Web page includes a field showing a
collage of items including a key, a magnifying glass, a newspaper, and a map of
the Southeastern United States, with the terms "Corporate Profile,"
"Financials," "Request Info.," "Acquisitions," "Locator," "Stock Quote,"
"Shareholder Activity," "Search," and "Analyst Book" throughout the collage.
Beneath the collage is an illustration of a stock quote "Ticker."
DESCRIPTION OF PHOTOGRAPH:
Immediately to the left of the caption "Web Site Creation" is an
illustration of a Web page with the title "Stock Quotes." Beneath the title is a
graph depicting stock prices over a two hundred day period for a company with
the ticker symbol "SNV."
Beneath the caption "T-HQ Games" is the following text:
-- Online catalog of game software
-- Interactivity through contests and "game tips"
-- Strong visual display of packaging and game content
DESCRIPTION OF PHOTOGRAPH:
Immediately to the right of the caption "T-HQ Games" is an illustration of
a Web site for T-HQ Inc. showing its name and graphic illustrations of the names
of various game software, such as "ROBO PIT," "BASS MASTERS," "ALONE IN THE
DARK," "IN THE HUNT," and "OLYMPIC SUMMER GAMES."
At the top right one-third of the page is the heading "The interactive
environment."
DESCRIPTION OF PHOTOGRAPH:
Under the caption is an illustration of a Web site for the Rainforest Cafe,
showing a variety of wild animals, a menu option entitled "Recipe," and text
describing the features available on the Web site.
Below the photograph is the caption "Rainforest Cafe."
Under the caption is the following text:
-- An online experience of the sites and sounds of the Rainforest Cafe
-- Creating an audience for a publicly traded restaurant company
-- A forum for locating restaurants and providing shareholder
information
At the bottom quarter of the right one-third of the page are the captions
"Security issues" and "HomeCom's Security Division."
iii
<PAGE> 5
Under the headings is the following text:
HomeCom addresses the three essential aspects of security:
-- Privacy - protecting against information "leaks"
-- Integrity - ensuring that stored information has not been and cannot
be altered
-- Availability - ensuring that information is readily accessible by
authorized users
iv
<PAGE> 6
[INSIDE RIGHT FLAP OF FOLDOUT]
The page is divided vertically into a left two-thirds portion and a right
one-third portion. On the top of the left portion of the page is the heading
"Meeting client expectations."
On the left side of the page underneath the above caption is the caption
"SouthTrust."
Underneath the caption "SouthTrust" is the following text:
-- Another example of the broadening base of clients in the financial
services area
-- A vehicle for distributing shareholder information
-- Quick access to banking information such as credit, account and trust
services
DESCRIPTION OF PHOTOGRAPH:
To the right of the text is an illustration of a Web site for SouthTrust
Bank showing a textual description of SouthTrust and services offered by
SouthTrust. At the bottom of the illustration are fields labeled "Home,"
"Locations," "Request Information," "Account Services," "Credit Services,"
"Business Services," "Investor Relations," and "Trust Services."
In the middle of the left two-thirds of the page is the caption "Brinker."
Under the caption is the following text: "Utilizing the power of the
Internet to collect Human Resources, create visibility and reinforce brand
identity."
DESCRIPTION OF PHOTOGRAPH:
Immediately to the left of the text is an illustration of a Web page for
Brinker International showing the logo for Brinker International and text
describing services available on the Web page.
DESCRIPTION OF PHOTOGRAPH:
Immediately beneath the Brinker International illustration is an
illustration of a Web site for Chili's Grill & Bar. This illustration includes
the logo for Chili's Grill & Bar above the text "Like No Place Else!" and a
graphic image of a baseball cap with the name "Chili's" written across its
front.
The right one-third of the page contains the heading "Accolades and
innovations."
At the top of the right one-third of this page is the following text:
"HomeCom forges technology and partnerships to perform state-of-the-art live Web
broadcasts -- achieving another Internet innovation."
DESCRIPTION OF PHOTOGRAPH:
At the top of the right one-third of the page, and below the text just
described, is an illustration of a Web page for the 1997 Codie Awards. The
illustration includes the text: "1997 Codie Awards, Excellence in Software
Awards, Accept the Challenge." The Web page indicates a graphical presentation
of the Codie Webcast, with prompts for a live broadcast, an indication of
sponsors, and technical information.
DESCRIPTION OF PHOTOGRAPH:
Immediately beneath the above heading "Accolades and innovations" is an
illustration of a HomeCom Web site with the captions "HomeCom Customer Showcase"
and "HomeCom and its clients have won virtually every major award for Web site
creation . . ." This Web site contains images of general industry awards won by
Web sites created by the Company for several of its clients.
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<PAGE> 7
Under the illustration is the following text: "HomeCom and its clients have
won several awards for Web sites created by HomeCom, including:"
-- MGM-UA "Top 10"
-- Point "Top 5% of All Web Sites"
-- Magellan "Four Star Site"
-- Net Guide "Gold Site"
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<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and the related notes thereto appearing
elsewhere in this Prospectus. In this Prospectus, the term "Company" or
"HomeCom" refers to HomeCom Communications, Inc., a Delaware corporation.
Investors should carefully consider the information set forth under the heading
"Risk Factors." Unless otherwise indicated, the information in this Prospectus
gives effect to a 93.07-for-1 stock split and recapitalization of the Company's
Common Stock from no par value to $.0001 par value per share, and assumes no
exercise of the Underwriter's over-allotment option. See "Underwriting." Certain
technical terms used in this Prospectus are defined in the Glossary on Page 54.
THE COMPANY
HomeCom develops and markets specialized software applications and products
and provides services that enable businesses to use the Internet and Intranets
to obtain and communicate important business information, conduct commercial
transactions and improve business productivity. HomeCom provides
Internet/Intranet solutions in five areas: (i) customized software applications
design, development and integration; (ii) World Wide Web site development; (iii)
Internet outsourcing services; (iv) specialized Internet-enabled software
products; and (v) security consulting and integration services. HomeCom's
objective is to be a leading provider of business communications solutions using
Internet standard protocol technologies.
According to International Data Corporation ("IDC"), the number of Internet
users with Web access increased from 1.1 million in 1994 to 8.3 million in 1995
and was estimated to have reached 31.4 million by the end of 1996. IDC estimates
that the number of individuals worldwide with access to the Internet will reach
approximately 200 million by the end of 1999. The explosive growth of the
Internet and World Wide Web has led to the rapid development of increasingly
sophisticated and advanced TCP/IP-enabled software applications such as Web
browsers and HTML compatible server software. These Internet tools enable users
to obtain and communicate information more efficiently and effectively.
The Company believes that there is a rapidly growing need for businesses to
expand and integrate their existing information and communications systems to
take advantage of the global communications framework and advanced graphics
capabilities of Internet-enabled systems. The Company also believes that
businesses today face a paradigm shift from proprietary protocol based local
area networks and wide area networks to Internet-enabled global communications
systems. HomeCom intends to capitalize on these changes by providing a suite of
integrated products and services.
HomeCom employs a team of highly trained Internet/Intranet software
developers and multimedia and graphics professionals who design and develop
specialized Internet/Intranet software applications. These applications enable
companies to obtain and communicate vital business information, such as sales
reports, order status systems, employee directories and client account
information. The Company works closely with its customers to analyze and design
Internet-based software solutions that facilitate the interactive exchange of
business information. Through its experience in designing custom Internet
solutions for businesses, HomeCom believes that it has developed and continues
to develop in-depth knowledge concerning industry-specific Internet applications
and requirements. The Company plans to leverage this knowledge to develop
additional Internet-enabled applications for targeted vertical industries,
including banking and financial services, retailing and entertainment.
The Company believes that it has established a reputation as a provider of
sophisticated interactive Web sites. The Company has developed more than 100 Web
sites for clients in many diverse industries, including sites for AT&T, Synovus,
SouthTrust Bank, Norwest, Rainforest Cafe, Brinker International, Executrain,
T-HQ and AFLAC. The Company has a highly trained staff able to
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<PAGE> 9
design Web sites ranging from basic "inquiry only" sites to complex, interactive
sites capable of providing on-line commerce, database integration and
manipulation and sophisticated graphics, animation, sound and video. The Company
uses its proprietary Post On The Fly(TM) software in designing and developing
many of its Web sites.
HomeCom also provides Internet outsourcing services and presently hosts
more than 1,600 Web sites for clients in approximately 45 countries. HomeCom
establishes and maintains the resources and facilities necessary to create and
support a customer's Internet server. As a provider of Internet outsourcing
services, HomeCom (i) advises its clients as to the appropriate hardware,
including servers and routers, and software necessary to create an Internet
server; (ii) coordinates the purchase of this hardware and software, including
operating system and Internet server software; and (iii) provides the facilities
to house and maintain the server. HomeCom provides network management, including
all network functions, the maintenance of an environmentally conditioned, secure
facility and access to the Internet.
The Company has developed advanced software products that it presently
includes in its custom applications and that it intends to develop further for
retail sale. The Company has developed software, called Post On The Fly(TM),
which enables non-technical users to add, retrieve and update information
through the Internet or an Intranet using standard browser software. Post On The
Fly(TM) Conference permits intuitive and easy conferences among employees,
customers and business partners. The product utilizes database technology to
archive user-inputted data, ideas and innovations for later retrieval and
review. Post On The Fly(TM) Store facilitates the creation and updating of an
on-line store or catalog. Post On The Fly(TM) Q&A is being designed to
facilitate the creation and updating of examinations and training courses in
question and answer format. Post On The Fly(TM) Publisher is being designed to
permit the publisher of a magazine or newsletter to design an electronic
publication layout where reporters, editors and writers can insert articles,
graphics and other content.
HomeCom is also developing a suite of software modules known as the
Personal Internet Banker(TM). Under the terms of the Company's business partner
agreement with Unisys Corporation ("Unisys"), HomeCom's suite of Personal
Internet Banker(TM) software will be marketed as optional software available to
purchasers of Unisys' Computer Systems Group enterprise server hardware. At the
heart of HomeCom's banking applications suite is its Personal Internet
Banker(TM) software, a scaleable financial software package that maintains a
customer's personal banking history and preferences for Internet banking.
HomeCom recently acquired an Internet security division to provide security
solutions for businesses connecting to the Internet. The Company plans to
develop and integrate advanced value-added security features into its custom
software applications and products and to provide consulting and integration
services to companies seeking to communicate and transact business securely over
the Internet.
The Company markets its products and services through its direct sales
force, print advertising and its own Web site. The Company also generates
customer leads through its business partner relationships with leading
technology companies such as AT&T Corporation ("AT&T"), BBN Planet Corporation
("BBN Planet"), Microsoft Corporation ("Microsoft"), Netscape Corporation
("Netscape"), Oracle Corporation ("Oracle"), Sybase, Inc. ("Sybase") and Unisys.
The Company intends to become a leading provider of Internet-standard
business communications solutions by: (i) increasing marketing of
industry-specific Internet-enabled applications; (ii) expanding software product
development and distribution; (iii) developing advanced security services; and
(iv) acquiring Internet-related software and services companies.
The Company's executive offices are located at 3535 Piedmont Road, Building
14, Suite 100, Atlanta, Georgia 30305. The Company's telephone number is
404/237-4646 and its Web site is located at http://www.homecom.com.
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THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company......................... 1,000,000 shares.
Common Stock to be outstanding after the
offering(1)............................................... 2,956,396 shares.
Use of proceeds............................................. For repayment of indebtedness,
general corporate purposes
(principally additions to working
capital and continued product
development) and possible future
acquisitions. See "Use of Proceeds."
Nasdaq SmallCap(TM) Market symbol........................... HCOM
</TABLE>
- ------------------------------
(1) Includes 33,333 shares of Common Stock issued immediately prior to the date
of this Prospectus in repayment of $200,000 in outstanding indebtedness. See
"Capitalization." Excludes (i) 300,000 shares reserved for issuance under
the Company's Stock Option Plan, of which options to acquire 159,866 shares
of Common Stock are issuable upon the exercise of outstanding options
granted at a weighted average exercise price of $6.22 per share, (ii)
300,000 shares reserved for issuance under the Company's Non-Employee
Directors Plan, of which options to acquire 150,000 shares of Common Stock
are issuable upon the exercise of outstanding options granted at an exercise
price of $6.50 per share, (iii) 150,000 shares reserved for issuance under
the Company's Stock Purchase Plan, no shares having been issued thereunder,
and (iv) 100,000 shares of Common Stock reserved for issuance upon the
exercise of warrants to be granted to the Underwriter and its designees,
exercisable at $7.20 per share (the "Underwriter's Warrants"). See
"Management - Incentive Plans," "Description of Capital Stock" and
"Underwriting." Also excludes shares that may be issued in connection with
the Company's August 1996 acquisition of HomeCom Internet Security Services,
Inc. See "Certain Transactions."
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<PAGE> 11
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The Summary Financial Data below have been taken or derived from the
historical financial statements and other records of the Company, and should be
read in conjunction with the Financial Statements and the Notes thereto included
elsewhere in this Prospectus. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 2 YEAR ENDED
(INCORPORATION) DECEMBER 31,
TO DECEMBER 31, ------------------------
1994 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
Net sales........................................ -- $ 327,574 $2,298,855
Cost of sales.................................... -- 59,871 675,347
---------- ---------- ----------
Gross profit..................................... -- 267,703 1,623,508
Operating expenses............................... $ 17,452 269,527 2,204,373
---------- ---------- ----------
Operating loss................................... (17,452) (1,824) (580,865)
Interest expense................................. -- 3,469 51,272
Other expense (income), net...................... -- 147 (6,554)
---------- ---------- ----------
Loss before income tax benefit................... (17,452) (5,440) (625,583)
Income tax benefit(1)............................ -- -- --
---------- ---------- ----------
Net loss......................................... $ (17,452) $ (5,440) $ (625,583)
========== ========== ==========
UNAUDITED PRO FORMA NET LOSS DATA
Loss before income tax benefit................... $ (17,452) $ (5,440) $ (625,583)
Pro forma adjustment to reflect federal and state
income tax benefit (actual for period
subsequent to February 8, 1996)(1)............. -- -- --
---------- ---------- ----------
Pro forma net loss............................... $ (17,452) $ (5,440) $ (625,583)
========== ========== ==========
Pro forma net loss per common and common
equivalent share............................... $ (.01) $ (.00) $ (.33)
========== ========== ==========
Pro forma weighted average common and common
equivalent shares outstanding.................. 1,850,447 1,850,447 1,879,696
========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
----------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA
Working capital (deficit)............................ $(1,304,682) $(1,104,682) $3,922,072
Total assets......................................... 1,726,522 1,726,522 5,499,800
Long-term obligations................................ 147,833 147,833 45,124
Total liabilities.................................... 2,347,191 2,147,191 1,197,969
Stockholders' equity (deficit)....................... (620,669) (420,669) 4,301,831
</TABLE>
- ------------------------------
(1) For the period from December 2, 1994 (date of incorporation) to February 8,
1996, the Company was taxed as an S Corporation under the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), and generally was
not subject to corporate income taxes. Effective February 9, 1996, the
Company terminated its S Corporation election, subjecting the Company to
corporate income taxes. The pro forma adjustment to reflect federal and
state income tax benefit, pro forma net loss and pro forma net loss per
common share represent the Company's income tax position had the Company
been subject to corporate income taxes for all periods presented. No income
tax benefit has been recorded due to the deferred tax asset arising from
operating loss carryforwards and temporary differences being fully offset by
a valuation allowance.
(2) Pro forma balance sheet data give effect to the issuance immediately prior
to the date of this Prospectus of 33,333 shares of Common Stock in repayment
of $200,000 in outstanding indebtedness. See "Capitalization" and "Certain
Transactions."
(3) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock
offered hereby at an initial public offering price of $6.00 per share and
the application of the net proceeds therefrom after deduction of
underwriting discounts and commissions and estimated expenses of the
offering. See "Use of Proceeds," "Capitalization" and "Underwriting."
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<PAGE> 12
RISK FACTORS
In evaluating an investment in the Common Stock, prospective purchasers
should consider carefully the following risk factors in addition to the other
information presented in this Prospectus. This Prospectus contains
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those discussed in "Risk Factors."
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT. The Company was
incorporated in December 1994 and commenced sales in January 1995. Consequently,
the Company has only a limited operating history upon which to base an
evaluation of the Company and its prospects. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving industries. To address these risks, the
Company must, among other things, respond to competitive developments, continue
to attract, retain and motivate qualified persons, and continue to upgrade and
commercialize products and services. There can be no assurance that the Company
will be successful in addressing such risks. The Company has incurred net losses
since its incorporation and as of December 31, 1996 had an accumulated deficit
of approximately $626,000. For the year ended December 31, 1996, the Company had
negative cash flows from operations of approximately $216,000. There can be no
assurance that the Company will achieve or sustain profitability.
WORKING CAPITAL DEFICIT. As of December 31, 1996, the Company's current
liabilities exceeded current assets by approximately $1.3 million. The Company
anticipates that the net proceeds of this offering will provide sufficient
working capital to fund its currently planned activities for at least the
12-month period following the completion of this offering. No assurance can be
given, however, that the Company will not encounter unforeseen difficulties that
may deplete its capital resources more rapidly than anticipated which could
require it to seek additional financing sooner than currently anticipated. There
can be no assurance that any additional financing will be available to the
Company if and when required on terms acceptable to the Company or that such
additional financing, if available, would not result in substantial dilution of
the equity interests of existing stockholders. The timing and amount of any
additional financing that may be required to continue the development and
marketing of the Company's products and for other purposes will depend on the
ability of the Company to improve its operating results and profitability.
NEW AND UNCERTAIN MARKET. The market for Internet and Intranet products
and services has only recently developed. Because this market is relatively new
and because current and future competitors are likely to introduce competing
Internet and Intranet products and services, it is difficult to predict the rate
at which the market will grow or at which new or increased competition will
result in market saturation. If the Internet and Intranet markets fail to grow,
grow more slowly than anticipated or become saturated with competitors, the
Company's business, financial condition and operating results will be materially
and adversely affected.
DEPENDENCE ON THE INTERNET. Although a portion of the sales of the
Company's products and services will depend upon growth of private Intranet
networks, sales of the Company's Internet related products and services will
depend in large part upon an adequate infrastructure for providing Internet
access and carrying Internet traffic. The Internet may not prove to be a viable
commercial marketplace because of inadequate development of the necessary
infrastructure or timely development of complementary products such as high
speed modems. Because global commerce and on-line exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace. There can be no assurance that the infrastructure
or complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if developed, that the Internet will become a
viable commercial marketplace. If the necessary infrastructure or complementary
products are not developed, or if the Internet does not become a
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<PAGE> 13
viable commercial marketplace, the Company's business, financial condition and
operating results will be materially and adversely affected.
RISK OF CHANGING TECHNOLOGY. The Internet software and services markets
are characterized by rapid technological change, evolving industry standards,
emerging industry competition and frequent new service, software and other
product introductions. The Company's future success will depend in significant
part on its ability to anticipate industry standards, continue to apply advances
in Internet and Intranet technologies, enhance its current services and
products, and develop and introduce new services and products on a timely basis.
The introduction of services and products embodying new technologies and the
emergence of new industry standards can render existing services and products
obsolete and unmarketable. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new services and
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these services or
products, or that its new services and products will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or products in a timely and cost-effective manner or to address
compatibility, inoperability or other issues raised by technological changes or
new industry standards, the Company's business, financial condition and
operating results will be materially and adversely affected. See
"Business - Products and Services."
MANAGEMENT OF A DEVELOPING BUSINESS. The Company has experienced
substantial change and expansion in its business and operations since its
incorporation in 1994 and expects to continue to experience periods of rapid
change. The Company's past expansion has placed, and any future expansion will
place, significant demands on the Company's administrative, operational,
financial and other resources. The Company expects to expend resources in
connection with planned marketing and sales programs, future expansion of its
accounting and internal management systems and implementation of a variety of
new systems and procedures. As a consequence, the Company expects operating
expenses and staffing levels to increase substantially in the future.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to attract, assimilate or retain additional highly
qualified personnel. In addition, the Company expects that future expansion will
continue to challenge the Company's ability to train, motivate, and manage its
employees, and to attract and retain qualified Internet applications engineers
and programmers, graphic artists, creative directors and security applications
specialists. If the Company cannot generate sufficient revenues to offset its
higher operating expenses, the Company's management and financial systems do not
expand to meet increasing demands, the Company fails to attract, assimilate and
retain qualified personnel, or the Company's management otherwise fails to
manage the Company's expansion effectively, the Company's business, financial
condition and operating results will be materially and adversely affected. See
"Business - Employees" and "Management."
DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent
upon its senior management and the loss of any member of senior management could
have a material adverse effect upon the Company's business, financial condition
and operating results. No assurance can be given that the Company can retain its
senior management or other key personnel. Although the Company has entered into
employment agreements with each of its executive officers which contain
non-competition and non-disclosure provisions, the Company's ability to benefit
from them is uncertain because such provisions typically must be limited in
geographic scope to be enforceable. Restrictions limited in geographic scope may
not effectively prohibit competition with the Company because of the global
nature of the Internet. See "Management."
INTENSE COMPETITION. The Company's current and prospective competitors
include many companies that have longer operating histories, longer customer
relationships and substantially greater financial, management, technical,
development, sales, marketing and other resources than the Company. Many
nationally known companies and regional and local companies across the country
are involved in Internet and Intranet applications, including the development
and support of
6
<PAGE> 14
Web sites, and the number of these companies is increasing. Companies competing
directly or indirectly with the Company include Web site service boutique firms,
communications, telephone and telecommunications companies, computer hardware
and software companies, established on-line services companies, advertising
agencies, direct access Internet and Internet-services and access providers as
well as specialized and integrated marketing communication firms. The Company
also competes with the internal information technology departments of
prospective customers who are choosing whether to outsource design and support.
The Company competes on the basis of creative talent, price, reliability of
services and responsiveness. See "Business - Competition."
