<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 14, 1998
REGISTRATION NO. 333-42599
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
POST-EFFECTIVE
AMENDMENT
NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
HOMECOM COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7371 58-2153309
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
</TABLE>
BUILDING 14, SUITE 100, 3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(404) 237-4646
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
HARVEY W. SAX
CHIEF EXECUTIVE OFFICER
HOMECOM COMMUNICATIONS, INC.
BUILDING 14, SUITE 100, 3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(404) 237-4646
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
RAYMOND L. MOSS, ESQUIRE
SIMS MOSS KLINE & DAVIS LLP
400 NORTHPARK TOWN CENTER
SUITE 310
1000 ABERNATHY ROAD
ATLANTA, GEORGIA 30328
(770) 481-7200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following box. [
]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THIS REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
HOMECOM COMMUNICATIONS, INC.
(THE "COMPANY")
UP TO 850,000 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION
OF AN AGGREGATE $1,700,000 OF THE COMPANY'S
5% CONVERTIBLE DEBENTURES DUE SEPTEMBER 22, 2000
This Prospectus relates to up to 850,000 shares (the "Conversion Shares")
of the Company's Common Stock, $.0001 par value per share ("Common Stock")
issuable upon conversion of an aggregate $1,700,000 principal amount of the
Company's 5% Convertible Debentures due September 22, 2000 (the "Debentures")
under the Securities Act of 1933, as amended (the "Securities Act"). The
Debentures were issued and sold in November 1997 (the "Debenture Sale") in
transactions exempt from the registration requirements of the Securities Act, to
"accredited investors" (as defined in Rule 501(a) under Regulation D of the
Securities Act) and/or in compliance with the provisions of Regulation S under
the Securities Act. The Common Stock issuable upon conversion thereof may be
offered and sold from time to time by the holders named herein or by their
transferees, pledgees, donees or their successors (collectively, the "Selling
Securityholders") pursuant to this Prospectus. The Registration Statement of
which this Prospectus is a part has been filed with the Securities and Exchange
Commission pursuant to a Registration Rights Agreement (the "Registration Rights
Agreement") between the Company and the Selling Securityholders, entered into in
connection with the Debenture Sale.
The Debentures are issued pursuant to the terms of a 5% Convertible
Debenture Purchase Agreement dated effective as of September 19, 1997 (the
"Debenture Agreement"). Principal and interest on the Debentures is payable on
September 22, 2000. The Debentures are convertible at the option of the holders.
The Purchasers have agreed that they may not convert any portion of the
remaining Debentures held by each of them for a period beginning April 8, 1998
and ending May 8, 1998 and thereafter not to convert more than 25% of the
Remaining Debentures held by each of them in any thirty (30) day period
thereafter (the "Gating Restrictions"). The Debenture Conversion Price is equal
to the lessor of (a) a 25% discount from the closing bid price of the Common
Stock as reported by Nasdaq or other securities exchanges or markets on which
the Common Stock is listed for the previous three trading days ending on the day
preceding notice of conversion, or (b) $2.625 per share. However, in the event
that the closing bid price of the Common Stock as reported by NASDAQ or on other
securities exchanges or markets on which the Common Stock is listed for the
previous five (5) trading days is $3.50 or greater, following May 8, 1998 the
foregoing Gating Restrictions shall not apply as long as the closing bid price
for the previous five (5) trading days is $3.50 or greater. In addition, if the
Common Stock is not traded on the NASDAQ SmallCap Market or the electronic
bulletin board, the
---------------
continued on following page
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8.
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.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1998
<PAGE> 3
continued from previous page
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foregoing Gating Restrictions shall no longer apply. The number of shares
issuable upon conversion of the Debentures is equal to the aggregate principal
balance of the Debentures divided by the Debenture Conversion Price. See
"Description of Securities -- Convertible Debentures." At May 8, 1998, $300,000
of the Debentures remain to be converted.
The Selling Securityholders have informed the Company that the Conversion
Shares may be offered from time to time in brokerage transactions (which may
include block transactions) on any exchange or market on which such securities
are listed or quoted, as applicable, in negotiated transactions, through a
combination of such methods of sale, or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
prevailing market prices or at negotiated prices. The Selling Securityholders
may effect such transactions by selling the Conversion Shares directly or to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Conversion Shares for whom such broker-dealers may act as
agents or to whom they may sell as principals, or both (which compensation as to
a particular broker-dealer might be in excess of customary commissions). The
Selling Securiyholders will receive all of the net proceeds from the sale of the
Conversion Shares and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the Conversion Shares. The
Company is responsible for payment of all other expenses incident to the offer
and sale of the Conversion Shares. The Company will not receive any of the
proceeds from the sale of the Conversion Shares by the Selling Securityholders.
In December 1997, the Company issued 20,000 shares of its Series A
Preferred Stock to private investors (the "Series A Preferred Holders") for an
aggregate purchase price of $2,000,000. The Series A Preferred Stock was issued
and sold in December 1997 (the "Series A Preferred Sale") in transactions exempt
from the registration requirements of the Securities Act, to "accredited
investors" (as defined in Rule 501(a) under Regulation D of the Securities Act)
under the Securities Act of 1933, as amended (the "Securities Act"). Net
proceeds to the Company from the Series A Preferred Sale were approximately $1.8
million. Pursuant to Registration Rights Agreements with the Series A Preferred
Holders (the "Series A Preferred Registration Agreements"), the Company agreed
to file a registration statement covering the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock (the "Series A Preferred
Registration Statement"). The Series A Preferred Holders have agreed that they
may not convert on a non-cumulative basis (i) more than 25% of the Series A
Preferred Stock during any thirty (30) day period following the effective date
(the "Registration Effective Date") of the registration statement (the
"Registration Statement") filed with the Securities and Exchange Commission (the
"Commission") with respect to the offer and sale of shares (the "Conversion
Shares") of the Company's Common Stock issuable upon conversion of the Series A
Preferred Stock. The Series A Preferred Stock is convertible into a number of
shares of Common Stock equal to the quotient of (a) the product of the number of
shares of Series A Preferred Stock being converted multiplied by $100.00 divided
by (b) the then-applicable conversion price. The conversion price for the Series
A Preferred Stock (the "Series A Preferred Conversion Price") is the lesser of
(i) 75% of the average closing bid price of the Company's Common Stock for the
five trading days ending on the day the Company actually receives a conversion
notice; or (ii) $3.50 (the "Fixed Conversion Price"). However, if the
Registration Statement is not declared effective by May 16, 1998, the Fixed
Conversion Price shall be $3.00 per share. The Series A Preferred Conversion
Price is subject to adjustment under certain circumstances. On May 8, 1998, the
closing bid price of the Common Stock on the Nasdaq SmallCap(TM) Market was
$4.5625 per share and the average of the closing bid price of the Common Stock
for the five trading days ending May 8, 1998 was $5.05 per share. See
"Description of Securities -- Series A Convertible Preferred Stock."