PRICE EROSION. The market for Internet and Intranet products and services
is highly competitive and is characterized by pressures to reduce prices,
incorporate new capabilities and accelerate completion schedules. Increased
competition could result in significant price competition, which in turn could
result in significant reductions in the average selling price of the Company's
products and services. There can be no assurance that the Company will be able
to offset the effects of any such price reductions through an increase in the
number of its customers, higher revenue from enhanced services or cost
reductions.
LENGTH OF SALES CYCLE. The development and implementation of interactive
Web sites may require the Company to engage in a lengthy sales cycle. The
pursuit of sales leads typically involves an analysis of the prospective
customer's needs, preparation of a written proposal, one or more presentations
and contract negotiations. The Company often provides significant education to
prospective customers regarding the use and benefits of Internet or Intranet
technologies and products. Extensive Web site development or licensing of the
Company's products may also involve a substantial commitment of capital by
potential customers as well as the attendant delays frequently associated with
approving larger capital expenditures and reviewing new technologies that affect
key operations. If the Company's average sales cycle continues to lengthen, the
Company will face increased costs, potentially lower profit margins and a
potential inability to achieve targeted sales goals.
RISK OF DEFECTS. Web site services and other services based on software
and computing systems often encounter development and completion delays and the
underlying software may contain undetected errors or failures when introduced
and, in the case of Web sites, when the volume of traffic on a site increases.
In addition, there can be no assurance that errors found in the software
underlying a Web site or other project will not result in delays in completion,
commercial release or market acceptance of such Web site or other project.
Likewise, there can be no assurance that the Company will not incur
unanticipated costs to cure any defect or be obligated to refund money paid to
the Company or to pay for damages caused by any delay or defect. Software
applications and products as complex as those being developed by the Company may
contain undetected errors or failures when first introduced. If software errors
are discovered after introduction, the Company could experience delays and lost
revenues during the period required to correct these errors. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new applications, products or releases
after commencement of installation or shipment, resulting in loss of or delay in
receiving revenues.
SECURITY RISKS. The Company's software and equipment are vulnerable to
computer viruses or similar disruptive problems caused by customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other
7
<PAGE> 15
misuse of software or equipment by third parties. Although the Company attempts
to limit its liability to customers for these types of risks through contractual
provisions, there can be no assurance that these provisions will be enforceable.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company relies primarily
on a combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company does not hold any registered trade
or service marks at this time, but has applied for federal registration of the
names "HomeCom," "Post On The Fly(TM)" and the Company's logo. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop competing
products and services. In distributing its software products, the Company
intends to rely primarily on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to as great an extent as the laws of the United
States. The Company does not believe that any of its proposed products infringe
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim infringement by the Company with respect to
its products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in electronic commerce grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company. In addition, Web site developers such as the Company
face potential liability for the actions of customers and others using their
services, including liability for infringement of intellectual property rights,
rights of publicity, defamation, libel, fraud, misrepresentation, unauthorized
computer access, theft, tort liability and criminal activity under the laws of
the United States, various states and foreign jurisdictions. An imposition of
liability could have a material adverse effect on the Company. See
"Business - Intellectual Property Rights."
BENEFITS OF THE OFFERING TO CURRENT STOCKHOLDERS. The Company intends to
use approximately $56,000 of the net proceeds of this offering to repay
indebtedness to the Company's Chief Executive Officer. See "Use of Proceeds" and
"Certain Transactions." Assuming the issuance immediately prior to the date of
this Prospectus of 33,333 shares of Common Stock in repayment of $200,000 in
outstanding indebtedness, the current stockholders will have paid an average of
$.36 per share for their 1,956,396 shares of Common Stock. See "Dilution." The
987,004 shares of Common Stock currently owned by the Company's executive
officers and directors, which were acquired at a total cost of approximately
$410,704, have a market value of approximately $5,922,024 based on an initial
public offering price of $6.00 per share. While the completion of the offering
would create a public market for the Common Stock, there can be no assurance
that an active trading market will develop or continue after completion of this
offering or that the market price of the Common Stock will not decline below the
initial public offering price. In addition, the Company's current stockholders
have acquired their respective equity interests at costs substantially below the
public offering price. Accordingly, to the extent that the Company incurs losses
in the future, purchasers of Common Stock in this offering will bear a
disproportionate amount of such losses. None of the Company's stockholders are
selling shares of Common Stock in the offering.
DILUTION. Purchasers of shares of Common Stock in this offering will
experience immediate and substantial dilution in net tangible book value per
share (76.2% or $4.57 per share). In addition, the Company may issue a
substantial number of additional shares of Common Stock in the future.
8
<PAGE> 16
The issuance of a material number of such shares may have the effect of
increasing the dilution to new investors in this offering. See "Dilution."
BROAD DISCRETION IN APPLICATION OF PROCEEDS; UNSPECIFIED ACQUISITIONS. The
Company has not determined specific uses for a substantial portion of the net
proceeds of this offering. The Company anticipates that a majority of the
estimated net proceeds from this offering will be used for the repayment of
indebtedness, general corporate purposes (principally additions to working
capital and continued product development) and possible future acquisitions.
However, such uses are subject to change depending upon a number of factors,
including future revenue growth, the amount of cash generated by the Company's
operations, the length of the sales cycle of the Company's products and services
and the rapidly changing industry in which the Company operates. A portion of
the net proceeds of this offering may be used to acquire later-stage development
or existing products from other companies or to acquire complementary
businesses. Although the Company has not entered into any agreement or
commitment and is not a party to any negotiations for any such acquisitions, it
has explored and plans to continue to evaluate opportunities to purchase,
license or otherwise acquire the right to market products, services or
businesses that complement the Company's business. Acquisitions of other
businesses entails significant risks relating to proper selection and valuation
of targeted businesses, the ability to manage and integrate acquired businesses
with the Company's business and the potential need to fund future development
and operations of acquired businesses. See "Use of Proceeds."
LACK OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF STOCK PRICE. Prior to
this offering, there has been no public trading market for the Common Stock. The
initial public offering price of the Common Stock was determined through
negotiations between the Company and the Underwriter. Factors considered in
determining the initial public offering price included prevailing market
conditions, the market capitalization and stages of development of other
companies that the Company and the Underwriter believed to be comparable to the
Company, the results of operations of the Company in recent periods, estimates
of the business potential of the Company, the present stage of the Company's
development and other factors deemed relevant. There can be no assurance that an
active trading market will develop or continue after completion of this offering
or that the market price of the Common Stock will not decline below the initial
public offering price. The market price of the Common Stock is likely to be
highly volatile. The Company believes factors such as actual or anticipated
quarterly fluctuations in financial results, changes in earnings estimates by
securities analysts and announcements of material events by the Company, its
major customers or its competitors may cause the market price for the Common
Stock to fluctuate, perhaps substantially. These fluctuations, as well as
general economic, political and market conditions, such as recessions, may have
a material adverse effect on the market price of the Common Stock.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's
limited operating history, the Company does not have historical financial data
for a significant number of periods on which to base planned operating expenses.
Accordingly, the Company's expense levels are based in part on its expectations
as to future revenues and to a large extent are fixed. However, the Company
typically operates with no significant backlog. As a result, quarterly sales and
operating results generally depend on the volume and timing of and ability to
perform services requested within the quarter, and are difficult to forecast.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenues shortfall. Accordingly, any significant shortfall of
demand for the Company's products and services in relation to the Company's
expectations would result in fluctuations in future quarterly operating results.
The Company may also experience significant fluctuations in future quarterly
operating results as the result of many factors, including demand for the
Company's products and services, introduction or enhancement of products by the
Company and its competitors, market acceptance of new products and services, mix
of products and services sold and general economic conditions. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance.
9
<PAGE> 17
CONCENTRATION OF STOCK OWNERSHIP. Upon completion of this offering, the
Company's present directors and executive officers will beneficially own
approximately 33% of the outstanding Common Stock. As a result, these
stockholders, if they act together, will be able to exercise significant
influence over all matters requiring stockholder approval, including the
election of directors and approval of significant corporate transactions. Such
concentration of ownership may also have the effect of delaying, preventing or
deterring a change in control of the Company. See "Principal Stockholders."
SENIORITY OF PREFERRED STOCK; STAGGERED BOARD; POSSIBLE ANTI-TAKEOVER
EFFECTS. The Board of Directors has authority to issue up to 1,000,000 shares
of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of the preferred stock without further
vote or action by the Company's stockholders. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. While the
Company has no present intention to issue shares of preferred stock, such
issuance, while providing desired flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of the outstanding voting
stock of the Company. See "Description of Capital Stock - Preferred Stock." In
addition, the Company's Restated Certificate of Incorporation provides that the
Board of Directors be divided into three classes of directors, with each class
serving a staggered three-year term. The division of the Board of Directors into
three classes may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
incumbency of the Board of Directors, because such a division generally makes it
more difficult for stockholders to replace a majority of directors. See
"Description of Capital Stock - Limitations on Liability of Directors."
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP(TM) MARKET;
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock has been
approved for listing on The Nasdaq SmallCap(TM) Market. In order to continue to
be included in The Nasdaq SmallCap(TM) Market, a company must maintain
$2,000,000 in total assets, a $200,000 public float market value and $1,000,000
in total capital and surplus. In addition, continued inclusion requires two
market-makers and a minimum bid price of $1.00 per share; provided, however,
that if a company falls below such minimum bid price, it will remain eligible
for continued inclusion in The Nasdaq SmallCap(TM) Market if the market value of
the public float is at least $1,000,000 and the company has $2,000,000 in
capital and surplus. Nasdaq has proposed new, more stringent maintenance
criteria. If these new criteria are approved, they will apply to the Company.
These new criteria require (i) either $2,000,000 in net tangible assets (total
assets less total liabilities and goodwill), $35,000,000 in market
capitalization or $500,000 in net income for two of the three immediately
preceding years; (ii) at least 500,000 shares of public float; (iii) market
value of the public float of not less than $1,000,000; (iv) a minimum bid price
of not less than $1.00 per share; and (v) a minimum of 300 stockholders. Failure
of the Company to meet Nasdaq's existing or future maintenance criteria may
cause the Common Stock to be delisted from The Nasdaq SmallCap(TM) Market, and
trading, if any, in the Common Stock would thereafter be conducted in the
over-the-counter market. As a result, an investor may find it more difficult to
dispose of, or to obtain accurate quotations as to the market value, of the
Common Stock. In addition, if the Common Stock were delisted from trading on The
Nasdaq SmallCap(TM) Market and the trading price of the Common Stock was less
than $5.00 per share, trading in the Common Stock would also be subject to
certain rules promulgated under the Securities Exchange Act of 1934, which
require additional disclosure by broker-dealers in connection with any trades
involving a stock defined as a "penny stock" (generally, any non-Nasdaq equity
security that has a market price of less than $5.00 per share, subject to
certain exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the Common Stock, which
could severely
10
<PAGE> 18
limit the market liquidity of the Common Stock and the ability of purchasers in
this offering to sell the Common Stock in the secondary market.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY. The Company's Restated
Certificate of Incorporation provides, as permitted by Delaware law, that its
directors shall have no personal liability for certain breaches of their
fiduciary duties to the Company. In addition, the Company's Restated Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. These limitations on personal liability do not
apply to liabilities under federal securities laws. However, these provisions
may reduce the likelihood of derivative litigation against directors and may
discourage stockholders from bringing a lawsuit against directors for a breach
of their fiduciary duties. See "Description of Capital Stock - Limitations on
Liability of Directors."
GOVERNMENT REGULATION. The Telecommunications Act of 1996 (the "1996
Telecommunications Act"), which became effective on February 8, 1996, imposes
criminal liability on persons sending or displaying in a manner available to
minors indecent material on an interactive computer service such as the
Internet. The 1996 Telecommunications Act also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for those
activities. The constitutionality of these provisions has been successfully
challenged in federal court and, as of the date of this Prospectus, enforcement
of certain provisions has been enjoined. The United States Supreme Court has
agreed to hear an appeal by the U.S. government of this Federal court decision.
If the Supreme Court determines that a portion or all of the provisions of the
1996 Telecommunications Act are constitutional, this legislation may decrease
demand for Internet access, chill the demand for Internet content or have other
adverse effects on Web site service providers such as the Company. In addition,
in light of the uncertainty of the interpretation and application of this law,
there can be no assurance that the Company would not have to modify its
operations to comply with the statute. Except for the 1996 Telecommunications
Act, the Company does not believe that it is currently subject to direct
regulation by any government agency, other than regulations applicable to
businesses generally, and believes that there are currently few laws or
regulations directly applicable to Web site service companies. The Federal
Communications Commission is studying the possible regulation of the Internet.
Any such regulations adopted by the Federal Communications Commission may
adversely impact the manner in which the Company conducts its business. It is
possible that a number of additional laws and regulations may be adopted with
respect to the Internet, covering issues such as user privacy, pricing and
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 products and 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's business, financial condition
or operating results. 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 future regulation
or regulatory changes may have on its business. In addition, Web site developers
such as the Company face potential liability for the actions of customers and
others using their services, including liability for infringement of
intellectual property rights, rights of publicity, defamation, libel, fraud,
misrepresentation, unauthorized computer access, theft, tort liability and
criminal activity under the laws of the United States, various states and
foreign jurisdictions. Any imposition of liability could have a material adverse
effect on the Company. The Company's network services are transmitted to its
customers over dedicated and public telephone lines. These transmissions are
governed by regulatory policies establishing charges and terms for
communications. Changes in the regulatory environment relating to the
telecommunications and media industry, including regulatory changes which
directly or indirectly affect use of or access to the Internet or increase the
likelihood or scope of competition from regional telephone companies, could have
a material adverse effect on the Company.
11
<PAGE> 19
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$4,722,500 ($5,532,500 if the Underwriter's over-allotment option is exercised
in full). The Company currently intends to apply the net proceeds from this
offering to the repayment of indebtedness (including indebtedness to the
Company's Chief Executive Officer), for general corporate purposes (principally
additions to working capital and continued product development) and possible
future acquisitions.
The Company plans to utilize a portion of the net proceeds of this offering
to repay indebtedness in the following amounts:
<TABLE>
<S> <C>
Promissory note payable to the Company's Chief Executive
Officer on September 12, 2000, with annual interest at
prime rate plus 1%........................................ $ 86,000
Promissory note payable to a financial institution with
monthly installments through January 2001, with annual
interest at prime rate plus 1.5%.......................... 61,000
Promissory notes payable to two private investors in August
and September 1997, with interest payable at maturity at
the rate of 8% per annum (See "Certain Transactions.").... 1,300,000
</TABLE>
The balance of the net proceeds of approximately $3.3 million will be
applied toward general corporate purposes (principally additions to working
capital and continued product development) and, possibly, to acquire later-stage
development or existing products from other companies or to acquire
complementary businesses that have developed specific industry expertise or have
existing relationships with large businesses needing Internet/Intranet
solutions. Although the Company has not entered into any agreement or commitment
and is not a party to any negotiations for any such acquisition, it has explored
and plans to continue to evaluate opportunities to purchase, license or
otherwise acquire the right to market products, services or businesses that
complement the Company's business.
The Company anticipates that it will utilize a portion of the net proceeds
applied toward general corporate purposes to fund the following estimated 1997
costs and expenditures:
<TABLE>
<S> <C>
Product development......................................... $ 640,000
Advertising................................................. 400,000
Additional personnel........................................ 600,000
Computer equipment purchases................................ 233,333
Additional office space..................................... 250,000
Additional office furniture and communications equipment.... 250,000
Internet connections for hosting services................... 100,000
----------
Total............................................. $2,473,333
</TABLE>
The Company has not determined the exact amount it plans to expend on each
of such uses or the timing of such expenditures. The amounts actually expended
for each such use, if any, are at the discretion of the Board of Directors and
may vary significantly depending upon a number of factors, including future
revenue growth, the amount of cash generated by the Company's operations, the
length of the sales cycle and the rapid changes in the Internet and Intranet
marketplaces. To the extent that the net proceeds of this offering are not used
immediately, they will be invested in United States government and governmental
agency securities and other short-term, investment-grade, interest-bearing
instruments.
DIVIDEND POLICY
The Board of Directors intends to retain any of the Company's earnings to
support operations and to finance expansion and does not intend to pay cash
dividends on the Common Stock in the foreseeable future. Any future
determination to pay dividends will be at the discretion of the Board of
Directors, and will depend on the Company's financial condition, results of
operations, capital requirements and such other factors as the Board of
Directors deems relevant.
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<PAGE> 20
DILUTION
At December 31, 1996, the Company had a pro forma net tangible book value
of approximately $(909,152) or $(0.46) per share, after giving effect to the
issuance immediately prior to the date of this Prospectus of 33,333 shares of
Common Stock in repayment of $200,000 in outstanding indebtedness. See
"Capitalization" and "Certain Transactions." Pro forma net tangible book value
per share is determined by dividing the pro forma net tangible book value
(tangible assets less liabilities) of the Company by the number of shares of
Common Stock outstanding. After giving effect to the issuance and sale of the
1,000,000 shares of Common Stock offered hereby at the initial public offering
price of $6.00 per share and the application of the estimated net proceeds
therefrom as set forth in "Use of Proceeds," the adjusted pro forma net tangible
book value of the Company at December 31, 1996 would have been $4,220,311 or
$1.43 per share. This represents an immediate increase in pro forma net tangible
book value of $1.89 (410.9%) per share to the existing stockholders and an
immediate dilution of $4.57 (76.2%) per share to new investors purchasing shares
of Common Stock at the initial public offering price of $6.00 per share. The
following table illustrates this dilution per share:
<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $6.00
Pro forma net tangible book value per share at December
31, 1996............................................... $(0.46)
Increase in pro forma net tangible book value per share
attributable to new investors.......................... $ 1.89
------
Adjusted pro forma net tangible book value per share after
offering.................................................. 1.43
-----
Dilution per share to new investors......................... $4.57
=====
</TABLE>
The following table summarizes, on a pro forma basis at December 31, 1996
(giving effect to the items listed above), the number of shares of Common Stock
previously purchased from the Company, the total consideration paid to the
Company and the average price paid per share by the existing stockholders and
new investors, assuming sale by the Company of 1,000,000 shares of Common Stock
at the initial public offering price of $6.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- -------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ---------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders............... 1,956,396 66.2% $ 695,810 10.4% $ .36
New investors....................... 1,000,000 33.8% 6,000,000 89.6% 6.00
--------- ----- ---------- -----
Total..................... 2,956,396 100.0% $6,695,810 100.0%
========= ===== ========== =====
</TABLE>
Immediately following completion of this offering, the Company will have
outstanding options to acquire approximately 309,866 shares of Common Stock at
exercise prices ranging from $4.55 to $6.50 per share and a weighted average
exercise price per share of $6.36. In addition: (i) upon completion of this
offering, the Company will grant the Underwriter's Warrants; and (ii) in
connection with the Company's acquisition of HomeCom Internet Security Services,
Inc., the Company may issue shares of Common Stock in the future in payment of
all or a portion of the purchase price. See "Underwriting" and "Certain
Transactions." The issuance of a material number of shares of Common Stock in
the future may have the effect of increasing the dilution to new investors in
this offering.
13
<PAGE> 21
CAPITALIZATION
The following table sets forth at December 31, 1996 (i) the actual
short-term borrowings and capitalization of the Company, (ii) the pro forma
short-term borrowings and capitalization of the Company after giving effect to
the issuance immediately prior to the date of this Prospectus of 33,333 shares
of Common Stock (based upon an assumed initial public offering price of $6.00
per share) in repayment of $200,000 in outstanding indebtedness and (iii) the
pro forma short-term borrowings and capitalization of the Company, as adjusted
to give effect to the issuance and sale by the Company of the 1,000,000 shares
of Common Stock offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Certain Transactions." This table should
be read in conjunction with the Financial Statements and the Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
---------- -------- -----------
<S> <C> <C> <C>
Short-term borrowings.................................... $1,003,518 $803,518 $ 0
---------- -------- ----------
LONG-TERM DEBT:
Note payable, net of current maturities................ 47,032 47,032 0
Notes payable to stockholders, net of current
maturities.......................................... 55,677 55,677 0
---------- -------- ----------
Total long-term debt........................... 102,709 102,709 0
---------- -------- ----------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none outstanding........................ -- -- --
Common stock, $.0001 par value, 15,000,000 shares
authorized, 1,923,063 shares issued and outstanding,
actual; 1,956,396 shares issued and outstanding, pro
forma; 2,956,396 shares issued and outstanding, pro
forma as adjusted(1)................................ 192 196 296
Additional paid-in capital............................. 472,726 672,722 5,395,122
Stock subscriptions.................................... (468,004) (468,004) (468,004)
Accumulated deficit.................................... (625,583) (625,583) (625,583)
---------- -------- ----------
Total stockholders' equity (deficit)........... (620,669) (420,669) 4,301,831
---------- -------- ----------
Total capitalization...................... $ 485,558 $485,558 $4,301,831
========== ======== ==========
</TABLE>
- ------------------------------
(1) Excludes (i) 300,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 159,866 shares of Common Stock are
issuable upon the exercise of outstanding options granted at a weighted
average exercise price of $6.22 per share, (ii) 300,000 shares reserved for
issuance under the Company's Non-Employee Directors Plan, of which options
to acquire 150,000 shares of Common Stock are issuable upon the exercise of
outstanding options granted at an exercise price of $6.50 per share, (iii)
150,000 shares reserved for issuance under the Company's Stock Purchase
Plan, no shares having been issued thereunder, and (iv) 100,000 shares of
Common Stock reserved for issuance upon the exercise of the Underwriter's
Warrants. See "Management - Incentive Plans," "Description of Capital
Stock" and "Underwriting." Also excludes shares that may be issued in
connection with the Company's August 1996 acquisition of HomeCom Internet
Security Services, Inc. See "Certain Transactions."
14
<PAGE> 22
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following historical and pro forma financial data selected by the
Company have been taken or derived from the historical financial statements and
other records of the Company. The statements of operations and balance sheets
for the period from December 2, 1994 (date of incorporation) to December 31,
1994, and for the years ended December 31, 1995 and 1996, have been audited by
Coopers & Lybrand L.L.P., independent public accountants. The selected
historical and pro forma financial data should be read in conjunction with the
Company's historical financial statements and related notes and other financial
information included elsewhere in this Prospectus. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
DECEMBER 2
(INCORPORATION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------
1994 1995 1996
--------------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
NET SALES:
Service sales...................................... $ -- $ 327,574 $2,112,878
Equipment sales.................................... -- -- 185,977
---------- ---------- ----------
Total net sales............................ -- 327,574 2,298,855
---------- ---------- ----------
COST OF SALES:
Cost of services................................... -- 59,871 546,409
Cost of equipment sold............................. -- -- 128,938
---------- ---------- ----------
Total cost of sales........................ -- 59,871 675,347
---------- ---------- ----------
GROSS PROFIT......................................... -- 267,703 1,623,508
---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing................................ 1,045 124,253 845,690
Product development................................ -- 20,239 78,887
General and administrative......................... 16,407 121,313 1,194,728
Depreciation and amortization...................... -- 3,722 85,068
---------- ---------- ----------
Total operating expenses................... 17,452 269,527 2,204,373
---------- ---------- ----------
OPERATING LOSS....................................... (17,452) (1,824) (580,865)
OTHER EXPENSES:
Interest expense................................... -- 3,469 51,272
Other expense (income), net........................ -- 147 (6,554)
---------- ---------- ----------
LOSS BEFORE INCOME TAX BENEFIT....................... (17,452) (5,440) (625,583)
INCOME TAX BENEFIT................................... -- -- --
---------- ---------- ----------
NET LOSS............................................. $ (17,452) $ (5,440) (625,583)
========== ========== ==========
PRO FORMA NET LOSS(1)................................ $ (17,452) $ (5,440) (625,583)
========== ========== ==========
Pro forma net loss per common and common equivalent
share.............................................. $ (.01) $ (.00) (.33)
========== ========== ==========
Pro forma weighted average common and common
equivalent shares outstanding...................... 1,850,447 1,850,447 1,879,696
========== ========== ==========
</TABLE>
15
<PAGE> 23
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------
DECEMBER 31, DECEMBER 31, PRO PRO FORMA
1994 1995 ACTUAL FORMA(2) AS ADJUSTED(3)
BALANCE SHEET DATA ------------ ------------ ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Working capital
(deficit)............... $ 8,455 $133,792 $(1,304,682) $(1,104,682) $3,922,072
Total assets.............. 10,254 247,382 1,726,522 1,726,522 5,499,800
Long-term obligations..... -- 160,792 147,833 147,833 45,124
Total liabilities......... -- 242,568 2,347,191 2,147,191 1,197,969
Stockholders' equity
(deficit)............... 10,254 4,814 (620,669) (420,669) 4,301,831
</TABLE>
- ------------------------------
(1) For the period from December 2, 1994 (date of incorporation) to February 8,
1996, the Company was taxed as an S Corporation under the provisions of the
Code and generally was not subject to corporate income taxes. Effective
February 9, 1996, the Company terminated its S Corporation election,
subjecting the Company to corporate income taxes. The pro forma adjustment
to reflect federal and state income tax benefit, pro forma net loss and pro
forma net loss per common share represent the Company's income tax position
had the Company been subject to corporate income taxes for all periods
presented. No income tax benefit has been recorded due to the deferred tax
asset arising from operating loss carryforwards and temporary differences
being fully offset by a valuation allowance.
(2) Pro forma balance sheet data reflect the issuance immediately prior to the
date of this Prospectus of 33,333 shares of Common Stock in repayment of
$200,000 in outstanding indebtedness. See "Capitalization" and "Certain
Transactions."
(3) Adjusted to give effect to the sale of 1,000,000 shares of Common Stock
offered hereby and the application of the net proceeds therefrom. See "Use
of Proceeds," "Capitalization" and "Underwriting."
16
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was incorporated in December 1994 and commenced sales in
January 1995 when it began marketing its Web site development and hosting
services. Revenues from service sales have increased each quarter, through 1995
and 1996. The Company markets its services through a direct sales force,
advertisement, referrals, and active business partner relationships with
organizations such as AT&T, BBN, Microsoft, Netscape, Oracle, Sybase and Unisys.
The Company generates revenues through Internet and Intranet customized
software applications, Web site development, Web site hosting services, computer
hardware resales, consulting services and fees charged for the maintenance of
Web sites. Most customized software application projects are generally completed
within six to eight weeks, although certain past, current and future projects
have taken and are expected to take longer to complete. Revenues on customized
application and Web site projects are recognized using the percentage of
completion method. Web site maintenance and hosting revenues represent recurring
revenues and are deferred and recognized ratably over the period. Because the
Company will continue to develop and market new products and services, the
results of operations for the fiscal years ended December 31, 1995 and 1996 are
not necessarily indicative of future operating results.
During 1996, custom Internet and Intranet applications and integration
services (including hardware resales) accounted for approximately 18.5% of the
Company's revenues. The Company believes that custom applications and Web-based
software products will represent an increasing percentage of its total revenues.
During 1996, Web site design and development services accounted for
approximately 50% of the Company's revenues. The Company expects that revenues
from such services will increase, but believes that fees for such services will
represent a smaller percentage of total revenue over the foreseeable future.
During 1996, Internet outsourcing services generated approximately 16% of
the Company's total revenues. The Company believes that its total Internet
solution marketing focus, together with the recurring nature of outsourcing
fees, will lead to an increase in outsourcing fees as a percentage of total
revenue over the foreseeable future.
During 1995 and 1996, expenses exceeded net sales as the Company developed
its products and services, instituted its marketing and sales programs and began
implementation of the operational and administrative support structure necessary
to support its business. HomeCom expects to experience increased operating
expenses and capital investments during 1997 as it continues to expand its
infrastructure to support its growth. See "Risk Factors - Management of a
Developing Business."
The Company's revenues and operating results have varied substantially from
period to period, and should not be relied upon as an indication of future
results. See "Risk Factors - Potential Fluctuations in Quarterly Results." The
Company historically has operated with no significant backlog because its
services are provided as requested by customers. As a result, revenues in any
quarter are substantially affected by the amount of services requested by its
customers. Because the Company is incurring expenses in anticipation of future
revenue growth and a high percentage of the Company's expenses are relatively
fixed, a small variation in the timing of recognition of specific revenues could
cause significant variations in operating results from quarter to quarter.
17
<PAGE> 25
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentages
of net sales by certain items reflected in the Company's statements of
operations.
<TABLE>
<CAPTION>
DECEMBER 2
(INCORPORATION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, --------------------------
1994 1995 1996
--------------- --------------- -----
<S> <C> <C> <C>
NET SALES:
Service sales................................ -- 100.0% 91.9%
Equipment sales.............................. -- -- 8.1
----- ----- -----
Total net sales...................... -- 100.0 100.0
----- ----- -----
COST OF SALES:
Cost of services............................. -- 18.3 23.8
Cost of equipment sold....................... -- -- 5.6
----- ----- -----
Total cost of sales.................. -- 18.3 29.4
----- ----- -----
GROSS PROFIT................................... -- 81.7 70.6
----- ----- -----
OPERATING EXPENSES:
Sales and marketing.......................... -- 37.9 36.8
Product development.......................... -- 6.2 3.4
General and administrative................... -- 37.1 52.0
Depreciation and amortization................ -- 1.1 3.7
----- ----- -----
Total operating expenses............. -- 82.3 95.9
----- ----- -----
OPERATING LOSS................................. -- (0.6) (25.3)
OTHER EXPENSES (INCOME):
Interest expense, net........................ -- 1.1 2.2
Other expense (income), net.................. -- 0.0 (0.3)
----- ----- -----
LOSS BEFORE INCOME TAX BENEFIT................. -- (1.7) (27.2)
INCOME TAX BENEFIT............................. -- 0.0 0.0
----- ----- -----
NET LOSS....................................... -- (1.7%) (27.2%)
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales
Net sales increased 601.8% from $327,574 in 1995 to $2,298,855 in 1996.
Revenues from service sales increased 545.0% from $327,574 in 1995 to $2,112,878
in 1996. This increase of $1,785,304 is primarily attributable to increases in
hosting revenues of $321,278, Web site development and customized applications
revenues of $1,159,205, and consulting and maintenance revenues of $112,779.
Revenues from equipment sales were $185,977 during 1996.
Cost of Sales
Cost of sales for services includes salaries for programmers, technical
staff and customer support. Cost of sales for services increased from $59,871,
or 18.3% of revenues in 1995 to $546,409, or 23.8% of revenues in 1996. This
increase reflects the Company's significant increase in payroll costs associated
with the hiring of additional technical personnel in 1996. Increases in the
Company's personnel costs as a percentage of sales also reflects higher costs
incurred to attract and retain Internet software development professionals, and
a change in the mix of products and services sold.
18
<PAGE> 26
Gross Profit
Gross profit increased by $1,355,805 from $267,703 in 1995 to $1,623,508 in
1996. Gross profit margins decreased from 81.7% during 1995 to 70.6% during
1996. This decrease as a percentage of revenues primarily reflects increased
costs incurred by the Company for technical personnel and a change in the mix of
products and services sold.
Sales and Marketing
Sales and marketing expenses include salaries, variable commissions and
bonuses for the sales force, advertisement and promotional marketing materials,
travel and telephone charges. Sales and marketing expenses increased 580.6% from
$124,253 in 1995 to $845,690 in 1996. This increase was primarily attributable
to an increase in the size of the Company's sales force. As a percentage of
revenues, these expenses decreased from 37.9% of revenues in 1995 to 36.8% of
revenues in 1996. The Company intends to increase marketing expenditures in
1997, but generally anticipates that sales and marketing expenses, as a
percentage of revenues, will not increase materially above current levels.
Product Development
Product development expenses consist of personnel costs required to conduct
the Company's product development effort. Management believes that significant
continuing investments in product development are required to compete
effectively in the Company's industry. As a consequence, the Company has
increased expenditures on product development primarily through the employment
of additional development personnel. Total expenditures for product development
were $163,069, or 7.1% of net sales in 1996, of which $84,182, or 51.6%, were
capitalized. This compares to total product development expenditures of $20,239,
or 6.2% of sales, in 1995, none of which were capitalized.
General and Administrative
General and administrative expenses include salaries for administrative
personnel, rents, telephone charges, insurance and other administrative
expenses. General and administrative expenses increased from $121,313 in 1995 to
$1,194,728 in 1996. As a percentage of net sales, these expenses increased from
37.1% in 1995 to 52.0% in 1996. This increase as a percentage of net sales
reflects primarily increases for operational and administrative support
personnel incurred to support anticipated growth. The Company expects to
experience continuing increases in general and administrative expenses during
1997 as it continues to develop the infrastructure required to support
anticipated future growth.
Depreciation and Amortization
Depreciation and amortization includes depreciation and amortization of
computers, network equipment, office equipment and equipment under capital
leases. Depreciation and amortization increased from $3,722 in 1995 to $85,068
in 1996, or 1.1% of revenues during 1995 to 3.7% of revenues in 1996, reflecting
increased expenditures on capital equipment. The Company expects additional
capital investments during 1997 as it continues to develop the infrastructure
needed to support higher levels of operations.
Interest Expense
Interest expense increased from $3,469 in 1995 to $51,272 during 1996,
principally reflecting increased debt levels associated with notes payable to
investors entered into in 1996.
19
<PAGE> 27
Income Taxes
The Company has not paid income taxes to date because it has not had
taxable income. Net operating loss carryforwards are recorded as a deferred tax
asset with a full valuation allowance.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales
The Company was formed on December 2, 1994, and recognized no revenues
during 1994. During 1995, the Company had net sales of $327,574, with associated
cost of sales of $59,871.
Operating Expenses
For the year ended December 31, 1994, the Company had operating expenses of
$17,452, which consisted of $1,045 in marketing expenses and $16,407 in general
and administrative expenses. Operating expenses during 1995 were $269,527.
QUARTERLY REVENUES
The following table presents the Company's unaudited quarterly revenues for
each of the eight quarters beginning January 1, 1995 and ending December 31,
1996. In the opinion of management, this information includes all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation. The revenues for any quarter are not necessarily indicative of the
revenues to be expected for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------------------
1995 1996
----------------------------------------------- ------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ ----------- -------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $4,855 $34,106 $134,439 $154,174 $271,617 $545,689 $654,018 $827,531
</TABLE>
The Company's operations and related revenues historically have varied
substantially from quarter to quarter, and the Company expects these variations
to continue. Unanticipated variations in the number and timing of the Company's
projects or in employee utilization rates may cause significant variations in
revenues in any particular quarter. An unanticipated termination of a major
project, a client's decision not to pursue a new project or proceed to
succeeding stages of a current project, or the completion during a quarter of
several major client projects, could require the Company to pay underutilized
employees and therefore have a material adverse effect on the Company's results
of operations and financial condition. See "Risk Factors -- Potential
Fluctuations in Quarterly Results."
LIQUIDITY AND CAPITAL RESOURCES
The Company's current primary focus is on increasing revenues and expanding
operations. The Company continues to hire additional personnel and increase
expenses related to administration, production, technical resources, marketing,
customer support and infrastructure to enhance and expand its operations. The
Company may from time to time issue debt or equity securities and otherwise
raise long-term capital to finance the expansion of its business.
Since its incorporation, the Company has financed its operations through
private debt financing. Net cash used in operating activities was $19,251,
$6,415 and $215,925 for the years ended December 31, 1994, 1995 and 1996,
respectively. As of December 31, 1996, the Company had a working capital deficit
of $1,304,682, $50,000 in deposits to its landlord under the Company's office
lease and $7,527 in other deposits.
In 1995, the Company generated $163,497 through loans from a private
investor and its Chief Executive Officer. In 1996, the Company generated cash
from financing activities of $853,035, primarily through the issuance of
promissory notes.
20
<PAGE> 28
The Company spent $33,737 and $349,646 during the years ended December 31,
1995 and 1996, respectively, for the purchase of capital equipment. These
amounts were expended primarily for computer equipment, communications equipment
and software necessary for HomeCom to increase its presence in the Internet and
Intranet applications marketplace.
The Company's commitments as of December 31, 1996 consisted primarily of a
five year lease on its headquarters facility, a promissory note commitment to
Harvey Sax, the Company's Chief Executive Officer, in the principal amount of
approximately $56,000, a loan commitment to a financial institution in the
amount of approximately $61,000, and promissory note commitments to outside
investors in the aggregate principal amount of approximately $989,904 ($200,000
of which will be converted into Common Stock immediately prior to the date of
this Prospectus). See "Capitalization." At December 31, 1996, there were no
material commitments for capital expenditures. In connection with the Company's
recent acquisition of HomeCom Internet Security Services, Inc. ("HISS"), the
Company is obligated to pay cash and/or issue shares of Common Stock in the
future in payment of the purchase price. See "Certain Transactions." The Company
believes that its current cash balances, credit line, cash flow from operations
and the net proceeds of this offering will be sufficient to meet its working
capital and capital expenditure needs for at least the next 12 months. The
Company may from time to time issue debt or equity securities and otherwise
raise long-term capital to finance the expansion of its business.
Accounts receivable net of allowance for doubtful accounts totaled $488,254
as of December 31, 1996. Trade receivables are monitored by the Company through
ongoing credit evaluations of its customers' financial conditions. The allowance
for doubtful accounts is considered by management to be an adequate reserve for
known and estimated bad debts of the Company. A revision in this reserve due to
actual results differing from this estimate could have a material impact on the
results of operations, financial position and liquidity of the Company.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), was issued. SFAS 128 is designed to improve
the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of earnings per share data on an
international basis. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The Company will adopt SFAS 128 on its effective
date. Pro forma earnings per share of the Company computed using SFAS 128 is not
different from earnings per share computed using existing standards and
guidelines.
21
<PAGE> 29
BUSINESS
GENERAL
HomeCom develops and markets specialized software applications and products
and provides services that enable businesses to use the Internet and Intranets
to obtain and communicate important business information, conduct commercial
transactions and improve business productivity. HomeCom provides
Internet/Intranet solutions in five areas: (i) customized software applications
design, development and integration; (ii) World Wide Web site development; (iii)
Internet outsourcing services; (iv) specialized Internet-enabled software
products; and (v) security consulting and integration services. HomeCom's
objective is to be a leading provider of business communications solutions using
Internet standard protocol technologies.
HomeCom employs a team of highly trained Internet/Intranet software
developers and multimedia and graphics professionals who design and develop
specialized Internet/Intranet software applications. These applications enable
companies to obtain and communicate vital business information, such as sales
reports, order status systems, employee directories and client account
information. The Company works closely with its customers to analyze and design
Internet-based software solutions that facilitate the interactive exchange of
business information. Through its experience in designing custom Internet
solutions for businesses, HomeCom believes that it has developed and continues
to develop in-depth knowledge concerning industry-specific Internet applications
and requirements. The Company plans to leverage this knowledge to develop
additional Internet-enabled applications targeted for vertical industries,
including banking and financial services, retailing and entertainment.
The Company believes that it has established a reputation as a provider of
sophisticated interactive Web sites. The Company has developed more than 100 Web
sites for clients in many diverse industries, including sites for AT&T, Synovus
Financial Corporation ("Synovus"), SouthTrust Bank Corporation ("SouthTrust"),
Norwest Corporation ("Norwest"), Rainforest Cafe, Incorporated ("Rainforest"),
Brinker International ("Brinker"), Executrain Corporation ("Executrain"), T-HQ,
Inc. ("T-HQ") and American Family Life Assurance Corporation ("AFLAC"). The
Company has a highly trained staff able to design Web sites ranging from basic
"inquiry only" sites to complex, interactive sites capable of providing on-line
commerce, database integration and manipulation and sophisticated graphics,
animation, sound and video. The Company uses its proprietary Post On The Fly(TM)
software in designing and developing many of its Web sites.
HomeCom also provides Internet outsourcing services and presently hosts
more than 1,600 Web sites for clients in approximately 45 countries. HomeCom
establishes and maintains the resources and facilities necessary to create and
support a customer's Internet server. As a provider of Internet outsourcing
services, HomeCom (i) advises its clients as to the appropriate hardware,
including servers and routers, and software necessary to create an Internet
server; (ii) coordinates the purchase of this hardware and software, including
operating system and Internet server software; and (iii) provides the facilities
to house and maintain the server. HomeCom provides network management, including
all network functions, the maintenance of an environmentally conditioned, secure
facility and access to the Internet.
The Company has developed advanced software products that it presently
includes in its custom applications and that it intends to develop further for
retail sale. The Company has developed software, called Post On The Fly(TM),
which enables non-technical users to add, retrieve and update information
through the Internet or an Intranet using standard browser software. Post On The
Fly(TM) Conference permits intuitive and easy conferences among employees,
customers and business partners. The product uses database technology to archive
the user's data, ideas and innovations for later retrieval and review. Post On
The Fly(TM) Store facilitates the creation and updating of an on-line store or
catalog. Post On The Fly(TM) Q&A is being designed to facilitate the creation
and updating of examinations and training courses in question and answer format.
Post On The Fly(TM) Publisher is
22
<PAGE> 30
being designed to permit the publisher of a magazine or newsletter to design an
electronic publication layout where reporters, editors and writers can insert
articles, graphics and other content.
HomeCom is also developing a suite of software modules known as the
Personal Internet Banker(TM). Under the terms of the Company's business partner
agreement with Unisys, HomeCom's suite of Personal Internet Banker(TM) software
will be marketed as optional software available to purchasers of Unisys'
Computer Systems Group enterprise server hardware. At the heart of HomeCom's
banking applications suite is its Personal Internet Banker(TM) software, a
scaleable financial software package that maintains a customer's personal
banking history and preferences for Internet banking.
HomeCom recently acquired an Internet security division to provide security
solutions for businesses connecting to the Internet. The Company plans to
develop and integrate advanced value-added security features into its custom
software applications and products, and to provide consulting and integration
services to companies seeking to communicate and transact business securely over
the Internet.
The Company markets its products and services through its direct sales
force, print advertising and its own Web site. The Company also generates
customer leads through its business partner relationships with leading
technology companies such as AT&T, BBN Planet, Microsoft, Netscape, Oracle,
Sybase and Unisys.
The Company's staff of 20 full-time software engineers design and develop
custom applications and software products as well as run the Company's
outsourcing services and design Web sites. The Company's software engineers have
experience with various computer operating systems, including Sun Solaris, SGI's
IRIX, Windows NT, Digital's Unix on the Alpha platform, Intel's Pentium Pro on
BSDI Unix, Hewlett Packard's HP 9000 and Apple's Macintosh operating system. The
software engineers write software programs using various tools and languages,
including Perl, JAVA, CGI Programming, C and C++. The software engineers also
have database expertise in Oracle, Informix, Sybase and SQL, and many software
development tools. The Company's multimedia artists and engineers utilize many
of the generally available software programs and tools such as Adobe Photoshop,
MacroMedia Shockwave, RealAudio and VDOLive.
INDUSTRY OVERVIEW
The Internet and the World Wide Web
The Internet represents a global network of thousands of interconnected
computers and computer networks. By using the Internet, businesses, individuals,
educational institutions and government agencies communicate electronically to
access and share information and conduct business. Open communications on the
Internet are enabled by TCP/IP, an inter-networking protocol software standard.
Advances in microprocessor technology and the development of Web technologies,
such as Hypertext Markup Language ("HTML") technology (which allows users to
move directly from one Web site to another) and advanced graphical user
interface browser and search engine software, have made the Internet easier to
navigate and more accessible to a larger number of users and for a broader range
of applications. These recent technological advances have led to dramatic
increases in the use of the Internet by businesses and individuals.
The fastest growing portion of the Internet is the World Wide Web. The Web
is the worldwide network of computer services that uses a special communications
protocol, Hypertext Transfer Protocol ("HTTP"), that links different servers
throughout the Internet and enables non-technical users to move from Web site to
Web site easily and to access information using browser software. According to
IDC, the number of Internet users with Web access increased from 1.1 million in
1994 to 8.3 million in 1995 and was estimated to have reached 31.4 million by
the end of 1996. IDC
23
<PAGE> 31
estimates that the number of individuals worldwide with access to the Internet
will reach approximately 200 million by the end of 1999.