In connection with the issuance and sale of the Series A Preferred Stock,
the Company granted the Series A Preferred Stock Warrants to the Series A
Preferred Holders to acquire an aggregate of 75,000 shares of Common Stock, with
warrants to purchase 62,500 shares of Common Stock having an exercise price per
share equal to $14.50625 and warrants to purchase 12,500 shares of Common Stock
having an exercise price per share equal to $15.825. The Company also granted
50,000 warrants to a placement agent at an exercise price of $15.825 per share.
The Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. See "Description
of Securities -- Warrants."
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in connection with, (i) the Company's financial statements and
notes thereto included elsewhere in this Prospectus; and (ii) the exhibits filed
with the registration statement of which this Prospectus is a part. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the conversion of the Debentures, the conversion of the Series A Preferred Stock
or the exercise of the Offered Warrants.
THE COMPANY................ HomeCom Communications, Inc. ("HomeCom" or 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
three areas: (i) customized software applications
design, development and integration including,
World Wide Web site development; (ii) Internet
outsourcing services; and (iii) security consulting
and integration services. HomeCom's objective is to
be a leading provider of business communications
solutions using Internet standard protocol
technologies.
THE OFFERING............... Up to 1,078,572 shares of Common Stock (the
"Conversion Shares") are offered hereby by the
Selling Securityholders. The Conversion Shares are
issuable upon conversion of an aggregate $1,700,000
of the Company's 5% Convertible Debentures due
September 22, 2000 (the "Debentures") issued by the
Company to the Selling Securityholders. The Selling
Securityholders will receive all of the net
proceeds from the sale of the Conversion Shares and
will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the
Conversion Shares. The Company is responsible for
payment of all other expenses incident to the offer
and sale of the Conversion Shares. The Company will
not receive any of the proceeds from the sale of
the Conversion Shares by the Selling
Securityholders.
CONVERSION................. The Debentures are convertible at the option of the
holders. Pursuant to certain amendments to the
Debentures, dated as of April 8, 1998, the
Purchasers agree not to convert any portion of the
remaining Debentures held by each of them for a
period beginning April 8, 1998 and ending May 8,
1998 and thereafter not to convert more than 25% of
the Remaining Debentures held by each of them in
any thirty (30) day period thereafter (the "Gating
Restrictions"). The Debenture Conversion Price is
equal to the lessor of (a) a 25% discount from the
closing bid price of the Common Stock as reported
by Nasdaq or other securities exchanges or markets
on which the Common Stock is listed for the
previous three trading days ending on the day
preceding notice of conversion, or (b) $2.625 per
share. However, in the event that the closing bid
price of the Common Stock as reported by NASDAQ or
on other securities exchanges or markets on which
the Common Stock is listed for the previous five
(5) trading days is $3.50 or greater, following May
8, 1998 the foregoing Gating Restrictions shall not
apply as long as the closing bid price for the
previous five (5) trading days is $3.50 or greater.
In addition, if the Common Stock is not traded on
the NASDAQ SmallCap Market or the electronic
bulletin board, the foregoing Gating Restrictions
shall no longer apply. The number of shares
issuable upon conversion of the Debentures is equal
to the aggregate principal balance of the
Debentures divided by the Debenture Conversion
Price.
3
<PAGE> 5
The offer and sale of the Debenture Conversion
Shares has been registered pursuant to the
Debenture Registration Statement which was declared
effective by the Commission on February 12, 1998.
SERIES A PREFERRED STOCK... In December 1997, the Company issued 20,000 shares
of its Series A Preferred Stock to the Series A
Preferred Holders for an aggregate purchase price
of $2,000,000. Net proceeds to the Company were
approximately $1.8 million. Pursuant to the Series
A Preferred Registration Agreements, the Company
agreed to file the Series A Preferred Registration
Statement. The Series A Preferred Holders have
agreed that they may not convert on a cumulative
basis (i) more than 25% of the Series A Preferred
Stock during any thirty (30) day period following
the effective date (the "Registration Effective
Date") of the registration statement (the
"Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") with
respect to the offer and sale of shares (the
"Conversion Shares") of the Company's Common Stock
issuable upon conversion of the Series A Preferred
Stock. The Series A Preferred Conversion Price is
subject to adjustment under certain circumstances.
See "Description of Securities -- Series A
Convertible Preferred Stock." On May 8, 1998, the
closing bid price of the Common Stock on the Nasdaq
SmallCap(TM) Market was $4.5625 per share and the
average of the closing bid price of the Common
Stock for the five trading days ending May 8, 1998
was $5.05 per share.
The Company has received no firm commitment for the
conversion of any of the Shares of Series A
Preferred Stock. Consequently, there can be no
assurance that the Shares of Series A Preferred
Stock will be converted. Pursuant to the Series A
Preferred Registration Rights Agreement, the
Company has agreed to register 678,866 shares of
Common Stock. Following conversion in full or
redemption of the Series A Preferred Stock, the
Company intends to deregister any and all shares of
Common Stock registered hereunder that are not
issued to a Selling Securityholder upon conversion
of the Series A Preferred Stock. See "Risk
Factors -- Variability of Number of Shares of
Common Stock Issuable Upon Conversion of Debentures
and Series A Preferred Stock."
In connection with the completion of the Debenture
Sale, the Company issued to First Granite
Securities, Inc., an entity designated by the
holders of the Debentures, the Debenture Warrants
to acquire an aggregate 400,000 shares of Common
Stock. Of the Debenture Warrants, warrants to
acquire an aggregate 200,000 shares are exercisable
at a price of $4.00 per share and warrants to
acquire an aggregate 200,000 shares are exercisable
at a price of $6.00 per share. The exercise price
of the Debenture Warrants is subject to adjustment.
If not earlier exercised, the Debenture Warrants
expire on October 27, 2000. Pursuant to an
agreement dated April 8, 1998, in the event that
the Company agrees to adjust the exercise price of
the Series A Preferred Stock Warrants to an
exercise price below $5.00 (the "Reduced Exercise
Price"), the Company has agreed to amend the
exercise price of any unexercised First Granite
Debenture Warrants to the Reduced Exercise Price.