The development of the Web and Internet-based technologies has allowed
fundamental and structural changes in the way information is published,
distributed and retrieved, thereby lowering the cost of publishing information
and expanding its potential reach. By facilitating the publishing and exchange
of information, the Web dramatically increases the amount of information
available to users. Businesses are increasingly recognizing that the Internet
can enhance the delivery and exchange of information, both among their
geographically dispersed locations and employees and with their business
partners and customers. Businesses are also realizing that the Internet can
facilitate relatively inexpensive, standards-based and easy-to-use methods for
accessing and delivering business information, such as sales, marketing and
distribution data. As a result, many businesses are using Web sites as a new
medium for advertising, promotion, conferencing, technical support and exchange
of information.
Web Sites
A Web site is a collection of one or more electronic documents or "Web
pages," which may contain graphics, text, audio and video information, which is
available to a visitor accessing the Web site. Web sites can contain from one to
hundreds of pages, and can be searched, retrieved and viewed through the use of
widely available "browsers," such as Netscape Navigator or Microsoft Internet
Explorer. Using Web browser software, computer users can connect to a Web site
by entering the site's unique electronic Web address, known as its Universal
Resource Locator ("URL"). Users can navigate the Web sites by utilizing
hypertext link capabilities contained in Web pages. Hypertext links are active
areas on a Web page which, when selected by a user, automatically identify and
display a specific page, which can be located anywhere else on the Web, thus
enabling users to move from one Web page to another without specifying the
underlying URL address. Web sites can vary significantly in complexity and
interactivity. A simple Web site may display only text, and more complex sites
may display colored text, graphics, pictures, sound, animation, video and
database information.
The Company believes that increased processor speed, higher
telecommunications bandwidth (resulting in increased transmission speed) and the
development of software standards have led to the growing acceptance of the
Internet as a communications tool. As a result, many businesses are choosing to
re-engineer their distribution, logistics, customer service and marketing
functions into "Information Depots" accessible through their Web sites.
Consequently, the Company believes that there is an expanding market for
developers of sophisticated, graphically enhanced, interactive Web sites.
Enterprise Networks and Intranets
As network technology has advanced, business-wide networking has evolved.
Organizations have developed local area networks ("LANs") and have connected
geographically dispersed LANs into wide area networks ("WANs"). Many LANs employ
proprietary communications software, such as Novell NetWare. Today, in addition
to proprietary protocols, an increasing number of businesses are using the
Internet protocol TCP/IP for communications. TCP/IP facilitates communications
over internal networks using Internet software tools and applications. An
Intranet is a TCP/IP network inside a company that links the company's people
and information in a way that makes information more accessible and facilitates
navigation through all the resources and applications of the company's computing
environment.
Enterprise networks have increasingly used high-cost leased data lines to
create private and secure LANs and WANs. Internet protocol network software now
allows organizations to use the Internet for a lower-cost communications system
by reducing long distance and leased line charges. Businesses now can expand the
reach of and access to their internal information systems and
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enterprise applications to allow geographically dispersed facilities, remote
offices, mobile employees, customers and business partners to access their
networks through the Internet at lower communications costs. The integration of
LANs and WANs through the Internet, plus the advancement of encryption security
capabilities, has promoted the use of high-speed virtual private networks
("VPNs"), which may be maintained at a fraction of the operating cost of
dedicated, leased line networks. VPNs that facilitate Internet banking, sales
entry and express delivery shipment tracking services are examples of this
fast-growing segment of the computing industry. The rapid growth of Intranets
and VPNs has increased the need for specialized software applications that
facilitate information delivery and communication using TCP/IP protocol.
Internet Security
An integral part of developing Internet based software applications for
businesses is protecting against unauthorized access to enterprise networks and
corporate data. Examples of valuable corporate data include financial results,
medical records, personnel files, research and development projects, marketing
plans and credit information. Businesses are vulnerable to unauthorized access
to this information both by employees and outside persons. Unauthorized access
may go undetected by the computer user or network administrator. The Company
believes that concerns about the security of data transmitted over the Internet
have limited growth in the Internet's commercial use. As a result, the Company
believes that there is a rapidly expanding need for the services of Internet
security specialists.
The Internet-Enabling Products and Services Market
The explosive growth of the Internet and World Wide Web has led to the
rapid development of increasingly sophisticated and advanced TCP/IP-enabled
software applications such as Web browsers and HTML compatible server software.
These Internet tools enable users to obtain and communicate information more
efficiently and effectively. Forrester Research, Inc. estimates that the
combined Internet and Intranet worldwide software market will increase from $382
million in 1996 to $8.5 billion in 1999.
The Company believes that there is a rapidly growing need for businesses to
expand and integrate their existing information and communications systems to
take advantage of the global communications framework and advanced graphics
capabilities of Internet-enabled systems. The Company also believes that
businesses today face a paradigm shift from proprietary protocol based local
area networks and wide area networks to Internet-enabled global communications
systems. However, the Company believes that there is a need for high quality
software applications designed to support these new systems.
THE HOMECOM SOLUTION
HomeCom was established to provide advanced software applications and
integration services to businesses seeking to take advantage of the Internet.
Integration of existing business operations with new Internet technologies is a
costly and complex undertaking which the Company believes requires a high level
of expertise to complete effectively. HomeCom believes that many businesses do
not have the in-house experience and expertise to establish effective
Internet-based communications in order to increase their productivity and
compete more effectively in the marketplace. Also, HomeCom believes that the
growth of electronic commerce over the Internet has been impeded by the
perceived lack of effective security components. Finally, the Company believes
that there presently is a lack of specialized software applications to support
the growing Internet market. Therefore, the Company believes that businesses
will engage specialized firms like HomeCom to
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implement Internet solutions. HomeCom believes it is well positioned to become a
leading Internet solutions provider for the following reasons:
- HomeCom focuses on creating Internet "Information Depots" for clients,
including sophisticated database integrated software applications and
interactive Web sites, to provide valuable information to business'
customers, prospects, employees, stockholders and business partners.
This is in contrast to the public relations material that represents
much of the content currently on Web sites.
- The Company has assembled a team of professional programmers, database
experts and graphic artists that is able to create advanced
interactive Web sites with database integration that function as
effective Information Depots. Through developing specialized Internet
applications for clients in vertical industries, HomeCom's team
attains valuable knowledge about industry specific Internet needs and
solutions, which it uses to provide efficient, value-added services to
its customers.
- HomeCom's recent establishment of its Internet security division has
furthered the Company's knowledge of, and expertise in, Internet
security. As a result, the Company is able to include advanced
security features to create a more comprehensive Internet solution.
- The Company provides businesses with a "one stop shop" for Internet
communications applications. The Company can provide applications
development, Web site creation, Internet security and Web server
outsourcing. By combining its advanced programming, database and
security expertise with outsourcing capabilities, the Company intends
to create next generation Internet business solutions.
HOMECOM BUSINESS STRATEGY
The Company's objective is to be a leading provider of business
communications solutions using Internet standard protocol technologies. The
Company intends to achieve this position by implementing the following key
elements of its growth strategy:
Develop and Market Industry-Specific Applications
The Company will develop specialized software applications and market these
applications to large businesses. The Company intends to focus on
industry-specific applications such as insurance and real estate sales force
data systems, financial institution client account access systems, inventory
order entry systems, human resources information directories, and collaborative
and groupware environments. The Company's goal is to develop a reputation as a
leading full-service Internet applications developer for specific vertical
industries, including banking and financial services, retailing and
entertainment.
Expand Software Product Development
By developing specific Internet-based applications, the Company expects to
continue to obtain valuable industry-specific data and knowledge of the
Internet-based software needs in such industries. The Company will seek to
retain the rights to use important elements of specific business applications in
order to develop other custom applications. For example, the Company has
developed software, which it calls Post On The Fly(TM), which enables
non-technical users to add, retrieve and update information through the Internet
or an Intranet using standard browser software. The Company expects to continue
to develop, integrate and offer Post On The Fly(TM) products such as Post On The
Fly(TM) Conference, Post On The Fly(TM) Store, Post On The Fly(TM) Q&A and Post
On The Fly(TM) Publisher. The Company has entered into a business partner
agreement with Unisys to resell the Company's suite of software modules known as
the Personal Internet Banker(TM).
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Develop and Integrate Advanced Security Services
HomeCom's Internet security division will provide advanced security
integration consulting services and develop Internet applications with high
levels of integrated security. HomeCom's Internet security division is staffed
by Internet software and integration security consultants with a broad range of
Internet and Intranet security applications and integration experience to both
commercial and government users. HomeCom intends to market these advanced
services and applications both as part of a total package of Internet conversion
services and as a single service. The Company's objective is to become a leading
provider of integrated security services and applications to large business
enterprises and to government agencies.
Expand by Acquisition
The Internet/Intranet products and services market is highly fragmented.
The Company is one of numerous Internet software applications and advanced
multimedia developers who design, develop and provide Internet software products
and services. In addition, a substantial number of client/server developers,
database systems integrators and resellers provide services to established
clients but do not provide Internet-based solutions for those clients. The
Company will seek to make strategic acquisitions of companies that have
developed specific industry expertise or have existing relationships with large
businesses needing Internet/Intranet solutions. However, the Company has not
entered into any agreement or commitment and is not a party to any negotiations
for any such acquisition.
PRODUCTS AND SERVICES
HomeCom provides Internet/Intranet solutions in five integrated areas:
custom software applications design, development and integration; World Wide Web
site development; Internet outsourcing services; specialized Internet software
products; and security consulting and integration services.
Customized Software Applications for the Internet
HomeCom designs and develops specialized software applications that enable
companies to obtain and communicate important business information through
Internet standard protocol communications. To date, the Company has completed
custom applications projects for clients such as Data Track Systems, Inc.,
Coverdell Insurance, Inc., AFLAC and Vital Integration Solutions, Inc.
The Company works closely with its customers to analyze and design
specifications for Internet standard software applications. To begin a custom
applications project, the Company's customers generally either request a
proposal from the Company or meet with Company personnel to discuss their
Internet/Intranet communications needs. The Company generally analyzes the
customers' present system and provides a recommendation and a quotation. A
typical quotation specifies a fixed fee for significant design and development
activities, a variable fee for maintenance support services, and includes
pricing for equipment, software and communications. Criteria for pricing these
services include the complexity of the project, the amount of custom programming
required, the anticipated usage and traffic and the level of security required.
The Company's custom application projects have generated fees ranging from
approximately $40,000 to approximately $200,000.
Following are examples of how HomeCom uses its integrated services to
create specialized Internet and Intranet based software solutions for large
businesses:
- Sales Force Information System. A Fortune 250 insurance company hired
HomeCom to design and implement a system to allow its agents across the
United States to search and retrieve insurance product descriptions,
prices and other product data and to update the agents' personal
profiles on a continuous basis. To meet the customer's needs,
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HomeCom designed and implemented an Internet-based custom software
solution using its Post On The Fly(TM) technology. The customer
advised HomeCom that this new system could increase the customer's
revenues by allowing the public direct access to information about
its products and assisting prospective customers in locating agents
who meet their personal needs. The Company implemented the first
phase of this project in the fourth quarter of 1996.
- Real-Time Public Viewing System. HomeCom was hired by a contractor to
an international telecommunications company to design and implement a
real-time video of selected 1996 Olympic Games venues for the
telecommunications company's Web site. HomeCom designed and
implemented software which integrated the video feed from various
sites at the Centennial Olympic Games in Atlanta, Georgia to allow
Internet users throughout the world to view specified venues. As
part of this project, the Company supplied computer and
communications hardware to the customer.
- Order Entry System. HomeCom was engaged by a contractor to the
nation's largest mortgage origination firm to create an Intranet order
entry system to allow the customer's geographically disbursed
employees to communicate important information relating to real estate
mortgages. HomeCom presently is developing an Intranet system for the
customer through which employees and business partners will be able to
access a variety of title-related information, including title
insurance, escrow information, public records and flood plain
information. Users will be able to request title policies and
services, report expected delivery dates, update order information and
view order executions by other employees. The system, called "The
Automated Order and Delivery Service for Real Estate Loan Services,"
uses a Sybase database to collect and process orders and Netscape's
Commerce Server's Secure Socket Layer to provide secured transactions.
The customer believes that this system will increase the speed at
which its employees can process mortgage information, and will reduce
paperwork, without requiring the customer to incur the cost of
expensive leased phone lines, banks of modems and cost-prohibitive WAN
systems. The first phase of this project was completed in the third
quarter of 1996.
- Interactive Insurance Quotation System. A regional insurance
brokerage approached HomeCom with the need to develop an electronic
commerce system to allow the public to enter personal and financial
information and to obtain competing quotes for life insurance policies
and annuities. HomeCom has developed a secure interactive system,
using a Microsoft SQL database and Netscape Enterprise server
software, to allow the public to obtain competing quotes for life
insurance policies and annuities through the Internet. The product is
currently accessible through Prodigy. The customer has advised HomeCom
that it believes this system will enhance the customer's marketing
presence for its brokerage services and increase its sales by allowing
customers to obtain quote information without utilizing an agent. The
customer has advised the Company that it plans to market this system
to the banking industry.
During 1996, custom Internet and Intranet applications and integration
services (including hardware resales) accounted for approximately 19% of the
Company's revenues. The Company believes that special applications services will
represent an increasing percentage of its total revenues as the Company
continues to market its custom applications services to larger businesses.
Web Site Development and Design
HomeCom is an established provider of advanced Web site design and
implementation services, having developed more than 100 Web sites for clients in
many industries. The Company has a highly trained staff able to design Web sites
ranging from basic "inquiry only" sites to
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complex, interactive sites capable of providing on-line commerce, data base
integration and manipulation, sophisticated graphics, animation, sound and other
multimedia content.
The Company has developed a standard process for the design and
implementation of Web sites. Initially, the Company's creative director and
project manager meet with the customer to discuss its current methods for
serving its customers, employers and suppliers, as well as its objectives and
marketing needs. Prices for the design of relatively simple Web sites, without
additional software applications, currently range from $5,000 to more than
$50,000.
The Company's staff of 20 full-time software engineers uses a variety of
computer operating systems, tools and language to develop Web sites. In
particular, the Company's software engineers have developed a high level of
expertise using C, C++, Perl, JAVA and CGI programming. These programmers write
complex computer programs to create special features on a Web site. In addition,
they regularly assess new applications and tools that may assist the Company in
providing leading edge Web site services.
The Company's graphics designers create sophisticated Web sites which
include functions such as interactive on-line commerce, 3-D modeling, virtual
reality and audio and video creation and editing. The Company's staff of
professional artists, multimedia programmers and graphic designers develops Web
sites to meet the customers' creative needs. HomeCom and its clients have won
several awards for Web sites created by HomeCom, including the MGM-UA "Top 10,"
Point "Top 5% of All Web Sites" and Magellan "Four Star Site." The Company
intends to continue to recruit the best available multimedia artistic talent.
A business' decision to begin marketing and communicating through the
Internet generally involves the expenditure of substantial funds and can result
in major changes to its marketing and communications systems. Forrester
Research, Inc. estimates that the typical annual costs for establishing and
operating a business Web site currently ranges from approximately $304,000 for a
"promotional" site to nearly $3.4 million for a full transactional site.
Consequently, HomeCom believes that businesses generally prefer companies such
as HomeCom that have established track records, professional staffing and good
reputations to provide these services.
During 1996, Web site design and development services accounted for
approximately 50% of the Company's revenues. The Company expects that revenues
from such services will increase, but believes that fees for such services will
represent a smaller percentage of total revenue over the foreseeable future.
Internet Outsourcing Services
HomeCom provides full service Internet network outsourcing services,
consisting of Web site and Internet application hosting and facilities, which it
markets both as an integrated part of its full-service Internet solution and as
a separate service. HomeCom's customers utilize the Company to maintain the
customers' Internet servers and network functions at facilities located at
HomeCom's main office. HomeCom presently hosts approximately 1,600 Web sites.
HomeCom's Internet Network Development Center ("NDC") is housed in Class A
office space with 24-hour manned on-premises security. Access to the NDC
computer room is 24-hour double secured. HomeCom provides its Internet
outsourcing services through multiple leased T1 and T3 data lines. See
"Facilities."
Because the Company is an established provider of these services, conducts
its operations using sophisticated technologies and operates in Class A office
space, it believes it can compete effectively to provide Internet outsourcing
services for large businesses. At the same time, because the Company prices its
outsourcing services competitively, it believes it can compete effectively for
the hosting services of small business and individuals.
The Company maintains the file servers for a customer's Web site for a
monthly fee. Presently, the monthly fees range from approximately $25 to $3,000.
Pricing levels vary depending on the
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amount of storage used on the file server. The Company also provides ongoing
maintenance, problem correction and periodic updates, as well as outsourcing
services for customers who own their own equipment.
Following are examples of HomeCom's outsourcing services:
- HomeCom presently maintains the interactive Web site for one of the
nation's largest film processing companies. This Internet-based
customer service system allows customers to review and order pictures
from film which has been developed by the company. This system is
integral to the company's operations, and is maintained and operated
by HomeCom on a 24-hour basis.
- HomeCom presently hosts the interactive Web site for a publicly traded
restaurant chain. This Web site provides up-to-date company and
stockholder information, on-line job resources and employment
information.
- HomeCom is hosting a Web site for a publicly traded insurance company
that provides information about its insurance products and services,
including an on-line agent location and profile system.
- HomeCom is hosting a regional bank's interactive Web site
communications system which enables the public to receive stockholder
information, branch location information and press releases, and to
participate in on-line interviews with the company's chief executive
officer. The customer has advised the Company that it intends to
include all its approximately 34 subsidiary banks in its Web site.
- Prior to and during the recent 1996 Olympic Games in Atlanta, Georgia,
HomeCom hosted the server for an international telecommunications
company's Web site, which enabled the public to view real-time
pictures of selected venues of the Olympic Games.
During 1996, Internet outsourcing services generated approximately 16% of
the Company's total revenues.
Software Products
The Company uses its proprietary technology as an integral part of many of
its custom applications services and believes that there are valuable potential
retail applications for this technology. The Company is currently adopting some
of its custom Web applications into generic software products. For example, the
Company has developed advanced Internet-enabled software products based on the
Company's Post On The Fly(TM) technology. Post On The Fly(TM) is software which
enables non-technical users to add, retrieve and update information through the
Internet or an Intranet using standard browser software. The Company has used
Post On The Fly(TM) technology to create the following software application
products:
Post On The Fly(TM) Conference. In September 1996, the Company began
selling Post On The Fly(TM) Conference ("Conference"), an Internet Web
conferencing software product designed to operate on Web servers. Conference
allows users to create their own conference sessions and allows discussion
groups to be created and administered by non-technical personnel. Conference
utilizes Post On The Fly(TM) technology to store and search all user profiles
and discussions. Each conference participant is required to have only a Web
browser and an Internet connection. Conference operates on a Web server and
allows users of many different types of computers to communicate interactively
in the same conference. Conference stores all responses to a HomeCom created
database, which allows the business and participants to search, locate and
retrieve all posts, replies and user profiles. Conference integrates the user
profiles into the conference so that participants have access to the education
and job experience of each other participant and other historical information
necessary to assess a participant's responses. Conference allows users to add
photos, videos, word processing files and sound bites to conferences and to
their profiles.
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Conference may be customized by the user to define the scope and subject of
the conference, the conference participants and the persons who may administer
the conference. Conference administrators are permitted to update the conference
and evaluate persons who apply to participate. Conference also has powerful
administrative features that enable a principal conference administrator to
distribute all or certain administrative functions to sub-administrators quickly
and easily. Conference provides a dynamic business tool for interactive
conference communications, including soliciting employee comments on business
initiatives, proposals, group projects and topics of mutual interest to
participants.
For example, one of the nation's largest film processing companies
presently uses Conference for three distinct types of interactive communication
through its Web site. First, it establishes "open" conferences for its customers
and the general public, soliciting their input on its present services and
products and certain proposed future services and products. Second, it
establishes conferences for its employees to solicit their input on topics of
importance to them. Third, it establishes private conferences for its store
managers to discuss topics relating to store operations and proposed future
services and products. HomeCom's customer believes that the implementation of
the Conference software application has allowed it to obtain valuable feedback
from its employees and managers, as well as its present and potential customers,
and has given it a valuable marketing tool by increasing the usefulness of its
Web site. Conference is presently sold at a retail price of $495.
The Company believes that there are presently several other publicly
available software products that offer Internet-based group discussion,
including Lotus Notes and Digital's AltaVista(TM) Forum. The Company believes
Conference will be competitive with these software products because Conference
offers ease of use, a multiplicity of features and an attractive price. The
Company is presently preparing and intends to file a U.S. patent application
covering certain aspects of Conference.
Post On The Fly(TM) Store. In February 1996, the Company completed
development of its first version of Post On The Fly(TM) Store ("Store"), an
Internet Web server database product that enables businesses to sell products
over the Internet in a secure on-line catalog environment. Store also allows a
customer's non-technical employees to create and update the on-line store or
catalog using any Internet World Wide Web connection and standard browser
software. HomeCom's customer, the "store merchant", can enter and later modify
the descriptions and prices of products to be sold in the on-line store. Product
descriptions can include graphics, pictures and product, shipping and pricing
information. The store merchant can add to or delete its product inventory at
any time without any special training or programming skills. A Post On The
Fly(TM) Store can be a simple 12 item store for a small merchant or a large
on-line catalog.
Store customers can purchase products using standard Web browser software.
Store customers also can search for specific types of products based on
description, name, price or product ID number, and retrieve the relevant product
information. After deciding to purchase a product, a customer can point and
click to select the product for purchase and place that product into the
customer's shopping basket list. After selecting all purchases, the customer can
checkout and purchase the products in the shopping basket list by using a credit
card. The order entry system will summarize the total purchase price for the
products purchased and the exact shipping charges through automatic reference to
UPS's rate information system. Store notifies the merchant of all customer
orders by secure Web sites, encrypted e-mail or facsimile to the merchant.
Merchants are also able to access Store's accounting system to review the
purchases of their customers. The Company believes that Store will be
competitive with other existing Internet store creation products such as
Netscape Merchant software because Store is competitively priced and requires no
programming skills once installed. HomeCom anticipates that Store will be
released in the second quarter of 1997 and will be sold at an initial retail
price of between $2,000 and $2,500.
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Post On The Fly(TM) Q&A. The Company is developing Post On The Fly(TM) Q&A
("Q&A"), a testing and training software application product that will enable
users to create and revise complicated examinations, training courses, and
simple question and answer forms. A customer will be able to use Q&A to create
an examination by typing or pasting a series of questions and answers into the
program using standard Web browser software. The user will be able to specify
the number of questions, the time allowed to answer each question, the score
necessary for a passing grade, and other testing and training criteria to create
a highly customized test or training course. The user also will be able to
determine who should be entitled to see the results of the Q&A tests or training
courses. All user information, scores and examination answers will be stored in
the database for later viewing and analysis. The Q&A software will allow
non-technical persons to create sophisticated training courses and examinations
without any programming experience. Encryption technology will maintain the
confidentiality of the tests and training courses. HomeCom anticipates that Q&A
will be released in the second half of 1997 and will be sold at an initial
retail price of between $3,500 and $5,000.
Post On The Fly(TM) Publisher. The Company is developing Post On The
Fly(TM) Publisher ("Publisher"), a proposed database software product designed
to provide customized publishing templates, including text and graphics
placement, headings, background colors, text colors and font sizes. As currently
designed, this product will allow publishers to design an electronic publication
and to create an Internet Web magazine or other electronic publication.
Publisher will allow reporters, editors, writers and other non-technical people
to utilize the Internet to insert articles, graphics, video clips, sound clips
and other content to create a multimedia publication. Content will be able to be
inserted into the publication simply by typing or pasting into the proper areas
of the template. Reporters and others submitting content to an electronic
magazine from the field will be able to access a secure section of the Publisher
software, using log-in and password protection, and paste their articles or
graphics into the proper sections. Content submitted in this manner will be
converted into HTML format ready for viewing on the Web without further
intervention. Information submitted by a user will automatically be stored in a
database for later use.
Publisher will be designed to provide users with two possible versions of
an electronic publication. One version will contain all of the content. A second
version will be customized "on the fly" to contain only the information that is
of interest to an individual user, based on content placed in the user's
profile. Publisher will determine the content of the custom version based on its
built-in intelligent agent rules that match user interests with select articles
and other content.
Although there are numerous HTML editing products such as Netscape
Navigator Gold and Microsoft Front Page, the Company believes its products will
allow non-technical users to create a customized version of their publication in
real time for each reader. The Company will seek to compete against other
products by offering Publisher as a ready-to-run application with easy-to-use
features at a competitive price.
The Company intends to market its Post On The Fly(TM) software products by
offering a free limited use demonstration license through its Web site, similar
to programs offered by other software developers, and through print media and
reseller agreements. The Company has not conducted market studies for its Post
On The Fly(TM) products and, consequently, cannot determine whether there will
be a substantial market for such products or whether such products will compete
effectively against present and future competing products. HomeCom anticipates
that Publisher will be released in the second half of 1997. As of the date of
this Prospectus, the Company has not determined a price or price range for
Publisher.
During 1996, the Company's Post On The Fly(TM) products, other than
Conference, were under development and not available for retail sale.
Personal Internet Banker.(TM) The Company is in the process of developing
a suite of banking software applications designed to facilitate Internet
banking. At the heart of this suite of software products is the Personal
Internet Banker(TM), a scaleable financial package for the banking industry that
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maintains a customer's personal banking preferences for Internet banking. With
the intelligent agent technology of the Personal Internet Banker(TM), a software
agent answers a consumer's personal financial questions and consummates
financial transactions such as purchasing stocks, accessing checking account
balances, processing loan applications, purchasing insurance and other personal
banking functions. The Company anticipates that this suite of banking
applications will be made available to financial institutions for the purpose of
remarketing these products to their banking customers. Through knowledge of a
customer's financial history and banking preferences, the Company believes that
financial institutions will be better able to market financial products and
services on a one-to-one basis to their customers. The Company anticipates that
this product will be commercially available in the last half of 1997 or the
first half of 1998. The Company has entered into a marketing agreement with
Unisys which provides that Unisys will market Personal Internet Banker(TM) as
optional software available to purchasers of Unisys' Computer Systems Group
enterprise server hardware.
During 1996, sales of software products developed by the Company generated
less than 1% of the Company's total revenues.
Internet Security Services
In August 1996, HomeCom acquired an Internet security division to provide
security solutions for businesses connecting to the Internet. See "Certain
Transactions." The Company plans to develop and integrate advanced value-added
security features into its custom software applications and products, and
provide consulting and integration services to companies seeking to communicate
securely and transact business over the Internet.
The Company's objective is to provide its customers with a comprehensive
family of integrated network security solutions. The Internet security division
will assess the customer's needs and recommend and install "firewalls,"
encryption and authentication applications, other repudiation techniques and
secured networks. Management of the Internet security division has experience in
performing Internet security services for the federal government.
During 1996, Internet security services generated approximately 3% of the
Company's total revenues.
SALES AND MARKETING
The Company markets its products and services through its direct sales
force, print advertising and its own Web site. The Company also generates
customer leads through its business partner relationships with leading
technology companies such as AT&T, BBN Planet, Microsoft, Netscape, Oracle,
Sybase and Unisys.
The Company has instituted an in-depth two-week training program for its
sales staff to enable them to market the Company's Internet-based services and
products effectively. During the first week, the Company teaches an overview of
basic Internet and Intranet technology and current and developing hardware and
software. This allows its sales staff to become conversant in the terms and
technology of the Internet industry, and provides in-depth training about the
Company's services and products. During the second week, the Company teaches its
direct sales system, using role playing to teach its staff how to locate
prospective customers, define their needs, overcome obstacles to sales and
finalize sales.
The Company is focusing its marketing on large businesses with
industry-specific applications needs in areas such as insurance and real estate
sales force data systems, financial institution client account access systems,
inventory order entry systems, human resources information directories, parts
databases and collaborative and groupware environments. The Company also intends
to utilize traditional print and media marketing strategies to enhance Company
and product name recognition.
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CUSTOMERS
During 1996, no customer accounted for more than 10% of the Company's total
revenues.
Because substantially all of the Company's customers have retained the
Company for a single project, customers from whom the Company generated
substantial revenue in one quarter generally have not been a substantial source
of revenue in a subsequent quarter.
FACILITIES
The Company occupies approximately 10,000 square feet in an office building
in Atlanta, Georgia under a lease expiring in March 2001. The facility serves as
the Company's headquarters and computer center. The Company also has an office
in McLean, Virginia occupying approximately 450 square feet under a lease
expiring in July 1997.
The Company's Internet services are maintained in secured, environmentally
conditioned premises at its NDC computer room at the Company's principal
offices. Company personnel monitor server and network functions on a 24 hour per
day, 7 days per week basis, and access to the NDC is 24 hour double secured.
Back-up servers replace production services in the event of failure or down
time. Tape back-ups are performed on a weekly basis and transported for off-site
storage. Each server is SNMP managed and utilizes devices located on a separate
network to notify NDC personnel by pager in the event of problems that are not
otherwise detected by HomeCom's own SNMP.
All power supplied to the NDC computer room is supplied by two separate
power substations through American Power Conversion Matrix UPS lines, with
back-up battery power. Telecommunications are provided to the computer room
through multiple leased T1 and T3 lines directly connected to the T3 Internet
provided by interexchange carriers. Each T1 and T3 line is provisioned on
separate local carrier fiber optics using the latest SONET and FDDI technology.
Telecommunications lines are provided through two physically diverse entrance
facilities. The Company has acquired and installed multiple Cisco routers for
connection to the Internet, which automatically redistribute traffic load in the
event of telecommunications failure.
The Company believes that the properties which it currently has under lease
are adequate to serve the Company's business operations for the foreseeable
future. The Company believes that if it were unable to renew the lease on either
of these facilities, it could find other suitable facilities with no material
adverse effect on the Company's business.
COMPETITION
The market for specialized Internet applications and products is highly
competitive, and the Company expects that this competition will intensify in the
future. In providing specialized software design and development, the Company
competes with numerous businesses that also provide software design and
development services, companies that have developed and market application
specific Internet software products, companies that provide software tools that
enable customers to develop specific Internet-enabled software applications and
companies that choose to develop Internet application products internally.
Andersen Consulting, L.L.P., Electronic Data Systems Corporation ("EDS"),
International Business Machines Corporation ("IBM") and Cap Gemini America are
significant custom software developers, integrators and resellers whose services
include a broad range of Internet and Intranet software applications design and
development services. Companies such as Broadvision, Inc., Edify Corporation and
Security First Network Bank have developed application specific Internet
software products that are broadly marketed and licensed and perform such
functions as interactive one-to-one marketing, human resources benefits inquiry,
enrollment and training and Internet banking. In addition, companies that offer
and sell client/server based Internet-enabled software products, such as
Netscape and Microsoft, may in the future bundle software capabilities and
applications with existing products in a manner which
34
<PAGE> 42
may limit the need for software capabilities and application services such as
those offered by the Company. The Company also competes with the information
technology departments of significant business enterprises who may choose to
design and develop their Internet applications internally. The emergence of
sophisticated software products and tools that enable companies to build
customized Internet-enabled software applications internally also may have the
effect of encouraging internal development and, thus, may materially reduce the
demand for the Company's custom software application services.
The Company's Web site development services face competition from a variety
of sources, from small operations to large global competitors like EDS and
Computer Sciences Corporation. The Company believes Web site development
presently is a fragmented market, with no business commanding a dominant share.
HomeCom believes that as Web sites increase in interactivity and complexity, Web
site development companies will increasingly need to maintain an integrated team
of Intranet-enabled software engineers, advanced graphics programmers,
multi-media artists and Internet security experts in order to compete
effectively for large business customers. Consequently, HomeCom believes that it
will need to continue to expand its personnel and work to maintain leading edge
technology capabilities in order to remain competitive. Although there is likely
to be a continuing market for individual Web site development, the Company
intends to continue to focus its Web site development services on large
businesses with complex interactive requirements.
The Company's Internet outsourcing services face competition from numerous
large and small competitors that provide comparable outsourcing services. Such
competition includes BBN Planet, AT&T, MCI Communications Corporation ("MCI"),
IBM, EDS and WorldCom, Inc., as well as numerous regional Internet outsourcing
services providers.
The Company's security services division faces competition from many
sources, including companies that provide security consulting services and
companies that market specific Internet-based security solutions. Such
competitors include Digital Equipment Corporation, IBM, Andersen Consulting,
L.L.P. and EDS. In addition, many companies currently market Internet-based
application-specific software products that incorporate security and
confidentiality features and functions.
The Company believes that the rapid expansion of the market for Internet
software applications will foster the growth of many significant competitors
performing comparable services and offering comparable products to those offered
by the Company. The Company competes on the basis of creative talent, price,
reliability of services and responsiveness. Many of the Company's current and
prospective competitors have substantially greater financial, technical,
marketing and other resources than the Company. The Company believes that it
presently competes favorably with respect to each of its various service
offerings. There can be no assurance that the Company's present and proposed
products will be able to compete successfully with current or future competitors
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition and operating
results.
INTELLECTUAL PROPERTY RIGHTS
In accordance with industry practice, the Company relies primarily on a
combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company does not hold any registered trade
or service marks at this time, but has applied for federal registration of the
names "HomeCom(TM)," "Post On The Fly(TM)" and the Company's logo. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information that the Company regards as proprietary. There can be no assurance
that the Company's means of protecting its proprietary rights will be adequate
or that the Company's competitors will not independently develop competing
products and services. In distributing its software products, the
35
<PAGE> 43
Company intends to rely primarily on "shrink wrap" licenses that are not signed
by licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to as great an extent as the laws of the United
States. The Company does not believe that any of its proposed products infringe
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim infringement by the Company with respect to
its products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in electronic commerce grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company. In addition, Web site developers such as the Company
face potential liability for the actions of customers and others using their
services, including liability for infringement of intellectual property rights,
rights of publicity, defamation, libel fraud, misrepresentation, unauthorized
computer access, theft, tort liability and criminal activity under the laws of
the United States, various states and foreign jurisdictions. The Company
routinely enters into non-disclosure and confidentiality agreements with
employees, vendors, contractors, consultants and customers. The Company is
presently preparing and intends to file a U.S. patent application as to certain
aspects of its Post On The Fly(TM) Conference software.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. The Company believes that, due to the
rapid pace of Internet innovation and related software industries, factors such
as the technological and creative skills of its personnel are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections of its technology.
EMPLOYEES
At March 1, 1997, the Company employed 60 full-time employees, of whom 31
were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 17 were marketing and sales personnel
and 12 were involved in administration and finance.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. The Company believes
that such insurance is adequate to cover potential claims relating to its
existing business activities.
GOVERNMENT REGULATION
The Telecommunications Act of 1996 (the "1996 Telecommunications Act"),
which became effective on February 8, 1996, imposes criminal liability on
persons sending or displaying in a manner available to minors indecent material
on an interactive computer service such as the Internet. The 1996
Telecommunications Act also imposes criminal liability on an entity knowingly
permitting facilities under its control to be used for those activities. The
constitutionality of these provisions has been successfully challenged in
federal court and, as of the date of this Prospectus, enforcement of certain
provisions has been enjoined. The United States Supreme Court has agreed to hear
an appeal by the U.S. government of this Federal court decision. If the Supreme
Court determines that a portion or all of the provisions of the 1996
Telecommunications Act are constitutional, this legislation may decrease demand
for Internet access, chill the demand for Internet content or have other adverse
effects on Web site service providers such as the Company. In addition, in light
of the uncertainty of the interpretation and application of this law, there can
be no assurance that the Company would not have to modify its operations to
comply with the statute.
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<PAGE> 44
Except for the 1996 Telecommunications Act, the Company does not believe
that it is currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and believes that
there are currently few laws or regulations directly applicable to Web site
service companies. The Federal Communications Commission is studying the
possible regulation of the Internet. Any such regulations adopted by the Federal
Communications Commission may adversely impact the manner in which the Company
conducts its business. It is possible that a number of additional laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy, pricing and 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 products and
services and increase the Company's cost of doing business or cause the Company
to modify its operations, or otherwise have an adverse effect on the Company's
business, financial condition and operating results. 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 future regulation or regulatory changes may have on its business.
In addition, Web site developers such as the Company face potential liability
for the actions of customers and others using their services, including
liability for infringement of intellectual property rights, rights of publicity,
defamation, libel, fraud, misrepresentation, unauthorized computer access,
theft, tort liability and criminal activity under the laws of the U.S., various
states and foreign jurisdictions. Any imposition of liability could have a
material adverse effect on the Company.
In addition, the Company's network services are transmitted to its
customers over dedicated and public telephone lines. These transmissions are
governed by regulatory policies establishing charges and terms for
communications. Changes in the regulatory environment relating to the
telecommunications and media industry could have an effect on the Company's
business, including regulatory changes which directly or indirectly affect use
or access of the Internet or increase the likelihood or scope of competition
from regional telephone companies, could have a material adverse effect on the
Company.
LEGAL PROCEEDINGS
The Company is not a party to any legal proceedings.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harvey W. Sax................ 45 President, Chief Executive Officer and Director
R. Douglas MacIntyre(1)...... 45 Chairman of the Board of Directors
Nat Stricklen................ 53 Senior Vice President, Sales and Marketing, Chief
Operating Officer and Director
Vinod Keni................... 34 Chief Financial Officer, Treasurer, Secretary and
Director
Krishan Puri................. 31 Executive Vice President and Director
Gia Bokuchava, Ph.D. ........ 31 Chief Technical Officer and Director
Roger Nebel.................. 43 Vice President and Director
Gregory Abowd, Ph.D.(2)...... 32 Director
Winn Schwartau(2)............ 44 Director
</TABLE>
- ------------------------------
(1) Member of the Audit Committee.
(2) Member of the Audit and Compensation Committees.
HARVEY W. SAX is a founder of the Company and has served as President and
Chief Executive Officer of the Company since January 1995. He was Secretary of
the Company from December 1994 until January 1995. From October 1994 until
December 1995, when he began working as a full-time employee of the Company, Mr.
Sax served as a Vice President of Oppenheimer & Co., Inc. From February 1993
until September 1994, Mr. Sax served as a Senior Vice President of D. Blech &
Co. From July 1992 until February 1993, Mr. Sax was a Vice President of Paine
Webber, Inc. From January 1989 until July 1992, Mr. Sax was a Vice President of
Bear, Stearns & Co. Inc. Mr. Sax received a Bachelor of Arts degree from Emory
University in 1972. Mr. Sax has been a member of the Board of Directors since
December 1994.
R. DOUGLAS MACINTYRE has served as Chairman of the Board of Directors of
the Company since October 1996. Mr. MacIntyre has been President, Chief
Executive Officer and a member of the Board of Directors of Brock International,
Inc. since December 1996. From June 1994 until November 1996, Mr. MacIntyre
served as President and Chief Executive Officer of Dun & Bradstreet Software.
From April 1993 until June 1994, Mr. MacIntyre was a private business
consultant. From June 1990 until April 1993, Mr. MacIntyre served as President
and Chief Operating Officer of Software 2000, Inc., a business software company.
Mr. MacIntyre received a Bachelor of Science degree from the U.S. Military
Academy at West Point in 1973 and a Master of Science in Business Administration
degree from Boston University in 1976. Mr. MacIntyre is immediate past President
of the American Software Association, a member of the Board of Directors of the
Southeastern Software Association, and is a member of the advisory board of
Georgia Institute of Technology's College of Computing. Mr. MacIntyre has been a
member of the Board of Directors since September 1996.
NAT STRICKLEN has served as Senior Vice President, Sales and Marketing, and
Chief Operating Officer of the Company since January 1996. Mr. Stricklen was
President of the Company from December 1994 until January 1995, and Vice
President and Secretary of the Company from January 1995 until January 1996. For
more than 25 years prior to joining the Company in December 1994, Mr. Stricklen
was employed by IBM where from 1988 until November 1994 he was the senior
product manager for the IBM Link product used for electronic communication for
IBM employees and business partners. Mr. Stricklen was a member of the team that
developed the original IBM Internet home page. Mr. Stricklen received a Bachelor
of Science degree in Data Processing and Application Systems Design from
Washington University in 1975. Mr. Stricklen has been a member of the Board of
Directors since December 1994.
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<PAGE> 46
VINOD KENI has served as Chief Financial Officer, Treasurer and Secretary
of the Company since February 1996. Before joining the Company, Mr. Keni was a
Senior Financial Analyst with Harvard Pilgrim Health Care, an HMO, from February
1995 until February 1996. From May 1994 until February 1995, he was a Financial
Analyst with Kent County Memorial Hospital in Providence, Rhode Island. From
April 1993 until April 1994, he was a Financial Coordinator with IVF America,
Inc., a healthcare research and products company. From August 1991 until April
1993, Mr. Keni was a student at Johnson & Wales University. Mr. Keni received a
Master of Business Administration degree from Johnson & Wales University in 1993
and a Master of Science degree in Finance and Accounting from Bangalore
University, India in 1987. Mr. Keni has been a member of the Board of Directors
since September 1996.
KRISHAN PURI has served as Executive Vice President of the Company since
February 1996, and was a member of its former Board of Advisors from May 1995
until August 1996. From March 1994 until January 1996, Mr. Puri was a Senior
Management Consultant with Deloitte & Touche Consulting Group in its
telecommunications practice. From March 1992 until March 1994, Mr. Puri served
as a Senior Engineer for International Communications Network Services for
British Telecom and MCI's Concert joint venture in Atlanta, Georgia. From March
1990 until March 1992, Mr. Puri was a network analyst with Sprint Corporation, a
long distance telecommunications company. Mr. Puri received a Bachelor of
Science degree in Electrical Engineering from Georgia Institute of Technology in
1987 and a Master of Business Administration degree from Georgia State
University in 1992. Mr. Puri has been a member of the Board of Directors since
September 1996.
GIA BOKUCHAVA, PH.D., has served as the Company's Chief Technical Officer
since August 1995. Dr. Bokuchava served as a visiting professor at Emory
University from September 1994 until August 1995 and was employed by the
National Library of Medicine, assisting in the development of Internet based
applications, from January 1995 until August 1995. From July 1990 until
September 1994, Dr. Bokuchava was the Director of The Computer Center at the
Institute of Mechanical Engineering at Georgia Technical University, Tblisi,
Georgia (formerly a part of the Soviet Union). Dr. Bokuchava has taught computer
science as a visiting associate professor at the Universities of Moscow and
China. Dr. Bokuchava received a doctorate in theoretical physics from Georgia
Technical University, Tblisi, in 1990. Dr. Bokuchava has been a member of the
Board of Directors since September 1996.
ROGER NEBEL has served as Vice President of the Company since August 1996.
From May 1991 until July 1996, Mr. Nebel was a Department Manager (May 1991 to
February 1993) and Senior Manager - Enterprise Assurance (March 1993 to July
1996) for PRC, Inc., a subsidiary of Litton Industries, Inc., which provides
information technology consulting and systems integration services for
governments and businesses. Mr. Nebel received a Bachelor of Science degree in
Engineering from California Coast University in 1990 and a Master of Science
degree in Management from National-Louis University in 1993. Mr. Nebel has been
a member of the Board of Directors since September 1996.
GREGORY ABOWD, PH.D., has been an assistant professor in the College of
Computing at the Georgia Institute of Technology since August 1994, where he is
a member of the Software Systems Design Group. From October 1989 until August
1994, Dr. Abowd held post-doctoral positions with the Human Computer Interaction
Group at the University of York in England (October 1989 until September 1992)
and with the Software Engineering Institute and Computer Science Department at
Carnegie Mellon University (September 1992 until August 1994). From October 1989
until September 1992, Dr. Abowd was a student at the University of Oxford, where
he attended as a Rhodes Scholar. Dr. Abowd received a Bachelor of Science degree
in Mathematics from the University of Notre Dame in 1986 and a Master of Science
degree in Computation and a Doctorate of Philosophy in Computation from the
University of Oxford in 1987 and 1991, respectively. Dr. Abowd has been a member
of the Board of Directors since September 1996.