RISK FACTORS............... An investment in the securities offered hereby
involves a high degree of risk. See "Risk Factors
4
<PAGE> 6
NASDAQ SMALLCAP(TM)
MARKET SYMBOL............ HCOM
COMMON STOCK OUTSTANDING
BEFORE
OFFERING(1)(2)(3)........ 4,154,965
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF THE
REMAINING UNCONVERTED
DEBENTURE CONVERSION
SHARES(1)(3)(4).......... 4,269,251
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF
THE SERIES A
PREFERRED CONVERSION
SHARES(2)(5)(6).......... 4,726,394
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF THE
REMAINING UNCONVERTED
DEBENTURE CONVERSION
SHARES AND THE SERIES A
PREFERRED CONVERSION
SHARES(4)(5)(6).......... 4,840,680
- ---------------
(1) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 557,160 shares of Common Stock are
issuable upon the exercise of outstanding options granted at exercise prices
ranging from $2.18 to $8.06 per share and weighted average exercise price of
$4.58 per share; (ii) 300,000 shares reserved for issuance under the
Company's Non-Employee Directors Plan, of which options to acquire 20,000
shares of Common Stock are issuable upon the exercise of outstanding options
granted at exercise prices ranging from $2.18 to $6.50 per share and a
weighted average exercise price of $4.34; (iii) 150,000 shares reserved for
issuance under the Company's Stock Purchase Plan, no shares having been
issued thereunder; (iv) 100,000 shares of Common Stock reserved for issuance
upon the exercise of warrants granted to the underwriter of the Company's
initial public offering at an exercise price of $7.20 per share; (v) 400,000
shares of Common Stock that are issuable upon the exercise of the warrants
granted in connection with the Debenture Sale, of which warrants to acquire
200,000 shares are exercisable at an exercise price of $4.00 per share and
warrants to acquire 200,000 shares are exercisable at an exercise price of
$6.00 per share; (vi) 125,000 shares of Common Stock that are issuable upon
exercise of the Series A Preferred Stock Warrants, of which warrants to
acquire 62,500 shares are exercisable at a price equal to $14.50625 per
share and warrants to purchase the remaining 62,500 shares are exercisable
at a price of $15.825 per share; and (vii) 25,000 shares of Common Stock
that are issuable upon exercise of warrants (the "InsureRate Warrants")
granted in connection with the Company's organization of InsureRate at an
exercise price of $3.70 per share. See "Management -- Incentive Plans,"
"Description of Securities -- Convertible Debentures," "Description of
Securities -- Series A Preferred Stock," and "Description of
Securities -- Warrants." 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."
(2) Excludes shares of Common Stock to be issued upon conversion of the
remaining $300,000 of outstanding Debentures.
(3) Excludes shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
(4) Assumes that all holders of Debentures elect to convert the Debentures into
an aggregate 114,286 shares of Common Stock at a Conversion Price of $2.625
per share, which represents the Conversion Price that would be in effect if
the Company received notice of conversion after the close of business on May
8, 1998. See "Description of Securities -- Convertible Debentures."
(5) Assumes that all holders of the Series A Preferred Stock elect to convert
the Series A Preferred Stock into an aggregate 571,429 shares of Common
Stock at a conversion price of $3.50 per share, which
5
<PAGE> 7
represents the Series A Preferred Conversion Price that would be in effect
if the Company received notice of conversion after the close of business on
May 8, 1998. See "Description of Securities -- Series A Convertible
Preferred Stock."
(6) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 557,160 shares of Common Stock are
issuable upon the exercise of outstanding options granted at exercise prices
ranging from $2.18 to $8.06 per share and weighted average exercise price of
$4.58 per share; (ii) 300,000 shares reserved for issuance under the
Company's Non-Employee Directors Plan, of which options to acquire 20,000
shares of Common Stock are issuable upon the exercise of outstanding options
granted at exercise prices ranging from $2.18 to $6.50 per share and a
weighted average exercise price of $4.34; (iii) 150,000 shares reserved for
issuance under the Company's Stock Purchase Plan, no shares having been
issued thereunder; and (iv) 25,000 shares of Common Stock that are issuable
upon exercise of the InsureRate Warrants. See "Management -- Incentive
Plans," "Description of Securities -- Convertible Debentures," "Description
of Securities -- Series A Preferred Stock," and "Description of
Securities -- Warrants." 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."
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 2,
(INCORPORATION)
TO DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------- --------------------------------------
1994 1995 1996 1997
--------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. -- $ 327,574 $ 2,298,855 $ 2,878,628
Operating loss............................. $ (17,452) (1,824) (580,865) (4,431,059)
Net loss................................... (17,452) (5,440) (625,583) (4,881,181)
Basic and diluted loss per share........... $ (.01) $ (.00) $ (.34) $ (1.88)
Weighted average common shares
outstanding.............................. 1,850,447 1,850,447 1,862,223 2,602,515
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................... $ 8,455 $133,792 $(1,304,682) $ 2,721,930
Total assets................................. 10,254 247,382 1,726,522 4,664,779
Long-term obligations........................ -- 160,792 147,833 1,652,009
Total liabilities............................ -- 242,568 2,347,191 2,708,007
Stockholders' equity (deficit)............... 10,254 4,814 (620,669) 1,956,772
</TABLE>
6
<PAGE> 8
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including without limitation, certain statements contained under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning the Company's expectations, beliefs, or strategies
regarding increased future revenues and operations and certain statements
contained under "Business" concerning the development and marketing of
customized Internet applications and security consulting services and the effect
of market conditions and competition. When used in this Prospectus, the words
"believes," "intends," "anticipates" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this Prospectus are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected or implied
by such forward-looking statements. Such risks and uncertainties include the
timing and acceptance of new product introductions, the actions of the Company's
competitors and business partners, and those discussed under the caption "Risk
Factors."
7
<PAGE> 9
RISK FACTORS
An investment in the securities offered hereby is speculative in nature and
involves a high degree of risk. In addition to other information contained in
this Prospectus, prospective investors should carefully consider the following
risk factors before purchasing the securities offered hereby.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; CONTINUING LOSSES. 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, 1997 had an accumulated deficit
of approximately $5.5 million. For the years ended December 31, 1996 and 1997,
the Company had negative cash flows from operations of approximately $216,000
and $4.0 million, respectively. The Company continues to incur operating losses
and there can be no assurance that the Company will ever achieve or sustain
profitability.
RECENT REDUCTION OF STAFF AND OTHER EXPENSES; CONTINUING LOSSES. 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 recent expansion of operating expenses
has placed significant demands on the Company's administrative, operational,
financial and other resources. Following completion of its initial public
offering, the Company expended considerable resources to expand its marketing
and sales programs, its product development staff, its accounting and internal
management systems and its other administrative and public relations
capabilities. These increases in expenditures were not followed by commensurate
increases in revenues, and during the quarter ended September 30, 1997, the
Company was forced to engage in substantial reductions in its personnel in order
to conserve operating capital. This reduction in staff has affected employee
morale and limited the Company's ability to increase sales to desired levels.