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<PAGE> 47
WINN SCHWARTAU has been President of Interpact, Inc., a provider of
consulting services for electronic privacy and related issues to industry and
governments, since August 1990. Since August 1990, Mr. Schwartau also has been
an architectural security consultant to Hughes STX, providing services related
to enterprise security network architectures, design and implementation. Mr.
Schwartau has been a member of the Board of Directors since September 1996.
The Company's Board of Directors is divided into three classes. The Class I
directors (Dr. Abowd and Messrs. MacIntyre and Schwartau) will serve an initial
term until the 1998 Annual Meeting of Stockholders, the Class II directors (Dr.
Bokuchava and Messrs. Puri and Nebel) will serve an initial term until the 1999
Annual Meeting of Stockholders and the Class III directors (Messrs. Sax,
Stricklen and Keni) will serve an initial term until the 2000 Annual Meeting of
Stockholders. Each class will be elected for three-year terms following its
respective initial term. The classification of the Board of Directors could have
the effect of making it more difficult for a third party to acquire control of
the Company. Officers are elected at the first Board of Directors meeting
following the stockholders meeting at which directors are elected and serve at
the discretion of the Board of Directors. Each executive officer of the Company
was chosen by the Board of Directors and serves at the pleasure of the Board of
Directors until his or her successor is appointed or until his or her earlier
resignation or removal in accordance with applicable law. There are no family
relationships between any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee. The Compensation Committee provides
recommendations to the Board of Directors concerning salaries and incentive
compensation for officers and employees of the Company. The Audit Committee
recommends the Company's independent auditors and reviews the results and scope
of audit and other accounting-related services provided by such auditors.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as
members of the Board of Directors but are reimbursed for their reasonable travel
expenses in attending Board of Directors and committee meetings. Directors who
are not employees of the Company are eligible to receive automatic grants of
stock options under the Company's Non-Employee Directors Stock Option Plan, and
may receive additional grants of options under such plan at the discretion of
the Compensation Committee of the Board of Directors. See "Stock Option
Plan - Non-Employee Directors Stock Option Plan." The Company may in the future
establish a policy for compensating members of the Board of Directors for
attending Board of Directors or committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, compensation of executive officers of the Company was
determined by Harvey W. Sax, the Company's President and Chief Executive
Officer. In September 1996, the Company established a Compensation Committee to
review the performance of executive officers, establish overall employee
compensation policies and recommend salaries and incentive compensation for
officers and employees of the Company. No member of the Compensation Committee
is or will be an executive officer of the Company.
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<PAGE> 48
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company in 1996 for its Chief Executive Officer and each executive officer
of the Company whose total annual salary and bonuses determined at December 31,
1996 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
NUMBER OF
ANNUAL COMPENSATION SECURITIES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS COMPENSATION
------------------------------ -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Harvey W. Sax.............................. $100,000 $0 -0- -0-
President and Chief Executive Officer
</TABLE>
- ---------------
(1) Other than its President and Chief Executive Officer, the Company had no
executive officer whose salary and bonuses exceeded $100,000 in 1996.
As of March 1, 1997, the annual salaries for the Company's executive
officers were as follows: Harvey W. Sax, President and Chief Executive Officer
($150,000); Nat Stricklen, Senior Vice President, Sales and Marketing, and Chief
Operating Officer ($75,000); Vinod Keni, Treasurer and Chief Financial Officer
($55,000); Krishan Puri, Executive Vice President ($100,000); Gia Bokuchava,
Ph.D., Chief Technical Officer ($65,000); and Roger Nebel, Vice President
($100,000). Pursuant to the employment agreements with Dr. Bokuchava and Messrs.
Keni and Puri, each is eligible to receive cash bonuses to repay certain
promissory notes issued by them to the Company in connection with their purchase
of shares of Common Stock from the Company in August 1996. See "Certain
Transactions." Each of the Company's executive officers also is eligible to
receive cash bonuses to be awarded at the discretion of the Compensation
Committee of the Board of Directors.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Harvey W. Sax,
its President and Chief Executive Officer, which provides a five year term
commencing on January 1, 1996, subject to automatic extension for an additional
one year on each one-year anniversary of the agreement. This employment
agreement is subject to early termination as provided therein, including
termination by the Company "for cause" (as defined in the employment agreement).
The employment agreement provides for an annual base salary of $150,000 and for
bonus compensation to be awarded at the discretion of the Compensation Committee
of the Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth all individual grants of stock options
during the year ended December 31, 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
-------------------------------------------------------- AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
NAME GRANTED FISCAL YEAR ($/SHARE) DATE 5%($) 10%($)
---- ---------- ------------ --------- ---------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Harvey W. Sax........... -0- -0- -0- -- -0- -0-
</TABLE>
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<PAGE> 49
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUES
The following table summarizes the value of the outstanding options held by
the Named Executive Officers at December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT
OPTIONS AT FISCAL YEAR-END FISCAL YEAR-END($)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Harvey W. Sax............................. -0- -0- -0- -0-
</TABLE>
STOCK OPTION PLANS
Employee Stock Option Plan. The Company's Stock Option Plan (the "Stock
Option Plan") was adopted by the Company's stockholders in September 1996. The
purpose of the Stock Option Plan is to provide incentives for officers and key
employees to promote the success of the Company, and to enhance the Company's
ability to attract and retain the services of such persons. The Company has
reserved 300,000 shares of Common Stock for issuance under the Stock Option
Plan. Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the Code
or (ii) non-qualified stock options. Stock options may be granted under the
Stock Option Plan for all employees of the Company, or of any present or future
subsidiary or parent of the Company. The Stock Option Plan is administered by
the Compensation Committee of the Board of Directors. The Compensation Committee
has the authority to determine exercise prices applicable to the options, the
eligible employees or consultants to whom options may be granted, the number of
shares of Common Stock subject to each option and the terms upon which options
are exercisable. The Compensation Committee has the authority to interpret the
Stock Option Plan and to prescribe, amend and rescind the rules and regulations
pertaining to the Stock Option Plan. No option is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee.
Any incentive stock option that is granted under the Stock Option Plan may
not be granted at a price less than the fair market value of the Common Stock on
the date of grant (or less than 110% of fair market value in the case of holders
of 10% or more of the total combined voting power of all classes of stock of the
Company or a subsidiary or parent of the Company). Non-qualified stock options
may be granted at the exercise price established by the Compensation Committee,
which will not be less than 85% of the fair market value of the Common Stock on
the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period
not to exceed ten years from the date of grant (or five years in the case of a
holder of 10% or more of the total combined voting power of all classes of stock
of the Company or a subsidiary or parent of the Company) and shall lapse upon
expiration of such period, or earlier upon termination of the recipient's
employment with the Company, or as determined by the Compensation Committee.
As of March 1, 1997, options to purchase approximately 159,866 shares of
Common Stock were outstanding under the Stock Option Plan, all of which vest 25%
per year from their date of grant. Of such grants, options to purchase 22,928
shares were granted at an exercise price of $4.55 per share and options to
purchase 136,938 shares were granted at an exercise price of $6.50 per share.
Non-Employee Directors Stock Option Plan. The Company's Non-Employee
Directors Stock Option Plan (the "Non-Employee Directors Plan") was adopted by
the Company's stockholders in September 1996 and amended in October 1996. The
Company has reserved 300,000 shares of Common Stock for issuance under the
Non-Employee Directors Plan.
The Non-Employee Directors Plan provides for the automatic granting of
non-qualified stock options to directors who are not officers or employees of
the Company ("Non-Employee Direc-
42
<PAGE> 50
tors"). Each Non-Employee Director who is first appointed or elected to the
Board of Directors is granted an option to purchase 10,000 shares of Common
Stock. Also, each Non-Employee Director automatically receives an option to
purchase 5,000 shares of Common Stock on the date of each annual meeting of the
Company's stockholders. The Non-Employee Directors Plan also allows the
Compensation Committee to make extraordinary grants of options to Non-Employee
Directors. All options granted under the Non-Employee Directors Plan vest 50%
per year of service by the Non-Employee Director on the Board of Directors. No
option is transferable by the optionee other than by will or laws of descent and
distribution, and each option is exercisable, during the lifetime of the
optionee, only by such optionee. The exercise price of all options will be the
fair market value of the shares of Common Stock on the date of grant, and the
term of each option may not exceed seven years. The Non-Employee Directors Plan
will continue in effect for a period of ten years unless sooner terminated by
the Board of Directors.
During September 1996, each of Dr. Abowd and Messrs. MacIntyre and
Schwartau was granted an option under the Non-Employee Directors Plan to
purchase 10,000 shares of Common Stock at an exercise price of $6.50 per share.
During October 1996, in consideration of his agreement to serve as Chairman of
the Board of Directors, Mr. MacIntyre was also granted an option under the
Non-Employee Directors Plan to purchase 120,000 shares of Common Stock at an
exercise price of $6.50 per share.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Stock Purchase Plan") became effective on March 1, 1997. A total of
150,000 shares of Common Stock have been reserved for issuance under the Stock
Purchase Plan. The Stock Purchase Plan is intended to qualify under sec. 423 of
the Code. The purpose of the Stock Purchase Plan is to encourage and enable
employees of the Company to acquire a proprietary interest in the Company
through ownership of shares of Common Stock. Eligible employees of the Company
will purchase shares of Common Stock at 85% of fair market value and the Company
will partially subsidize purchases under the Stock Purchase Plan and will pay
the expenses of its administration.
An employee electing to participate in the Stock Purchase Plan must
authorize a stated dollar amount or percentage of the employee's regular pay to
be deducted by the Company from the employee's pay during each of four quarterly
payroll deduction periods (each a "Purchase Period"). Purchase Periods begin on
January 1, April 1, July 1 and October 1 of each calendar year during which the
Stock Purchase Plan is in effect. The Company is deemed on the last day of each
Purchase Period to have granted a purchase right to each participant as of the
first day of the Purchase Period to purchase as many full and fractional shares
of Common Stock as can be purchased with the participant's payroll deductions.
On the last day of the Purchase Period, the participant will be deemed to have
exercised this option, at the option price, to the extent of such participant's
accumulated payroll deductions. In no event, however, may the participant
purchase Common Stock having a fair market value (measured on the first business
day of the Purchase Period) of greater than $25,000 during a calendar year. The
option price under the Stock Purchase Plan is equal to 85% of the fair market
value of the Common Stock on either the first business day or the last business
day of the applicable Purchase Period, whichever is lower.
The initial Purchase Period under the Stock Purchase Plan will begin on
April 1, 1997 or, if later, the first business day after the date of this
Prospectus (the "Initial Purchase Period"). With respect to the Initial Purchase
Period, an employee electing to participate in the Stock Purchase Plan may
authorize a stated dollar amount of the employee's regular pay to be deducted by
the Company from the employee's pay during the Initial Purchase Period, or the
employee may make a direct cash contribution to his or her account under the
Stock Purchase Plan. On the last day of the Initial Purchase Period, the Company
will be deemed to have granted a purchase right to each participant to purchase
as many full and fractional shares of Common Stock as can be purchased with the
participant's payroll deductions and cash contributions, as of the first
business day after the date of this Prospectus.
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<PAGE> 51
Employees of the Company who have completed six full months of service with
the Company and whose customary employment is more than 20 hours per week and
five or more months per calendar year are eligible to participate in the Stock
Purchase Plan. An employee may not be granted an option under the Stock Purchase
Plan if after the granting of the option such employee would be deemed to own 5%
or more of the combined voting power of value of all classes of stock of the
Company. As of March 1, 1997, approximately 60 employees would have been
eligible to participate in the Stock Purchase Plan. An employee's rights under
the Stock Purchase Plan may not be assigned, transferred, pledged or otherwise
disposed of, except by will or the laws of descent and distribution. An
employee's rights under the Stock Purchase Plan terminate upon termination of
his or her employment for any reason, including retirement. Upon such
termination, the Company will refund the employee's payroll deductions or
contributions made during the Purchase Period.
An employee may not sell shares of Common Stock purchased under the Stock
Purchase Plan until the later of: (i) 180 days after the date of this
Prospectus; or (ii) the first day of the second Purchase Period following the
Purchase Period in which the option for such shares was granted.
The Stock Purchase Plan is administered by the Compensation Committee. No
member of the Board of Directors will be eligible to participate in the Stock
Purchase Plan during the period he or she serves as a member of the Compensation
Committee. The Compensation Committee may terminate or amend the Stock Purchase
Plan at any time. However, any termination or amendment may not affect or change
purchase rights previously granted under the Stock Purchase Plan without the
consent of the affected participants. Also, any amendment that materially
increases the benefits or number of shares under the Stock Purchase Plan (except
for adjustments due to changes in the Company's capital structure) or that
materially modifies the eligibility requirements of the Stock Purchase Plan will
be subject to stockholder approval. If not sooner terminated by the Compensation
Committee, the Stock Purchase Plan will terminate at the time that all
authorized shares of Common Stock reserved for grant under the Stock Purchase
Plan have been purchased.
401(k) Profit Sharing Plan. The Company's Board of Directors has approved
the adoption of a 401(k) Profit Sharing Plan (the "401(k) Plan") which is
intended to be a tax-qualified defined contribution plan under Section 401(k) of
the Code. In general, all employees of the Company who have completed one year
of service and 1,000 hours of service will be eligible to participate. The
401(k) Plan will include a salary deferral arrangement pursuant to which
participants may contribute, subject to certain Code limitations, a maximum of
15% of their first $15,000 in salary on a pre-tax basis. Subject to certain Code
limitations, the Company may make a matching contribution of up to $1,000 of the
salary deferral contributions of participants at a rate of 50% of the
participant's contributions, up to 4% of the participant's salary. The Company
may also make an additional contribution to the 401(k) Plan each year at the
discretion of the Board of Directors. A separate account will be maintained for
each participant in the 401(k) Plan. The portion of a participant's account
attributable to his or her own contributions will be 100% vested. The portion of
the account attributable to Company contributions (including matching
contributions) will vest after 5 years of service with the Company.
Distributions from the 401(k) Plan may be made in the form of a lump-sum cash
payment or in installment payments.
AGREEMENTS WITH EMPLOYEES
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company (i) restricting the ability of
the employee to compete with the Company during his or her employment and for a
period of eighteen months thereafter, (ii) restricting solicitation of customers
and employees following employment with the Company, and (iii) providing for
ownership and assignment of intellectual property rights to the Company.
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<PAGE> 52
CERTAIN TRANSACTIONS
During the period December 1994 through April 1997, Harvey W. Sax, the
Company's President and Chief Executive Officer, loaned a total of approximately
$93,497 to the Company pursuant to a promissory note payable by the Company on
September 12, 2000, which accrues interest at the prime rate plus 1% per annum.
The Company intends to use approximately $86,000 of the net proceeds of this
offering to repay the remaining outstanding amounts owed under this promissory
note.
In February 1996, in connection with a recapitalization of the Common
Stock, the Company issued 787,844 shares of Common Stock to Harvey W. Sax, its
President and Chief Executive Officer and then its sole stockholder, for $.001
per share. In December 1994, the Company granted Nat Stricklen, a co-founder and
director of the Company, an option to acquire, for an aggregate exercise price
of $10.00, shares of Common Stock which, when issued, would represent
approximately 10% of the issued and outstanding Common Stock. Mr. Stricklen
exercised this option in February 1996 and received 93,070 shares of Common
Stock.
In a privately negotiated financing transaction, (i) in February 1996, the
Company sold for $.0001 per share 335,052 shares to Margery Germain, 111,684
shares to Sanford Zweifach, 148,912 shares to Esther Blech and 297,824 shares to
the Edward A. Blech Trust ("Blech Trust"), and (ii) in February 1996, the
Company issued to Mark Germain for $200,000 an unsecured promissory note due
September 1997 in the principal amount of $200,000 and bearing interest at the
rate of 8% per annum. Pursuant to the terms of the promissory note with Mr.
Germain, immediately prior to the date of this Prospectus the Company will issue
an aggregate of 33,333 shares of Common Stock to Mr. Germain in repayment of the
$200,000 outstanding principal balance of this note. Also in connection with
this financing transaction, the Blech Trust received unsecured promissory notes
having an aggregate principal balance of $299,904 due September 1997, bearing
interest at 8% per annum.
In August 1996, the Company borrowed $45,000 from Mrs. Blech and issued to
her a promissory note due August 1997, bearing interest at 8% per annum. In
October 1996, the Company borrowed $125,000 from the Blech Trust and issued to
it promissory notes due September 1997, bearing interest at 8% per annum. In
September 1996, the Company borrowed $175,000 from the Blech Trust and issued to
it promissory notes due September 1997, bearing interest at 8% per annum. In
December 1996, the Company borrowed $175,000 from the Blech Trust and issued to
it promissory notes due September 1997, bearing interest at 8% per annum. In
February 1997, the Company borrowed $150,000 from the Blech Trust and issued to
it a promissory note due September 1997, bearing interest at 8% per annum. In
March 1997, the Company borrowed $120,000 from the Blech Trust and issued to it
a promissory note due September 1997, bearing interest at 8% per annum. In April
1997, the Company borrowed $145,000 from the Blech Trust and issued to it a
promissory note due September 1997, bearing interest at 8% per annum. The
Company intends to repay the principal and interest owed under all of the
promissory notes payable to the Blech Trust and Mrs. Blech out of the net
proceeds of this offering.
In March 1997, Mrs. Esther Blech transferred 148,912 shares to two separate
transferees. Prior to this transfer, Mrs. Blech beneficially owned 7.7% of the
Common Stock and following this transfer Mrs. Blech no longer owned any shares
of the Common Stock. In March and April 1997, the Blech Trust transferred an
aggregate of 150,500 shares of Common Stock to six separate transferees. Prior
to these transfers, the Blech Trust beneficially owned 15.5% of the Common
Stock. After these transfers and before the issuance of 1,000,000 shares of
Common Stock in this offering, the Blech Trust owned 7.5% of the Common Stock.
After the issuance of 1,000,000 shares of Common Stock in this offering, the
Blech Trust will own 4.983% of the Common Stock. See "Principal Stockholders."
Douglas MacIntyre, the Company's Chairman of the Board of Directors, and Krishan
Puri, the Company's Executive Vice President and a director, purchased 10,000
and 5,000 shares of Common Stock, respectively, from the Blech Trust in these
transactions.
The transfers described above were completed in order to comply with a
decision of the Nasdaq Stock Market, Inc. ("Nasdaq") that Mr. David A. Blech,
Mrs. Esther Blech and the Blech Trust (collectively the "Blech Interests") must
divest themselves to an ownership interest, direct or
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<PAGE> 53
indirect, below 5% of the Common Stock. In order to comply with this decision,
the Blech Interests agreed that, for a period of three years subsequent to the
day of their respective purchases of securities of the Company, none of them
will sell, transfer, assign, pledge or hypothecate any shares of Common Stock.
Gifts of shares of the Common Stock are permitted provided that the recipient of
such gift agrees in writing to be bound by the terms of the agreement. The Blech
Interests further agreed that while the Common Stock is listed on any Nasdaq
market, there will be no further financial relationship between David Blech or
any of the foregoing Blech Interests, on the one hand, and the Company, on the
other hand; that the direct or indirect ownership of shares of Common Stock held
by Mr. David A. Blech and/or the Blech Interests may not exceed 5% of the Common
Stock; and that there may be no advisory relationship between Mr. David A. Blech
and the Company.
In August 1996, Harvey W. Sax, the Company's President and Chief Executive
Officer, contributed 3,956 shares of Common Stock to the Company.
In August 1996, the Company issued and sold to six of its employees an
aggregate of 102,855 shares of Common Stock for a total of $468,004, payable
through the issuance of promissory notes payable in four equal annual
installments, bearing interest at 8% per annum and secured by the shares of
Common Stock purchased therewith. Also in August 1996, the Company entered into
employment agreements with such persons which provide that for each of the first
four years of employment, the Company will issue a bonus to the employee in the
amount necessary to repay the annual amount due under such promissory note (plus
the taxes due by the employee as a consequence of receiving such bonus).
Pursuant to the terms of the employment agreements, the Company will continue to
make these annual payments if the employee is terminated other than "for cause,"
as defined in the employment agreements. Pursuant to the terms of the
subscription agreements for such shares, if the employee's employment is
terminated within such four-year period, the Company has the right to repurchase
that percentage of the shares purchased by the employee which shall equal the
percentage of the promissory note which is not yet due, payment for such
repurchase to be made by canceling the applicable outstanding amount of the
promissory note. Vinod Keni, Treasurer, Chief Financial Officer, and Secretary,
Gia Bokuchava, Ph.D., Chief Technical Officer and Krishan Puri, Executive Vice
President and a director, purchased 3,955, 39,559 and 29,669 shares of Common
Stock, respectively, in this transaction.
In August 1996, Krishan Puri, Executive Vice President and a director,
exercised a warrant to purchase 9,307 shares of Common Stock for a total
exercise price of $1.00. Mr. Puri was granted the warrant in June 1995 in
connection with his agreeing to serve on the Company's former Board of Advisors.
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a Delaware corporation formed
in July 1996 to provide Internet and Intranet security system consulting
services. In the transaction, the former holders of HISS's capital stock
received the right to receive their pro rata share of four annual earnout
payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each,
an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal
to 30% of HISS's gross revenues for the 12 month period ending December 31,
1997; provided, however, that (i) the amount of each Annual Earnout will be
limited to the amount of HISS's net profits for the 12-month period ended
December 31 immediately preceding the payment date (the "Profit Cap"), (ii)
amounts not paid in a year as a result of the Profit Cap will be carried forward
to the subsequent year, and (iii) amounts not paid in the fourth year as a
result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in
whole or in part in cash or, at HomeCom's option, in shares of Common Stock
based upon the average trading price of the Common Stock for the ten trading
days immediately preceding payment of the Annual Earnout. An Annual Earnout will
not be paid if the recipient is then in violation of the non-solicitation and
non-competition provisions contained in the Stock Purchase Agreement to which
the former holders of HISS's capital stock are subject. Roger Nebel, Vice
President and a director of the Company, owned 48% of HISS's outstanding capital
stock and will be entitled to receive 48% of the Annual Earnouts. HISS was
merged with and into the Company on September 11, 1996.