Notwithstanding the Company's efforts to limit its expenditures, its operating
costs continue to exceed revenues. If the Company cannot generate sufficient
revenues to offset its operating expenses or the Company's management otherwise
fails to manage the Company's growth effectively, the Company's business,
financial condition and operating results will be materially and adversely
affected. There can be no assurance that current management can operate the
Company's business adequately to achieve profitable operations. See
"Business -- Employees" and "Management."
NEED FOR ADDITIONAL FINANCING. The Company has substantially limited
sources of capital and continues to incur substantial operating losses. As of
December 31, 1997, the Company had net working capital of approximately $2.7
million. On December 23, 1997, the Company issued and sold 20,000 shares of
Series A Preferred Stock to the Series A Preferred Holders for aggregate net
proceeds of approximately $1.8 million. The proceeds will be used for general
working capital purposes. Because the Company expects to continue to incur
substantial operating losses, the Company will continue to use substantial sums
of cash in its operations for an indefinite period. Accordingly, the Company
will be required to obtain additional capital. No assurance can be given that
the Company will be successful in its efforts to obtain additional capital, or
that capital will be available on terms acceptable to the Company. If the
Company exhausts its current sources of capital and is not able to obtain
additional capital, the Company will be required to undertake certain steps to
continue its operations. Such steps may include immediate reduction of the
Company's operating costs and other expenditures, including potential reductions
of personnel and suspension of salary increases and capital expenditures. If
such measures are not sufficient, the Company may elect to implement other cost
reduction actions as the Company may determine are necessary and in the
Company's best interests. Any such actions undertaken may limit the Company's
opportunities to realize continued increases in sales and the Company may not be
able to reduce its costs in amounts sufficient to achieve break-even or
profitable operations. If the Company exhausts its sources of capital, and
subsequent cost reduction measures are not sufficient to allow
8
<PAGE> 10
the Company to achieve break-even or profitable operations, the Company will be
forced to seek protection from its creditors.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP(TM) MARKET;
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is listed
on The Nasdaq SmallCap(TM) Market. In order to continue to be included in the
Nasdaq SmallCap(TM) Market, companies must maintain certain listing
requirements. At December 31, 1997, the Company's net tangible assets of
approximately $1,957,000 did not meet the Nasdaq's requirements for at least
$2,000,000 of net tangible assets. The Company is developing a plan to achieve
compliance with all of Nasdaq's listing requirements, although no assurances can
be given that the Company will be able to achieve or maintain such compliance.
Failure of the Company to meet Nasdaq's 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 limit the market liquidity of the common stock and the ability of
stockholders to sell the Common Stock in the secondary market. In addition, if
the Company's common stock is delisted from the Nasdaq SmallCap(TM) Market,
unless for the purpose of listing on a national exchange, the unpaid balance of
the Company's 5% debentures may accelerate, unless waived by the holders.
PRICE EROSION; CONTINUING DECLINE IN MARGINS. 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 has resulted in significant price
competition, which in turn has resulted in significant reductions in the average
selling price of many of the Company's products and services, including its Web
site development and hosting services. The Company has not been able to offset
the effects of price reductions through an increase in the number of its
customers, higher revenue from enhanced services or cost reductions, and the
Company expects its margins to continue to decline.
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 Intranet and Intranet applications, including the development
and support of Web sites and Internet applications, 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. The
Company's ability to compete in its markets is substantially limited by its
available working capital and its continuing operating losses. See
"Business -- Competition."
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
9
<PAGE> 11
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 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."
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."
LENGTH OF SALES CYCLE. The development and implementation of interactive
Web sites and intranet software applications requires 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.
10
<PAGE> 12
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 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 has a registered service mark for
its logo, and has applied for federal registration of the names "HomeCom," "Post
On The Fly(TM)" and "Personal Internet Banker(TM)." 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."
11
<PAGE> 13
DILUTION. Purchasers of shares of Common Stock offered hereby will
experience immediate and substantial dilution in net tangible book value per
share. The number of shares of Common Stock that are issuable upon conversion of
the Debentures and the Series A Preferred Stock is variable based upon the
closing bid prices of the Company's Common Stock. Accordingly, the number of
shares issuable upon conversion of the Debentures or the Series A Preferred
Stock may increase significantly. See "Risk Factors -- Variability of Number of
Shares of Common Stock Issuable Upon Conversion of Debentures and Series A
Preferred Stock." In addition, the Company will be required to issue a
substantial number of additional shares of Common Stock in the future in order
to obtain additional financing. The issuance of any of the shares will have the
effect of increasing the dilution to new investors in this Offering.
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.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of this offering, the
Company will have outstanding 4,269,251 shares of Common Stock (assuming full
conversion of the Debentures at a Conversion Price of $2.625), will have
outstanding options to purchase of 557,160 shares of Common Stock pursuant to
the Company's stock option plans at a weighted average exercise price of
approximately $4.58 per share, and will have outstanding warrants to acquire an
aggregate 650,000 shares at a weighted average exercise price of approximately
$7.24 per share. Additionally, the Company has outstanding 20,000 shares of its
Series A Preferred Stock, which would be convertible into an aggregate 571,429
shares of Common Stock if the Company had received notice of conversion after
the close of business on May 8, 1998, based on a Series A Preferred Conversion
Price of $3.50 per share. The number of shares of Common Stock issuable upon
conversion of the Debentures or the Series A Preferred Stock can increase
significantly if the price of the Company's Common Stock is lower than the
prices listed above for the period preceding the date the Company receives
notice of conversion of the Debentures or the Series A Preferred Stock. See
"Risk Factors -- Variability of Number of Shares of Common Stock Issuable Upon
Conversion of Debentures and Series A Preferred Stock." Of the 4,269,251 shares
outstanding after this offering, approximately 1,961,464 shares (including the
114,286 shares assumed to be sold in this offering) will be freely tradable
without restriction or further registration under the Securities Act unless they
are purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. The remaining 2,307,787 outstanding shares of Common
Stock may be sold in the public market only if registered or pursuant to an
exemption from registration such as Rule 144 or Rule 144(k) promulgated under
the Securities Act. In addition, the Company intends to file a registration
statement on Form S-8 under the Securities Act for the purpose of registering
the potential sale of the 600,000 shares reserved for issuance under the
Company's Stock Option Plan (of which options to purchase 557,160 shares are
outstanding), the 300,000 shares for issuance under the Company's Non-Employee
Directors Plan (of which options to purchase 10,000 shares are outstanding) and
the 150,000 shares reserved for issuance under the Company's Stock Purchase Plan
(of which no shares or purchase rights have yet been granted). After the
effective date of that registration statement, except for shares held by
affiliates of the Company, shares purchased pursuant to the foregoing stock
option and purchase plans generally would be available for resale in the public
market.
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<PAGE> 14
VARIABILITY OF NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
DEBENTURES AND SERIES A PREFERRED STOCK. The number of shares of Common Stock
issuable upon conversion of the Debentures and Series A Preferred Stock is
essentially unlimited. If the price of the Common Stock as reported by the
Nasdaq SmallCap(TM) Market, declines to a price less than $2.625 per share, the
Company will be required to issue substantially more than the 114,286 shares
assumed hereunder to be issuable upon conversion of the remaining unconverted
Debentures. If the price of the Common Stock as reported by the Nasdaq
SmallCap(TM) Market declines to a price less than $3.50 per share, the Company
will be required to issue substantially more than the 571,429 shares assumed
hereunder to be issuable upon conversion of the Series A Preferred Stock. All
shares issuable by the Company upon conversion of the Debentures and the Series
A Preferred Stock are subject to effective registration statements filed with
the Commission. Consequently, all of such shares will be eligible for sale in
the market place without restriction, except to the extent that any of the
selling holders are deemed to be "affiliates" of the Company at the time of
sale. No assurance can be given that the trading price of the Company's Common
Stock will not fall significantly below the prices noted above, or that
purchasers in this offering will not suffer significant additional dilution as a
result of any such decline in the price of the Common Stock.
UNPAID BALANCE OF DEBENTURES ACCELERATES UPON DEFAULT. The unpaid balance
of the Debentures accelerates upon any default in the payment of the Debentures.
Consequently, if the Company defaults in the payment of any of the principle or
interest due or payable on the Debentures the value of the Common Stock may
decline.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO CONVERT
DEBENTURES. Holders of the Debentures will only be able to convert the
Debentures if (i) a current prospectus under the Securities Act relating to the
shares of Common Stock underlying the Debentures is then in effect, and (ii)
such shares of Common Stock are qualified for sale or exempt from qualification
under the applicable securities laws of the states in which they are offered.
There can be no assurance that the Company will be able to maintain the
effectiveness of a current prospectus covering the shares of Common Stock
issuable upon conversion of the Debentures. See "Description of Securities."
SENIORITY OF SERIES A 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-Series A 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 Securities -- Limitations
on Liability of Directors."
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 Securities -- Limitations on
Liability of Directors."
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<PAGE> 15
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 was successfully
challenged in federal district court and ultimately found to be unconstitutional
by the United States Supreme Court in Reno v. American Civil Liberties Union.
Therefore, at the time of this Prospectus, 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.
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<PAGE> 16
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered hereby by the Selling Securityholders that are issuable
upon conversion of the Debentures.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq SmallCap(TM) Market
under the symbol "HCOM." The following table shows for the periods indicated the
high and low sale prices for the Common Stock as reported by the Nasdaq
SmallCap(TM) Market.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1997
Second quarter (since May 8, 1997).......................... $ 7.25 $6.00
Third quarter............................................... 6.50 2.13
Fourth quarter.............................................. 15.56 2.63
1998
First quarter............................................... 16.00 2.00
Second quarter (through May 8).............................. 18.25 1.13
</TABLE>
On May 8, 1998, the last reported sale price of the Common Stock as
reported by the Nasdaq SmallCap(TM) Market was $4.625 per share. As of May 8,
1998, there were 44 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
15
<PAGE> 17
SELECTED FINANCIAL DATA
The following selected historical financial data of HomeCom Communications,
Inc. have been derived from the audited financial statements of the Company. The
data should be read in conjunction with the financial statements, related notes
and other financial information included herein.
<TABLE>
<CAPTION>
DECEMBER 2,
(INCORPORATION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -------------------------------------
1994 1995 1996 1997
--------------- -------- ---------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales:
Service sales....................................... $ -- $327,574 $2,112,878 $ 2,792,306
Equipment sales..................................... -- -- 185,977 86,322
---------- -------- ---------- -----------
Total net sales.............................. -- 327,574 2,298,855 2,878,628
---------- -------- ---------- -----------
Cost of Sales:
Cost of services.................................... -- 59,871 546,409 1,645,646
Cost of equipment sold.............................. -- -- 128,938 68,974
---------- -------- ---------- -----------
Total cost of sales.......................... -- 59,871 675,347 1,714,620
---------- -------- ---------- -----------
Gross profit.......................................... -- 267,703 1,623,508 1,164,008
---------- -------- ---------- -----------
Operating expenses:
Sales and marketing................................. 1,045 124,253 845,690 1,367,247
Product development................................. -- 20,239 78,887 435,810
General and administrative.......................... 16,407 121,313 1,194,728 3,553,473
Depreciation and amortization....................... -- 3,722 85,068 238,537
---------- -------- ---------- -----------
Total operating expenses..................... 17,452 269,527 2,204,373 5,595,067
---------- -------- ---------- -----------
Operating Loss........................................ (17,452) (1,824) (580,865) (4,431,059)
Other expenses (income):
Interest expense, net............................... -- 3,469 51,272 543,420
Other expense (income), net......................... -- 147 (6,554) (93,298)
---------- -------- ---------- -----------
Loss before income taxes.............................. (17,452) (5,440) (625,583) (4,881,181)
Income taxes.......................................... -- -- -- --
---------- -------- ---------- -----------
Net loss.............................................. $ (17,452) $ (5,440) $ (625,583) $(4,881,181)
========== ======== ========== ===========
Basic and diluted loss per share...................... $ (.01) $ (.00) $ (.34) $ (1.88)
========== ======== ========== ===========
Weighted average common shares outstanding............ 1,850,447 1,850,447 1,862,223 2,602,515
========== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997
--------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 8,455 $133,792 $(1,304,682) $2,721,930
Total assets......................................... 10,254 247,382 1,726,522 4,664,779
Long-term obligations................................ -- 160,792 147,833 1,652,009
Total liabilities.................................... -- 242,568 2,347,191 2,708,007
Stockholders' equity (deficit)....................... 10,254 4,814 (620,669) 1,956,772
</TABLE>
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<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was incorporated in December 1994 and commenced sales in
January 1995 when it began marketing its Web site development and hosting
services. The Company markets its services through a direct sales force,
advertisement, referrals, and active business partner relationships with
organizations such as AT&T, Microsoft, Netscape 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 (including consulting on internet and
intranet security) 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.
During 1997, custom Internet and Intranet applications and integration
services accounted for approximately 56% of the Company's revenues, Internet
outsourcing services generated approximately 29% of the Company's revenues and
Internet security services generated approximately 14% of the Company's
revenues.