In October 1996, the Company granted to R. Douglas MacIntyre, Chairman of
the Board and a director of the Company, a ten-year option to purchase 120,000
shares of Common Stock at an
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<PAGE> 54
exercise price of $6.50 per share under the Company's Non-Employee Directors
Plan, in consideration of Mr. MacIntyre's agreement to serve as Chairman of the
Board of Directors. This option vests 50% per year of service as Chairman of the
Board, but vesting will accelerate upon a change in control of the Company.
The Company believes that the foregoing transactions between the Company
and its officers, directors and stockholders were on terms no less favorable to
the Company than those which could have been obtained from unaffiliated parties.
Future transactions between the Company and its officers, directors and five
percent or greater stockholders will be on terms no less favorable to the
Company than could be obtained from unaffiliated parties. In addition, any
future loans or advances to officers, directors or five percent or greater
stockholders will be for a bona fide business purpose and will be approved by a
majority of the disinterested members of the Board of Directors.
PRINCIPAL STOCKHOLDERS
The following table sets forth, with respect to (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of the Common Stock,
(ii) each director, and (iii) all executive officers and directors as a group,
certain information with respect to the beneficial ownership of the Common Stock
as of March 12, 1997 and as adjusted to reflect (a) the issuance immediately
prior to the date of this Prospectus of 33,333 shares of Common Stock in
repayment of $200,000 in outstanding indebtedness, and (b) the sale by the
Company of the Common Stock offered hereby.
<TABLE>
<CAPTION>
NUMBER OF SHARES PERCENTAGE OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY BENEFICIALLY OWNED BENEFICIALLY OWNED
NAME AND ADDRESS OF BENEFICIAL OWNER(1) OWNED(2) BEFORE OFFERING AFTER OFFERING(2)
- --------------------------------------- ---------------- -------------------- --------------------
<S> <C> <C> <C>
Harvey W. Sax.......................... 796,444 40.71% 26.94%
Nat Stricklen.......................... 93,070 4.76% 3.15%
Vinod Keni............................. 3,955 * *
Krishan Puri........................... 43,976 2.25% 1.49%
Gia Bokuchava, Ph.D. .................. 39,559 2.02% 1.34%
Roger Nebel............................ 0 * *
Gregory Abowd, Ph.D. .................. 0 * *
R. Douglas MacIntyre................... 10,000 * *
Winn Schwartau......................... 0 * *
Mark Germain(3)........................ 350,116 17.90% 11.84%
81 Main Street
White Plains, NY 10601
Margery Germain(4)..................... 350,116 17.90% 11.84%
6 Olmstead Road
Scarsdale, NY 10583
The Edward A. Blech Trust.............. 147,324 7.53% 4.98%
c/o Rabbi Mordechai Jofen
418 Avenue I
Brooklyn, NY 11230
Sanford Zweifach....................... 111,684 5.71% 3.78%
2420 Steiner, No. 11
San Francisco, CA 94115
All executive officers and directors as
a group (9 persons).................. 987,004 50.45% 33.39%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted, the street address of the named beneficial owner
is Building 14, Suite 100, 3535 Piedmont Road, Atlanta, Georgia 30305.
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<PAGE> 55
(2) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock beneficially owned, subject to community property laws
where applicable. Excludes shares that may be purchased in this offering.
See "Underwriting."
(3) Includes 337,616 shares of Common Stock owned by Margery Germain, the wife
of Mr. Germain, as to which shares Mr. Germain disclaims beneficial
ownership. Percentage of shares beneficially owned after the offering gives
effect to 33,333 shares of Common Stock to be issued to Mr. Germain
immediately prior to the date of this Prospectus in repayment of $200,000
in outstanding indebtedness. See "Certain Transactions."
(4) Percentage of shares beneficially owned after the offering gives effect to
33,333 shares of Common Stock to be issued to Mark Germain, the husband of
Mrs. Germain, immediately prior to the date of this Prospectus in repayment
of $200,000 in outstanding indebtedness, as to which shares Mrs. Germain
disclaims beneficial ownership.
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, $.0001 par value, and 1,000,000 shares of preferred stock, $.01
par value. Upon the consumation of this offering, the Company will have
outstanding 2,956,396 shares of Common Stock. No shares of preferred stock have
been issued.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and all matters to be submitted to a vote of the
Company's stockholders. Subject to the rights of any holders of preferred stock
which may be issued in the future, the holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of dissolution,
liquidation or winding up of the Company, holders of shares of Common Stock are
entitled to share ratably in all assets remaining after payment of all
liabilities and the aggregate liquidation preference of outstanding shares of
preferred stock. Holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares of Common Stock to be issued by the Company in this
offering will be, duly authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of preferred stock with designations, rights and preferences determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividends, liquidation, conversion, voting and other rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In the
event of issuance, the preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Restated Certificate of Incorporation contains provisions
which eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty, other than liability for a
breach of the duty of loyalty, acts or omissions not in good faith that
constitute a breach of the director's duty to the Company, acts that involve
intentional misconduct or a knowing violation of the law, transactions in which
the director receives an improper benefit and acts or omissions for which
liability is expressly provided by an applicable statute. While the Restated
Certificate of Incorporation provides directors with protection from awards for
monetary damages for breach of duties to the Company, it does not eliminate
those duties. Accordingly, the Restated Certificate of Incorporation should not
affect the availability of equitable remedies, such as injunction or rescission,
based on a director's breach of the duty of care. However, equitable remedies
may not provide stockholders adequate monetary compensation for damages caused
by
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<PAGE> 56
breach of duties to the Company. The Company's Restated Bylaws contain
provisions requiring the indemnification of the Company's directors and
officers, and persons serving at the request of the Company as a director or
officer of another corporation, to the fullest extent permitted under the
Delaware General Corporation Law. These provisions do not apply to liabilities
under federal securities laws. The Company believes that these Restated
Certificate of Incorporation and Bylaws provisions are necessary to attract and
retain qualified persons as directors and officers of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person, or affiliate or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans) or (iii) on or after the date the person becomes
an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation that was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such charter or
bylaw amendment shall not become effective until twelve months after the date it
is adopted. Neither the Restated Certificate of Incorporation nor the Restated
Bylaws of the Company contains any such exclusion, although the Board of
Directors has excluded the stockholders of the Company prior to the offering
from the coverage of Section 203.
LISTING
The Company's Common Stock has been approved for listing on The Nasdaq
SmallCap(TM) Market under the trading symbol "HCOM."
TRANSFER AGENT AND REGISTRAR
The transfer agent for the Common Stock is American Stock Transfer & Trust
Company.
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common
Stock, and no assurance can be given that a public market for the Common Stock
will develop or be sustained after the offering. Future sales of substantial
amounts of Common Stock in the public market could have a material effect on the
market price of the Common Stock from time to time.
Upon completion of this offering, the Company will have outstanding
approximately 2,956,396 shares of Common Stock, giving effect to the issuance
immediately prior to the date of this Prospectus of 33,333 shares of Common
Stock in repayment of $200,000 in outstanding indebtedness. See "Certain
Transactions." Of these shares, the 1,000,000 shares sold in this offering will
be freely tradable without restriction or further registration under the
Securities Act of 1933, as
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<PAGE> 57
amended (the "Securities Act"), unless they are purchased by "affiliates" of the
Company as that term is defined in Rule 144 under the Securities Act (which
sales would be subject to certain limitations and restrictions described below).
The remaining 1,956,396 shares of Common Stock may be sold in the public
market only if registered under the Securities Act or pursuant to an exemption
from registration such as Rule 144 or 144(k) promulgated thereunder. Certain
shares of Common Stock outstanding after the offering will be subject to
contractual lock-up agreements with the Underwriters. Specifically, all
officers, directors and 5% or greater stockholders have agreed to execute
lock-up agreements providing that they will not, directly or indirectly, offer,
sell, contract to sell, grant any option to purchase or otherwise dispose of, or
agree to dispose of, any shares of Common Stock (other than gifts) until 180
days after the consummation of this offering, at which time their shares will be
released from the lock-up.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned shares for at least one year (including the holding
period of any prior owner except an affiliate) is entitled to sell in "brokers'
transactions" or to market makers, within any three-month period, a number of
shares that does not exceed the greater of (a) one percent of the number of
shares of Common Stock then outstanding (approximately 29,560 shares immediately
after this offering) or (b) the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are subject to the availability
of current public information about the Company. Under Rule 144(k), a person who
is not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares without having to
comply with the manner of sale, public information, volume limitation or notice
filing provisions of Rule 144. Unless otherwise restricted, "144(k) shares" may
therefore be sold immediately upon the completion of this offering. Under Rule
701 under the Securities Act, persons who purchase shares upon exercise of
options granted prior to this offering are entitled to sell such shares 90 days
after this offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the volume limitation or notice filing provisions
of Rule 144. In addition, Rule 144A would permit the resale of restricted
securities to qualified institutional buyers, subject to compliance with
conditions of the Rule. The Company is unable to estimate accurately the number
of "restricted" shares that will be sold under Rule 144 because this will depend
in part on the market price for the Common Stock, the personal circumstances of
the seller and other factors.
After the completion of this offering, the Company intends to file a
Registration Statement on Form S-8 under the Securities Act to register the
300,000 shares of Common Stock reserved for issuance under the Company's Stock
Option Plan, the 300,000 shares of Common Stock reserved for issuance under the
Company's Non-Employee Directors Plan and 150,000 shares of Common Stock
reserved for issuance under the Company's Employee Stock Purchase Plan. After
the date of such filings, if not otherwise subject to a lock-up agreement,
shares purchased pursuant to the Company's Stock Option Plan and its
Non-Employee Directors Plan generally would be available for resale in the
public market. As of March 12, 1997, the Company had granted options under such
plans to purchase an aggregate of 309,866 shares of Common Stock. See
"Management - Stock Option Plans." In addition, in connection with the Company's
acquisition of HISS, the Company may issue additional shares of Common Stock.
See "Certain Transactions."
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UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus is a part, Ladenburg Thalmann & Co. Inc. (the "Underwriter") has
agreed to purchase from the Company, and the Company has agreed to sell to the
Underwriter, 1,000,000 shares of Common Stock.
The Underwriter is committed to take and pay for all the shares of Common
Stock offered hereby, if any are purchased.
The Underwriter has advised the Company that it proposes to offer all or
part of the Common Stock offered directly to the public initially at the price
to the public set forth on the cover page of this Prospectus, that it may offer
shares to certain dealers at a price that represents a concession of not more
than $.26 per share and that the Underwriter may allow, and such dealers may
re-allow, a concession of not more than $.10 per share to certain other dealers.
After the commencement of this offering, the price to the public and the
concessions may be changed.
At the request of the Company, up to 116,000 shares of Common Stock in this
offering have been reserved for sale to existing stockholders, employees,
officers and directors of the Company, at the public offering price per share
set forth on the cover page of this Prospectus. Any shares not so purchased will
be offered in this offering at the initial public offering price per share set
forth on the cover page of this Prospectus.
The Company has granted the Underwriter an option, exercisable within 30
days after the date of this Prospectus, to purchase up to 150,000 additional
shares of Common Stock at the initial public offering price, less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriter may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of the shares offered hereby.
The Company has agreed to indemnify the Underwriter and certain related
persons against certain liabilities, including certain liabilities under the
Securities Act, and to contribute to payments the Underwriter may be required to
make in respect thereof.
The Company and its officers, directors and 5% or greater stockholders have
agreed that they will not, directly or indirectly, offer, sell, contract to
sell, grant any option to purchase or otherwise dispose of, or agree to dispose
of, any shares of Common Stock (other than gifts) for a period of 180 days after
the date of this Prospectus, without the prior written consent of the
Underwriter.
The Company has agreed to pay to the Underwriter a non-accountable expense
allowance of two percent of the gross proceeds of this offering ($120,000 if the
Underwriter's over-allotment option is not exercised and $138,000 if the
Underwriter's over-allotment option is exercised in full).
The Company has agreed to issue to the Underwriter and its designees, for
their own accounts, warrants to purchase an aggregate of 100,000 shares of
Common Stock. The warrants will be exercisable during the five-year period
commencing on the date of this Prospectus, at an exercise price per share equal
to $7.20. The warrants will contain customary anti-dilution provisions and
certain rights to register the shares issuable upon exercise of the warrants
under the Securities Act.
Prior to this offering, there has been no public market for the Common
Stock. The initial offering price was determined by negotiations between the
Company and the Underwriter. Among the factors considered in such negotiations
were the Company's historical results of operations and financial condition,
prospects for the Company and for the industry in which the Company operates,
the Company's capital structure and the general condition of the securities
market.
The Underwriter has informed the Company that the Underwriter does not
expect sales to discretionary accounts to exceed 5% of the total number of
shares offered hereby, and the Underwriter does not intend to confirm sales of
shares to any account over which it exercises discretionary authority.
The Company has granted the Underwriter a right of first refusal, expiring
on the second anniversary of the date of this Prospectus, on any future
financings with respect to the Company, subject to the right of the Company to
designate the Underwriter as a co-manager in any subsequent public offering.
51
<PAGE> 59
Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriter and
certain selling group members to bid for and purchase the Common Stock. As an
exception to these rules, the Underwriter is permitted to engage in certain
transactions that stabilize the price of the Common Stock. Such transactions
consist of bids or purchases for the purpose of pegging, fixing or maintaining
the price of the Common Stock.
If the Underwriter creates a short position in the Common Stock in
connection with this offering, i.e., if it sells more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Underwriter may
reduce that short position by purchasing Common Stock in the open market. The
Underwriter may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The Underwriter may also impose a penalty bid on certain selling group
members. This means that if the Underwriter purchases shares of Common Stock in
the open market to reduce the Underwriter's short position or to stabilize the
price of the Common Stock, it may reclaim the amount of the selling concession
from the selling group members who sold those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor the Underwriter make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor the Underwriter make any representation that the Underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
LEGAL MATTERS
The validity of the issuance of the shares of the Common Stock offered
hereby will be passed upon for the Company by Morris, Manning & Martin, L.L.P.,
Atlanta, Georgia. Morris, Manning & Martin, L.L.P. beneficially owns 9,307
shares of Common Stock. Certain legal matters in connection with this offering
will be passed upon for the Underwriter by Willkie Farr & Gallagher, New York,
New York.
EXPERTS
The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, stockholders' equity (deficit) and cash flows for the period from
December 2, 1994 (date of incorporation) to December 31, 1994, and for the years
ended December 31, 1995 and 1996, included in this Prospectus, have been
included herein in reliance on the report, which includes an explanatory
paragraph relating to the uncertainty of the Company's ability to continue as a
going concern, of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
52
<PAGE> 60
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (of which this Prospectus is
a part) under the Securities Act with respect to the shares of Common Stock
offered hereby. This Prospectus does not contain all of the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to the Registration Statement and
the exhibits and schedules filed therewith. Statements contained in this
Prospectus regarding the contents of any contract or any other document referred
to herein are not necessarily complete, and in each instance reference is made
to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement, including exhibits and schedules
thereto, filed by the Company with the Commission may be inspected, without
charge, and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, Room 1024; 7 World
Trade Center, New York, New York 10048, Room 1400; and 500 West Madison Street,
Chicago, Illinois 60661, Suite 1400. Copies of such materials also may be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, Room 1024, at prescribed rates. In
addition, the Company is required to file electronic versions of these documents
with the Commission through the Commission's Electronic Data Gathering, Analysis
and Retrieval (EDGAR) system. The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
The Company intends to furnish its stockholders with annual reports
containing financial statements audited by an independent accounting firm and
quarterly reports containing unaudited financial information for the first three
quarters of each fiscal year.
53
<PAGE> 61
GLOSSARY OF CERTAIN TECHNICAL TERMS
<TABLE>
<S> <C>
FDDI: Fiber distributed data interface. A standard for
distributing data on optical fiber cables at a rate of
approximately 100 million bits-per-second.
HTML: Hypertext markup language. The computer language in which
electronic information is published on the Web.
HTTP: Hypertext transfer protocol. The standard communications
protocol used to retrieve information on the Web. Hypertext
transfer protocol makes browsing possible. The user clicks
on hypertext links in a Web document and moves within that
document or to another document that may be located on a
different computer.
Hypertext links: Text in a Web site that links to other documents within that
Web site or to other unrelated Web sites, allowing movement
through information on the Web.
Internet: An open global network of interconnected commercial,
educational and government computer networks that allows any
interconnected computer to communicate with any other
interconnected computer utilizing a common communications
protocol, TCP/IP.
Intranet: Network inside a company or organization that employs a
TCP/IP network protocol for internal communications rather
than using a proprietary protocol, facilitating
communications using Internet tools and applications.
Protocol: The rules two or more machines must follow in order to
exchange information.
Server: A computer in a network shared by multiple users (or
clients). A high speed computer in a LAN that stores the
programs and data files shared by users on the network.
SNMP: Simple network management protocol. A protocol for managing
devices such as servers and routers.
SONET: Synchronous optical network. A circuit transmission
technology that allows the building of high speed fault
tolerant networks.
TCP/IP: Transmission Control Protocol/Internet Protocol. A
compilation of network and transport-level protocols that
allow computers with different architectures and operating
system software to communicate with other computers on the
Internet or an Intranet.
World Wide Web, The world wide network of computer servers that uses a
or the Web: special communications protocol (i.e., HTTP) that links
different servers throughout the Internet and enables
non-technical users to access graphic information, including
graphics, video, photographs, audio and text contained
therein.
</TABLE>
54
<PAGE> 62
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
HomeCom Communications, Inc.
We have audited the accompanying balance sheets of HomeCom Communications,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from December 2,
1994 (date of incorporation) to December 31, 1994 and for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HomeCom Communications, Inc.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the period from December 2, 1994 (date of incorporation) to December
31, 1994 and for the years ended December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred net losses from operations since
its incorporation and has an accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters, as described in Note 1, include raising additional capital
through a public offering. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 21, 1997
F-1
<PAGE> 63
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1996
-------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $129,095 $ 332,377
Accounts receivable, net.................................. 86,325 488,254
Other current assets...................................... 148 621
-------- ----------
Total current assets.............................. 215,568 821,252
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 30,015 359,260
SOFTWARE DEVELOPMENT COSTS, NET............................. -- 81,520
DEPOSITS.................................................... 1,799 57,527
DEFERRED OFFERING COSTS..................................... -- 406,963
-------- ----------
Total assets...................................... $247,382 $1,726,522
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 14,287 $ 649,794
Accrued salaries and payroll taxes payable................ 25,010 309,377
Accrued vacation.......................................... -- 14,935
Current portion of notes payable to stockholders and
affiliates............................................. -- 989,904
Current portion of note payable to bank................... -- 13,614
Unearned revenue.......................................... 42,479 133,170
Current portion of obligations under capital leases....... -- 15,140
-------- ----------
Total current liabilities......................... 81,776 2,125,934
NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 160,792 55,677
NOTE PAYABLE TO BANK........................................ -- 47,032
OTHER LIABILITIES........................................... -- 73,424
OBLIGATIONS UNDER CAPITAL LEASES............................ -- 45,124
-------- ----------
Total Liabilities................................. 242,568 2,347,191
-------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, no par value at December 31, 1995, $.0001
par value at December 31, 1996; 1,500 shares authorized
and 1,000 shares issued and outstanding at December 31,
1995; 15,000,000 shares authorized, 1,923,063 shares
issued and outstanding at December 31, 1996............ 27,706 192
Additional paid-in capital................................ -- 472,726
Subscriptions receivable.................................. -- (468,004)
Accumulated deficit....................................... (22,892) (625,583)
-------- ----------
Total stockholders' equity (deficit).............. 4,814 (620,669)
-------- ----------
Total liabilities and stockholders' equity
(deficit)....................................... $247,382 $1,726,522
======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 64
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 2 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
NET SALES:
Service sales...................................... $ -- $ 327,574 $2,112,878
Equipment sales.................................... -- -- 185,977
---------- ---------- ----------
Total net sales............................ -- 327,574 2,298,855
---------- ---------- ----------
COST OF SALES:
Cost of services................................... -- 59,871 546,409
Cost of equipment sold............................. -- -- 128,938
---------- ---------- ----------
Total cost of sales........................ -- 59,871 675,347
---------- ---------- ----------
GROSS PROFIT......................................... -- 267,703 1,623,508
---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing................................ 1,045 124,253 845,690
Product development................................ -- 20,239 78,887
General and administrative......................... 16,407 121,313 1,194,728
Depreciation and amortization...................... -- 3,722 85,068
---------- ---------- ----------
Total operating expenses................... 17,452 269,527 2,204,373
---------- ---------- ----------
OPERATING LOSS....................................... (17,452) (1,824) (580,865)
OTHER EXPENSES (INCOME):
Interest expense................................... -- 3,469 51,272
Other expense (income), net........................ -- 147 (6,554)
---------- ---------- ----------
LOSS BEFORE INCOME TAX BENEFIT....................... (17,452) (5,440) (625,583)
INCOME TAX BENEFIT................................... -- -- --
---------- ---------- ----------
NET LOSS............................................. $ (17,452) $ (5,440) $ (625,583)
========== ========== ==========
UNAUDITED PRO FORMA NET LOSS DATA:
Loss before income tax benefit..................... $ (17,452) $ (5,440) $ (625,583)
Pro forma adjustment to reflect federal and state
income tax benefit (actual for period subsequent
to February 8, 1996)............................ -- -- --
---------- ---------- ----------
Pro forma net loss................................. $ (17,452) $ (5,440) $ (625,583)
========== ========== ==========
Pro forma net loss per common and common equivalent
share........................................... $ (.01) $ (.00) $ (.33)
========== ========== ==========
Weighted average common and common equivalent
shares outstanding.............................. 1,850,447 1,850,447 1,879,696
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 65
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ADDITIONAL STOCKHOLDERS'
-------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (DEFICIT)
--------- -------- ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF STOCK,
December 2, 1994..... 1,000 $ 27,706 $ 27,706
Net loss............... $ (17,452) (17,452)
--------- -------- --------- ---------
BALANCE, December 31,
1994................. 1,000 27,706 (17,452) 10,254
Net loss............... (5,440) (5,440)
--------- -------- --------- ---------
BALANCE, December 31,
1995................. 1,000 27,706 (22,892) 4,814
Termination of S
Corporation.......... $(22,892) 22,892 --
Issuance of stock...... 19,663 468,104 $(468,004) 100
Net loss............... (625,583) (625,583)
93.07-for-one stock
split and
recapitalization..... 1,902,400 (495,618) 495,618 --
--------- -------- -------- --------- --------- ---------
BALANCE, December 31,
1996................. 1,923,063 $ 192 $472,726 $(468,004) $(625,583) (620,669)
========= ======== ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 66
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 2 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
--------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................ $(17,452) $ (5,440) $(625,583)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation.................................... -- 3,722 79,064
Amortization.................................... -- -- 8,666
Provision for bad debts......................... -- 2,485 104,360
Deferred rent expense........................... -- -- 73,424
Change in operating assets and liabilities:
Accounts receivable.......................... -- (88,810) (506,289)
Other current assets......................... -- (148) (473)
Deposits..................................... (1,799) -- (55,728)
Accounts payable and accrued
expenses................................... -- 14,287 316,641
Accrued salaries and payroll taxes payable... -- 25,010 284,367
Accrued vacation............................. -- -- 14,935
Unearned revenue............................. -- 42,479 90,691
-------- -------- ---------
Net cash used in operating activities............... (19,251) (6,415) (215,925)
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment....... -- (33,737) (349,646)
Software development costs.......................... -- -- (84,182)
-------- -------- ---------
Net cash used in investing activities............... -- (33,737) (433,828)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................ 27,706 -- 100
Payment of deferred offering costs.................. -- -- (88,096)
Proceeds from note payable.......................... -- -- 70,000
Repayment of note payable........................... -- -- (9,354)
Proceeds of notes payable to stockholders........... -- 163,497 889,904
Repayment of notes payable to stockholders.......... -- (2,705) (5,115)
Repayment of capital lease obligations.............. (4,404)
-------- -------- ---------
Net cash provided by financing activities........... 27,706 160,792 853,035
-------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 8,455 120,640 203,282
CASH AND CASH EQUIVALENTS at beginning of period...... 0 8,455 129,095
-------- -------- ---------
CASH AND CASH EQUIVALENTS at end of
period.............................................. $ 8,455 $129,095 $ 332,377
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NON CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest............ $ 0 $ 3,469 $ 6,277
======== ======== =========
</TABLE>
During the year ended December 31, 1996, capital lease obligations of
$64,667 were incurred when the Company entered into leases on computer
equipment.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 67
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of Business
HomeCom Communications, Inc. (the "Company") develops and markets
specialized software applications and products and provides services that enable
businesses to use the Internet and Intranets to obtain and communicate important
business information, conduct commercial transactions and improve business
productivity. HomeCom provides Internet/Intranet services in one business
segment in five integrated areas: customized software applications design,
development and integration; World Wide Web site development; Internet
outsourcing services; specialized Internet-enabled software products; and
security consulting and integration services.