During 1996 and 1997, expenses substantially exceeded net sales as the
Company expanded its products and services, increased its marketing and sales
staff and enhanced its operational and administrative support structure to
support anticipated increases in revenues. The anticipated increases in revenues
have not materialized and the Company has been forced to substantially reduce
its operating expenses. In the third quarter of 1997, the Company reduced the
number of its employees from approximately 100 persons in July 1997 to
approximately 42 persons by December 31, 1997. As a result of this substantial
reduction in its work force, the Company faces issues involving employee morale
and hiring. Notwithstanding these reductions in operating expenses, the Company
expects to continue to incur operating losses for an indefinite period. See
"Risk Factors -- Recent Reduction of Staff and Other Expenses; Continuing
Losses."
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.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Net sales:
Service sales............................................. 100.0% 91.9% 97.0%
Equipment sales........................................... -- 8.1 3.0
----- ----- ------
Total net sales................................... 100.0 100.0 100.0
----- ----- ------
Cost of sales:
Cost of services.......................................... 18.3 23.8 57.2
Cost of equipment sold.................................... -- 5.6 2.4
----- ----- ------
Total cost of sales............................... 18.3 29.4 59.6
----- ----- ------
Gross profit................................................ 81.7 70.6 40.4
----- ----- ------
Operating expenses:
Sales and marketing....................................... 37.9 36.8 47.5
Product development....................................... 6.2 3.4 15.1
General and administrative................................ 37.1 52.0 123.4
Depreciation and amortization............................. 1.1 3.7 8.3
----- ----- ------
Total operating expenses.......................... 82.3 95.9 194.4
----- ----- ------
Operating loss.............................................. (0.6) (25.3) (153.9)
----- ----- ------
Other expenses (income)
Interest expense.......................................... 1.1 2.2 18.9
Other expense (income), net............................... 0.0 (0.3) (3.2)
----- ----- ------
Loss before income taxes.................................... (1.7) (27.2) (169.6)
----- ----- ------
Income taxes................................................ 0.0 0.0 0.0
----- ----- ------
Net loss.................................................... (1.7)% (27.2)% (169.6)%
===== ===== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales increased 25.2% from $2,298,855 in 1996 to $2,878,628
in 1997. Revenues from service sales increased 32.2% from $2,112,878 in 1996 to
$2,792,306 in 1997. This increase of $679,428 is primarily attributable to
increases in hosting revenues of approximately $472,000 and security consulting
revenue of approximately $308,000. Revenues from equipment sales were $86,322
during 1997 as compared to $185,977 during 1996.
Cost of Sales. Cost of sales for services increased from $546,409, or
23.8% of revenues in 1996 to $1,645,646, or 57.2% of revenues in 1997. This
increase reflects higher overall payroll costs associated with increasing the
Company's technical staff to a high of approximately 60 persons in July 1997 to
create available capacity for anticipated revenue growth, which did not occur.
As part of ongoing efforts to control cash expenditures, the Company has reduced
this staff to approximately 30 persons at December 31, 1997.
Gross Profit. Gross profit decreased by $459,500 from $1,623,508 in 1996
to $1,164,008 in 1997. Gross profit margins decreased from 70.6% during 1996 to
40.4% during 1997. This decrease as a percentage of net sales primarily reflects
increased costs incurred by the Company for technical personnel hired in advance
of anticipated revenue growth, which did not occur.
Sales and Marketing. Sales and marketing expenses increased 61.7% from
$845,690 in 1996 to $1,367,247 in 1997. This increase was primarily attributable
to an increase in advertising and marketing expenses. As a percentage of net
sales, these expenses increased from 36.8% in 1996 to 47.5% in 1997. During
18
<PAGE> 20
the third quarter of 1997, the Company implemented procedures intended to
substantially reduce advertising and marketing expenses.
Product Development. Total expenditures for product development were
$604,643, or 21.0% of net sales in 1997, of which $168,833 were capitalized.
This compares to total product development expenditures of $163,069, or 7.1% of
sales, in 1996, of which $84,182 were capitalized. The product development staff
was 8 persons in July 1997. Subsequently, the Company reduced its product
development staff to two persons at December 31, 1997.
General and Administrative. General and administrative expenses increased
from $1,194,728 in 1996 to $3,553,473 in 1997. As a percentage of net sales,
these expenses increased from 52.0% in 1996 to 123.4% in 1997. This increase as
a percentage of net sales reflects primarily increases for operational and
administrative support personnel incurred to support anticipated growth in
revenues, which did not occur. During the third quarter of 1997, the Company
implemented steps to significantly reduce its general and administrative costs.
These steps included: (i) reductions in general and administrative staff; and
(ii) reductions in public relations and other professional services.
Depreciation and Amortization. Depreciation and amortization increased
from $85,068, or 3.7% of net sales in 1996 to $238,537, or 8.3% in 1997,
reflecting increased expenditures on capital equipment.
Interest Expense. Interest expense increased from $51,272 in 1996 to
$543,420 during 1997, principally reflecting $443,889 of amortization of the
discount associated with the convertible debentures issued in September 1997.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
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 net sales in 1995 to $546,409, or 23.8% of
net sales 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.
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 net sales 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 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 net
sales, these expenses decreased from 37.9% of net sales in 1995 to 36.8% of
revenues in 1996.
Product Development. 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 net sales, in 1995, none of which were capitalized.
General and Administrative. 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.
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<PAGE> 21
Depreciation and Amortization. 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.
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.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its components,
and is effective for fiscal years beginning after December 15, 1997. The
adoption of FAS 130 is not expected to have a material effect on the Company's
disclosures.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") was issued. FAS 131 is designed to improve the information provided in
financial statements about the different types of business activities in which
the enterprise engages and economic environments in which the enterprise
operates, and is effective for fiscal years beginning after December 15, 1997.
The adoption of FAS 131 is not expected to have a material effect on the
Company's disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions, and is effective for
transactions entered into in fiscal years beginning after December 31, 1997. The
adoption of SOP 97-2 is not expected to have a material effect on the Company's
financial statements.
In early 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 31,
1998. The adoption of SOP 98-1 is not expected to have a material effect on the
Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Following completion of its initial public offering, the Company increased
its expenses in anticipation of potential increased sales which did not occur.
During the quarter ended June 30, 1997, the Company realized that sales had not
increased at the rate anticipated. In response, the Company took efforts during
the quarter ended September 30, 1997 to reduce its general and administrative
costs. These efforts included (i) a reduction in staff from a high of
approximately 100 persons in July 1997 to approximately 42 persons by December
31, 1997; and (ii) reductions in advertising, public relations and other
professional services.
Subsequent to these actions, management has undertaken additional steps to
address the Company's ongoing cash requirements including narrowing the
Company's market focus, identifying additional operational and administrative
efficiencies, and actively managing working capital. The Company also may
consider raising additional capital through exercise of outstanding warrants,
sales of non-strategic business lines, and additional debt and equity offerings.
The Company has substantially limited unused sources of capital. As of
December 31, 1997, the Company had net working capital of approximately $2.7
million. Because the Company expects to continue to incur substantial operating
losses, the Company will continue to use substantial sums of cash in its
operations for an indefinite period. Accordingly, the Company will be required
to obtain additional capital. No assurance can be given that the Company will be
successful in its efforts to obtain additional capital, or that capital will
20
<PAGE> 22
be available on terms acceptable to the Company or on terms that will not
significantly dilute the interests of existing stockholders. If the Company
exhausts its current sources of capital and is not able to obtain additional
capital, the Company will be required to undertake certain steps to continue its
operations. Such steps may include immediate reduction of the Company's
operating costs and other expenditures, including potential reductions of
personnel and suspension of salary increases and capital expenditures. If such
measures are not sufficient, the Company may elect to implement other cost
reduction actions as the Company may determine are necessary and in the
Company's best interests, including the possible sale of certain of the
Company's service lines. Any such actions undertaken may limit the Company's
opportunities to realize continued increases in sales and the Company may not be
able to reduce its costs in amounts sufficient to achieve break-even or
profitable operations. If the Company exhausts its sources of capital, and
subsequent cost reduction measures are not sufficient to allow the Company to
achieve break-even or profitable operations, the Company will be forced to seek
protection from its creditors.
Net cash used in operating activities was $4,024,016 for year ended
December 31, 1997. The Company has primarily financed its operations to date
through public and private sales of debt and equity securities and loans from
its principal stockholders and affiliates. Net cash provided by financing
activities was $7,435,630 and $853,035 during 1997 and 1996, respectively.
During May 1997, the Company completed an initial public offering of its common
stock, issuing 1,000,000 shares at a price of $6.00 per share. The net proceeds
to the Company from the initial public offering were approximately $4,700,000.
The Company has repaid all outstanding principal amounts loaned to the Company
by stockholders and affiliates. During September 1997, the Company completed the
issuance of an aggregate $1,700,000 principal amount of the Company's 5%
convertible debentures due September 22, 2000 (the "Debentures"). Net proceeds
from the sale of the Debentures was approximately $1.5 million. In December
1997, the Company issued 20,000 shares of Series A preferred stock for aggregate
net proceeds of approximately $1,800,000
The Company spent $387,209 and $349,646 during 1997 and 1996, respectively,
for the purchase of capital equipment. These amounts were expended primarily for
computer equipment, communications equipment and software necessary for the
Company to increase its presence in the Internet and Intranet applications
marketplace. The Company's commitments as of December 31, 1997 consist primarily
of leases on its Atlanta, Vienna, Virginia and New York City facilities.
Accounts receivable, net of allowance for doubtful accounts, totaled
$470,839 as of December 31, 1997. 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.
At December 31, 1997, the Company had net operating loss carry-forwards for
income tax purposes of $5,008,001, of which $411,227 expire in 2011 and
$4,596,774 expire in 2012. Realization of these assets is contingent on having
future taxable earnings. In addition, certain stock transaction during the year
resulted in the Company incurring an ownership change as defined in Internal
Revenue Code Section 382. The result of this ownership change is to
substantially limit the utilization of the Company's net operating loss carry-
forwards in the future. Based on the cumulative losses in recent years and the
limitation on the use of the Company's net operating losses, management believes
that a full valuation allowance should be recorded against the deferred tax
asset.
YEAR 2000 READINESS
Many existing computer programs were originally designed to use only two
digits to identify a year in date fields. If not corrected, these applications,
could fail or produce erroneous results when working with dates in the year 2000
and beyond. This "Year 2000" issue could potentially affect the Company in three
areas: its product and service offerings to its customers, third-party products
used internally, and its suppliers. The Company plans to undertake a review of
software applications used in order to determine potential exposure to this
issue and develop an appropriate response.
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<PAGE> 23
If the Company's review and remediation efforts with respect to this issue
are not completed on a timely basis, Year 2000 issues could have a material
impact on the Company's operations and financial results. However, at this time,
it is not anticipated that the Company's Year 2000 response will have an adverse
material effect upon the Company's financial position or results of operations.
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<PAGE> 24
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 three areas: (i) customized software applications
design, development and integration including, World Wide Web site development;
(ii) Internet outsourcing services; and (iii) 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, and telecommunications.
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"), Marine Midland Bank ("Marine Midland"),
Rainforest Cafe, Incorporated ("Rainforest"), Excalibur Group, a joint venture
between Time Warner Cable and Time, Inc. ("Time Warner"), Brinker International
("Brinker"), Executrain Corporation ("Executrain"), American International
Underwriters ("AIG"), and American Family Life Assurance Corporation ("AFLAC").
The Company has a highly trained staff that is 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 8,000 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. 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. The Company's Marketplace product facilitates the creation and
updating of an on-line store or catalog. HomeCom is also developing a suite of
software modules known as the Personal Internet Banker(TM), a scaleable
financial software package that maintains a customer's personal banking history
and preferences for Internet banking.
HomeCom's Internet security division provides security consulting services
and solutions for businesses connecting to the Internet. The Company plans to
develop and integrate advanced value-added security
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<PAGE> 25
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 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, Microsoft, Netscape and Unisys.
The Company's staff of 37 full-time software engineers design and develop
custom applications 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 World Wide Web is a 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. 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.
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<PAGE> 26
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 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. 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
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<PAGE> 27
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 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 Internet security division furthers 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 develops specialized software applications and markets these
applications to large businesses. The Company intends to focus on
industry-specific applications such as banking, insurance, 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 the financial services industry.
DEVELOP AND INTEGRATE ADVANCED SECURITY SERVICES
HomeCom's Internet security division provides advanced security integration
consulting services and develops 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
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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 THROUGH 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. On April 16, 1998, the Company
acquired all of the outstanding capital stock of the Insurance Resource Center,
Inc. ("IRC") (see "Recent Transactions"). The Company has not entered into any
additional binding agreement or commitment. Moreover, the Company has extremely
limited sources of cash. Consequently, the Company has limited resources
available to it to complete an acquisition and no assurance can be given that
the Company will be able to successfully complete any acquisition.
PRODUCTS AND SERVICES
HomeCom provides Internet/Intranet solutions in three integrated areas:
custom software applications design, development and integration; Internet
outsourcing services; 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.
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 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 Web sites currently range from $5,000
to more than $100,000.
The Company's staff of 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 languages. These programmers write complex
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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.
During 1996 and 1997, custom Internet and Intranet applications and
integration services (including hardware resales) accounted for approximately
66% and 56%, respectively, of the Company's net sales.
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 Network Operations Center ("NOC"). HomeCom presently hosts
approximately 8,000 Web sites. HomeCom's NOC is housed in Class A office space
with 24-hour manned on-premises security. Access to the NOC computer room is
key-card 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 $1,600.