Basis of Presentation - Going Concern
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplate the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has incurred net losses from operations since its
incorporation, and has an accumulated deficit at December 31, 1996. Management
believes that a public offering of its common stock and the conversion of
certain debt to equity and successful commercialization of its products and
services will generate the required capital necessary to continue as a going
concern.
Cash and Cash Equivalents
For purposes of the statement of cash flows, management considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts.
The allowance was $2,485 and $106,845 at December 31, 1995 and 1996,
respectively.
Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation, which is computed using the straight-line method over the
estimated useful lives of the related assets (three to five years). Assets
recorded under capital leases are amortized over the shorter of their useful
lives or the term of the related leases using the straight line method.
Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income.
Income Taxes
Prior to February 9, 1996, the Company qualified as an S Corporation for
federal and state income tax purposes. Accordingly, no provision was made for
income taxes for its operations prior to February 9, 1996. Individual
stockholders report their share of the Company's taxable income or loss on their
respective individual income tax returns. The Company's taxable income or loss
allocated to the stockholders differs from book income primarily due to the use
of accelerated methods for depreciating furniture, fixtures and equipment for
income tax purposes.
Effective February 9, 1996, the Company converted from an S corporation to
a C corporation for income tax purposes and is, therefore, subject to corporate
income taxes. Deferred income tax
F-6
<PAGE> 68
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
assets and liabilities reflect differences between the bases of the Company's
assets and liabilities for financial reporting and income tax purposes. The net
deferred income tax asset of approximately $236,000 at December 31, 1996 is
primarily due to operating loss carryforwards generated since February 9, 1996
and is fully offset by a valuation allowance. The effect of a change in the
valuation allowance that results from a change in circumstances that causes a
change in judgment about the realizability of the related deferred tax asset in
future years would be included in income in that period. The statements of
operations include a presentation of the unaudited pro forma effects of income
taxes on the Company's operations as if the Company had been subject to
corporate income taxes for all periods presented.
As a result of termination of the S Corporation in February 1996, the
accumulated deficit as of that date was transferred to additional paid-in
capital.
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 revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Software Development Costs, Net
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting For Costs
of Computer Software To Be Sold, Leased, or Otherwise Marketed". The
capitalization of these costs begins when a product's technological feasibility
has been established and ends when the product is available for general release
to customers. Amortization is computed on an individual product basis and is the
greater of (a) the ratio of current gross revenues for a product to the total
current and anticipated future gross revenues for the product or (b) the
straight-line method over the estimated economic life of the product. As of
December 31, 1996, software development costs were $81,520, net of $2,662 of
accumulated amortization.
Deferred Offering Costs
Costs incurred in connection with the Company's proposed initial public
offering of securities have been deferred and will be netted against the gross
proceeds of the offering. As of December 31, 1996, costs deferred totaled
$406,963.
Revenue Recognition
The Company recognizes revenues on web page development and specialized
software application contracts using the percentage-of-completion method. The
percentage of completion is determined by relating the actual hours of work
performed to date to the current estimated hours at completion of the respective
contracts. Earned revenue is based on the percentage that incurred hours to date
bear to total estimated hours after giving effect to the most recent estimates
of total hours. Earned revenue reflects the original contract price adjusted for
agreed upon claim and change order revenue, if any. If estimated total costs on
any of these contracts indicate a loss, the entire amount of the estimated loss
is recognized immediately. Revenues related to other services are recognized as
the services are performed. Revenues from equipment sales and related costs are
recognized when products are shipped to the customer. Unearned revenue, as
reflected on the
F-7
<PAGE> 69
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
accompanying balance sheet, represents the amount of billings recorded on
contracts in advance of work being performed.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheet for the Company's notes
payable and capital lease obligations approximate fair value due to the
short-term nature of these instruments.
Advertising Expenses
All advertising costs are expensed when incurred. Advertising expenses were
approximately $9,000 and $211,000 for the years ended December 31, 1995 and
1996, respectively.
Loss Per Common Share
Loss per common share is based on the Company's common stock and is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options and warrants (calculated using the treasury
stock method at the initial public offering price of $6.00 per share). Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the assumed initial public offering price
per share and stock options issued with exercise prices below such price during
the twelve-month period preceding the proposed date of the initial filing of the
registration statement have been included in the calculation of common shares,
using the treasury stock method, as if they were outstanding for all periods
presented. All per share data has been retroactively adjusted to reflect the
93.07-for-one stock split approved by the Board of Directors on September 11,
1996 and effective September 11, 1996.
Recently Issued Accounting Standards
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), was issued. SFAS 128 is designed to improve
the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of earnings per share data on an
international basis. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The Company will adopt SFAS 128 on its effective
date. Pro forma earnings per share of the Company computed using SFAS 128 is not
different from earnings per share computed using existing standards and
guidelines.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET:
Furniture, fixtures and equipment, net, are comprised of the following as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
------- --------
<S> <C> <C>
Furniture and fixtures...................................... $ 3,187 $145,066
Computer equipment.......................................... 30,550 238,317
Computer equipment under capital leases..................... -- 64,667
------- --------
33,737 448,050
Less: accumulated depreciation and amortization............. (3,722) (88,790)
------- --------
$30,015 $359,260
======= ========
</TABLE>
F-8
<PAGE> 70
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. NOTES PAYABLE:
Notes payable are comprised of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1996
-------- ----------
<S> <C> <C>
Promissory note payable to a spouse of a stockholder
(interest accrues at 8%), payable September 1997, non-
collateralized, payable in cash and/or through issuance of
shares of common stock at the effectiveness of an initial
public offering at the initial public offering price per
share. The Company intends to issue shares in payment of
the principal amount payable under the note................ -- $ 200,000
Promissory notes payable to stockholders and affiliates
(interest accrues at 8%), payable August and September
1997, non-collateralized................................... $100,000 789,904
Promissory note payable to a stockholder (interest accrues
at the prime rate plus 1%), payable September 12, 2000..... 60,792 55,677
Promissory note payable to a bank (interest accrues at the
prime rate plus 1.5%), payable in 60 equal monthly
installments through February, 2001, collateralized by
certain trade receivables and equipment.................... -- 60,646
-------- ----------
160,792 1,106,227
Less current maturities of notes payable................... -- 1,003,518
-------- ----------
$160,792 $ 102,709
======== ==========
</TABLE>
Future principal payments on notes payable at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997................................ $1,003,518
1998................................ 13,903
1999................................ 15,321
2000................................ 72,561
2001................................ 924
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2001. During 1996, the Company entered into
several capital leases to purchase computer equipment.
F-9
<PAGE> 71
NOTES TO FINANCIAL STATEMENTS, CONTINUED
4. COMMITMENTS AND CONTINGENCIES, CONTINUED:
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1997...................................... $19,414 $ 291,405
1998...................................... 18,659 270,461
1999...................................... 17,148 248,501
2000...................................... 14,163 241,440
2001...................................... 539 40,240
------- ----------
Total minimum lease payments.............. 69,923 $1,092,047
==========
Less amount representing interest......... (9,659)
-------
Present value of minimum lease payments... $60,264
=======
</TABLE>
During January 1996, the Company executed a five-year lease for new office
space. Future minimum annual lease payments are approximately $241,000 per year
for the remainder of the lease term. The total amount of the base rent payments
is being charged to expense on a straight-line method over the term of the
lease. The Company has recorded a deferred credit to reflect the excess of rent
expense over cash payments since inception of the lease.
Rental expense under operating leases for the period from December 2, 1994
to December 31, 1994 and the years ended December 31, 1995 and 1996 was $1,299,
$22,188 and $226,700, respectively.
Subsequent to December 31, 1996, the Company entered into four additional
capital leases for computer equipment. The future minimum payments under these
leases are approximately $135,000 per year through 1999.
The Company's software and equipment are vulnerable to computer viruses or
similar disruptive problems caused by customers or other Internet users.
Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. Although the Company attempts to limit its liability
to customers for these types of risks through contractual provisions, there can
be no assurance that these provisions will be enforceable.
Various legal precedings may arise in the normal course of business.
Management does not believe that there are currently any asserted or unasserted
claims that will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
5. CONCENTRATION OF CREDIT RISKS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
F-10
<PAGE> 72
NOTES TO FINANCIAL STATEMENTS, CONTINUED
5. CONCENTRATION OF CREDIT RISKS, CONTINUED:
The Company places its cash and cash equivalents with quality financial
institutions.
Concentration of credit risk with respect to trade receivables is monitored
by the Company through ongoing credit evaluations of its customers' financial
condition. The Company's sales to its five largest customers represented
approximately 46% and 26% of total revenues for the years ended December 31,
1995 and 1996, respectively. The five most significant customer balances
represented approximately 73% and 39% of the accounts receivable balance at
December 31, 1995 and 1996, respectively. No company accounted for more than 10%
of the revenues of the Company during 1996.
6. EQUITY TRANSACTIONS:
All share and per share amounts presented below have been adjusted to
reflect the 93.07-for-one stock split effective September 11, 1996.
During 1995, the Company issued warrants to its former Board of Advisors to
purchase 37,228 shares of common stock for total consideration of $4.00. The
warrants were granted at the fair market value of the common stock at the time
of issuance. These warrants were exercised in August 1996.
During February 1996, the Company issued 707,332 additional shares to the
previous sole stockholder, 93,070 shares to an executive officer of the Company
pursuant to the exercise of options granted in connection with the founding of
the Company, and 893,472 shares to four private investors.
In August 1996, the Company sold to certain key employees an aggregate of
102,855 shares of common stock for an aggregate consideration of $468,004,
payable through the issuance of promissory notes payable in four equal
installments, bearing interest at 8% per annum and secured by the shares of
common stock purchased therewith. Also in August 1996, the Company entered into
employment agreements with such persons which provide that, assuming continued
employment with the Company, for each of the first four years of employment, the
Company will issue a bonus to the employee in the amount necessary to repay the
annual amount due under such promissory note (plus the taxes due by the employee
as a consequence of receiving such bonus). Pursuant to the terms of the
employment agreements, the Company will continue to make these annual payments
if the employee is terminated other than "for cause," as defined in the
employment agreements. Pursuant to the terms of the subscription agreements for
such shares, if the employee's employment is terminated within such four-year
period, the Company has the right to repurchase that percentage of the shares
purchased by the employee which shall equal the percentage of the promissory
note which is not yet due, payment for such repurchase to be made by canceling
the applicable outstanding amount of the promissory note. For financial
reporting purposes, these notes receivable have been presented as a separate
component of stockholders' equity.
In September 1996, the Company amended and restated its Certificate of
Incorporation (i) to reclassify its common stock from no par value stock to
stock with a par value of $0.0001 per share, (ii) to increase the authorized
shares of common stock to 15,000,000, and (iii) to authorize the issuance of
1,000,000 shares of $0.01 par value preferred stock. No preferred stock has been
issued.
In September 1996, the Board of Directors approved a 93.07-for-one stock
split effected in the form of a stock dividend, whereby each common stockholder
of record as of September 11, 1996 received 92.07 additional shares of common
stock for each share owned as of the record date. As a result of the stock split
and the above recapitalization, 1,902,400 shares were issued and $495,618
F-11
<PAGE> 73
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. EQUITY TRANSACTIONS, CONTINUED:
was transferred from Common Stock to Paid-in Capital. Weighted average common
shares outstanding and per share amounts for all periods presented have been
restated to reflect the stock split.
7. LONG-TERM INCENTIVE PLANS:
Employee Stock Option Plan
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996. Shares of common stock
may be sold or awarded to officers, key employees and consultants. The Company
has reserved 300,000 shares of common stock for issuance under the Stock Option
Plan. Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code or (ii) non-qualified stock options.
During 1996, the Company granted options to purchase shares under the Stock
Option Plan. The options vest 25% per year and expire ten years after the grant
date. The exercise price of the grants was made at or above the fair market
value of the stock on the grant date.
Non-Employee Directors' Stock Option Plan
The Company's Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") was adopted by the Company's stockholders in September 1996. Shares of
common stock may be sold or awarded to directors who are not officers or
employees of the Company ("Non-Employee Directors"). The Company has reserved
300,000 shares of common stock for issuance under the Directors' Plan.
The Directors' Plan provides for the automatic granting of an option to
purchase 10,000 shares of common stock to each Non-Employee Director who is
first appointed or elected to the Board of Directors. Also, each Non-Employee
Director is automatically granted an option to purchase 5,000 shares of common
stock on the date of each annual meeting of the Company's stockholders.
Furthermore, the Directors' Plan allows the Board of Directors to make
extraordinary grants of options to Non-Employee Directors.
During 1996, the Company granted options to purchase shares under the
Directors' Plan. The options granted under the Directors' Plan vest 50% per year
of service and expire seven years after date of grant. The exercise price of the
grants was above the fair market value of the stock on the grant date.
Options historically have been granted based on an amount greater than or
equal to the fair value of the shares at the date of grant. Since no quoted
market price was available prior to the Company's proposed initial public
offering, the best estimate of the fair value of the stock was determined by the
Board of Directors.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1996: dividend yield of 0%, expected volatility of 80%, risk-free
interest rate of 6.46%, and expected lives of four years for the Stock Option
Plan and two years for the Directors' Plan.
F-12
<PAGE> 74
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM INCENTIVE PLANS, CONTINUED:
A summary of the Company's stock option plan activity and related
information for the year ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
--------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------- ----------------
<S> <C> <C>
Outstanding at beginning of year.......................... 0 --
Granted................................................... 229,167 $6.30
Exercised................................................. 0 --
Forfeited................................................. (8,624) 6.19
-------
Outstanding at end of year................................ 220,543 6.30
=======
Options exercisable at year-end........................... 0 --
=======
Weighted average fair value of options granted during the
year at the share's fair value.......................... $2.86
Weighted average fair value of options granted during the
year at above the share's fair value.................... $1.89
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE
PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE
- -------------- ------------------ ---------------- ----------------
<C> <C> <C> <C>
$4.55 22,241 9.7 $4.55
6.50 198,302 7.5 6.50
</TABLE>
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. For the fiscal year ended December 31, 1996, no
compensation cost was recognized for its stock option plans. Had compensation
cost for the Company's stock-based compensation plans been determined under the
provisions consistent with FASB Statement 123, the Company's net loss and loss
per share for the year ended December 31, 1996, would have been the pro forma
amounts indicated below:
<TABLE>
<S> <C>
Net loss -- as reported..................................... $(625,583)
Net loss -- pro forma....................................... (676,776)
Loss per share -- as reported............................... (0.33)
Loss per share -- pro forma................................. (0.36)
</TABLE>
8. ACQUISITION:
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a Delaware corporation formed
in July 1996 to provide Internet and Intranet security system consulting
services. In the transaction, the former holders of HISS's capital stock
received the right to receive their pro rata share of four annual earnout
payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each,
an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal
to 30% of HISS's gross revenues for the 12 month period ending December 31,
1997; provided, however, that (i) the amount of each Annual Earnout will be
limited to the amount of HISS's net profits for the 12-month period ended
December 31 immediately preceding the payment date (the "Profit Cap"), (ii)
amounts not paid in a year as a result of the Profit Cap will be carried forward
to the subsequent year, and (iii) amounts not paid in the fourth year as a
result of the Profit Cap will be forfeited. Each Annual Earnout can be
F-13
<PAGE> 75
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. ACQUISITION, CONTINUED:
paid in whole or in part in cash or, at HomeCom's option, in shares of common
stock based upon the average trading price of the common stock for the ten
trading days immediately preceding payment of the Annual Earnout. An Annual
Earnout will not be paid if the recipient is then in violation of the
non-solicitation and non-competition provisions contained in the Stock Purchase
Agreement to which the former holders of HISS's capital stock are subject.
HISS was formed in July 1996 and was in its start-up phase at the date of
acquisition. The purchase consideration is contingent on achieving specified
earnings levels in future periods and is not currently estimable. When such
amounts are determinable, the consideration, if any, will be recognized and
amortized over the remaining life of the intangible assets acquired.
9. RELATED PARTY TRANSACTIONS:
The Company has borrowed $160,792 and $1,045,581 as of December 31, 1995
and 1996, respectively, from certain of its stockholders and affiliates of its
stockholders. Interest expense on these notes was $3,469 and $44,952 in 1995 and
1996, respectively.
The Company has entered into an employment agreement with its Chief
Executive Officer and principal stockholder which expires December 31, 2000.
10. INCOME TAXES:
Deferred income taxes at December 31, 1996 reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996, are as follows:
<TABLE>
<S> <C>
Temporary differences:
Allowance for uncollectibles.............................. $ 40,601
Vacation accrual.......................................... 5,675
Depreciation.............................................. 4,820
Deferred rent expense..................................... 27,901
Software development expenses............................. (29,515)
--------
49,482
Net operating loss carryforward............................. 190,156
--------
Deferred tax asset.......................................... 239,638
Valuation allowance......................................... (239,638)
========
Net deferred tax asset...................................... $ 0
========
</TABLE>
At December 31, 1996, the Company had net operating losses for income tax
purposes of $500,412 which expire in 2011. Realization of these assets is
contingent on having future taxable earnings. Based on the cumulative losses in
recent years, management believes that it is more likely than not that some
portion or all of the deferred tax asset and operating loss carryforward will
not be realized and has recorded a full valuation allowance.
Pro forma (unaudited)
As described in Note 1, the Company previously elected S Corporation status
under the provisions of the Internal Revenue Code. In February 1996, the Company
elected C Corporation status. The following unaudited pro forma information has
been determined based upon the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". This information reflects
income tax expense that the Company would have incurred had it
F-14
<PAGE> 76
10. INCOME TAXES, CONTINUED:
been subject to Federal and state income taxes. The Company would not have a
Federal and state income tax provision because of net operating loss
carryforwards for all periods presented.
The pro forma income tax benefit differs from the amounts computed by
applying the Federal statutory rate of 34% to loss before taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 2 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
-------------- ------------ ------------
<S> <C> <C> <C>
Tax benefit at the statutory rate............ $ 5,934 $ 1,850 $ 212,698
State income tax, net of federal benefit..... 698 218 25,023
Permanent differences........................ 1,917
Valuation allowance.......................... (6,632) (2,068) (239,638)
------- ------- ---------
$ 0 $ 0 $ 0
======= ======= =========
</TABLE>
F-15
<PAGE> 77
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE
COMPANY OR THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN
SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH
DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 5
Use of Proceeds....................... 12
Dividend Policy....................... 12
Dilution.............................. 13
Capitalization........................ 14
Selected Historical and Pro Forma
Financial Data...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 22
Management............................ 38
Certain Transactions.................. 45
Principal Stockholders................ 47
Description of Capital Stock.......... 48
Shares Eligible for Future Sale....... 49
Underwriting.......................... 51
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 53
Glossary of Certain Technical Terms... 54
Report of Independent Accountants..... F-1
</TABLE>
---------------------
UNTIL MAY 31, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
1,000,000 SHARES
[HOMECOM COMMUNICATIONS LOGO]
COMMON STOCK
------------------------------------------------
PROSPECTUS
------------------------------------------------
LADENBURG THALMANN & CO. INC.
MAY 6, 1997
======================================================