Pricing levels vary depending on the 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.
During 1996 and 1997, Internet outsourcing services generated approximately
16% and 29%, respectively, 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 and 1997, Internet security services generated approximately 3%
and 14%, respectively, of the Company's net sales.
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SALES AND MARKETING
The Company markets its 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, Microsoft, Netscape and Unisys. 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, parts
databases and collaborative and groupware environments. The Company also
utilizes traditional print and media marketing strategies to enhance Company and
product name recognition.
CUSTOMERS
During 1996 and 1997, no customer accounted for more than 10% of the
Company's total net sales. 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 17,000 square feet in two office
buildings in Atlanta, Georgia under leases expiring in March 2001 and October
2002. These facilities serve as the Company's headquarters and computer center.
The Company also has an office in McLean, Virginia occupying approximately 6,000
square feet under a lease expiring in June 2002, and an office in New York City
occupying approximately 3,400 square feet under a lease expiring in January
2003.
The Company's Internet services are maintained in its key-card
access-secured, dual Leibert air-conditioned NOC in Class A office space near
the Company's principal offices. Company personnel monitor server and network
functions on a 24 hour per day, 7 days per week basis. Back-up servers replace
production servers in the event of failure or down time. Tape back-ups are
performed on a daily basis and transported to secure off-site storage. Each
server is SNMP managed and utilizes devices located on a separate network to
notify network personnel by pager in the event of problems that are not
otherwise detected by HomeCom's own SNMP.
All power supplied to the NOC 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 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
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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
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 has a registered service mark for
its logo, and has applied for federal registration of the names "HomeCom(TM),"
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"Post On The Fly(TM)" and "Personal Internet Banker(TM)." 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. The Company
routinely enters into non-disclosure and confidentiality agreements with
employees, vendors, contractors, consultants and customers.
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 April 15, 1998, the Company employed 59 full-time employees, of whom 37
were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 8 were marketing and sales personnel
and 14 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 was successfully challenged in federal
district court and ultimately found unconstitutional by the United States
Supreme Court in Reno v. American Civil Liberties Union.
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
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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 material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company, their
ages as of December 31, 1997 and certain information about them are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harvey W. Sax........................... 46 President, Chief Executive Officer and Director
Nat Stricklen........................... 54 Senior Vice President and Director
Krishan H. Puri......................... 32 Executive Vice President and Director
Gia Bokuchava, Ph.D..................... 32 Chief Technical Officer and Director
Roger J. Nebel.......................... 44 Vice President and Director
Carl W. Peede........................... 50 Senior Vice President and Chief Operating Officer
Norman H. Smith......................... 34 Chief Financial Officer
Gregory Abowd, Ph.D.(1)................. 33 Director
Claude A. Thomas(1)..................... 55 Director
</TABLE>
- ---------------
(1) 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 and as Chairman of the
Board of Directors since September 1997. 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 PaineWebber, 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.
NAT STRICKLEN has served as Senior Vice President 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.
KRISHAN H. 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
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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 J. 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.
CARL W. PEEDE has served as Senior Vice President and Chief Operating
Officer of the Company since November 1997. Mr. Peede joined HomeCom in June
1997 as Senior Vice President and General Manager of Software Products. From
June 1996 to April 1997, Mr. Peede was employed by NetManage, Inc., located in
Cupertino, California, where he was the Senior Vice President of Worldwide
Marketing. From September 1994 to May 1996, Mr. Peede was the Vice President of
Worldwide Marketing at Attachmate/DCA in Bellevue, Washington prior to joining
NetManage, Inc. From January 1993 to September 1994, Mr. Peede managed the
marketing effort for Wall Data, Inc., a high-growth company in Redmond,
Washington. He began his career in 1970 with AT&T Western Electric in Atlanta as
a Project Manager after graduating with a BSEE from Georgia Tech and an MBA from
Georgia State University, both in Atlanta, Georgia.
NORMAN H. SMITH has served as Chief Financial Officer of the Company since
May 1997. Before joining the Company, Mr. Smith was employed by First Image
Management Company, a division of First Data Corporation, from January 1990 to
May 1997. Mr. Smith served in a number of accounting and finance positions with
First Image, most recently as Executive Director of Finance for the Data
Acquisition Division based in Lexington, Kentucky. Prior to that, Mr. Smith was
employed by Deloitte & Touche as a Senior Accountant in its audit practice. Mr.
Smith received a Master of Business Administration from Xavier University in
1991 and a Bachelor of Business Administration from Eastern Kentucky University
in 1985.
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.
CLAUDE A. THOMAS is a principal of Ambassador Capital Corporation, an
investment banking firm specializing in emerging technology companies. In his
present position, Mr. Thomas assists electronic commerce and emerging technology
companies with financing, business strategies, strategic alliances and financial
restructuring. From 1994-1997, he was Executive Vice President, Corporate
Development and Software Solutions for CheckFree Corporation (NASDAQ: CKFR).
Previously, he held positions as CEO of International Banking Technologies and
other subsidiaries of First Financial Management (now FirstData Corporation,
NYSE: FDC). He started his 30-year career with Electronic Data Systems (NYSE:
EDS) in the Wall Street division, and subsequently held executive positions with
Coopers & Lybrand and Digital Equipment Corporation. Mr. Thomas holds a BE cum
laude in Chemical Engineering from Vanderbilt University and an MBA in Marketing
and Finance with honors from Washington University. Mr. Thomas has been a member
of the Board of Directors since February 1998.
The Company's Board of Directors is divided into three classes. The Class I
director (Dr. Abowd) serves until the 1998 Annual Meeting of Stockholders, the
Class II directors (Dr. Bokuchava and Messrs. Puri and Nebel) serve until the
1999 Annual Meeting of Stockholders and the Class III directors (Messrs. Sax and
Stricklen) serve until the 2000 Annual Meeting of Stockholders. Upon election,
each class serves a three-year
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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 officers 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.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company in 1997 for its Chief Executive Officer and each executive officer
of the Company whose total annual salary and bonuses determined at December 31,
1997 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
---------------- --------------------
NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ------------------------------ -------- ----- -------------------- ------------
<S> <C> <C> <C> <C>
Harvey W. Sax.................................. $152,998 $0 10,000 -0-
President, Chief Executive Officer
Krishan Puri................................... $169,844 $0 25,000 -0-
Executive Vice-President
Roger Nebel.................................... $108,333 $0 20,000 -0-
Vice-President
Gia Bokuchava, Ph.D............................ $170,663 $0 25,000 -0-
Chief Technical Officer and Director
</TABLE>
As of December 31, 1997, the annual salaries for the Company's executive
officers were as follows: Harvey W. Sax, President and Chief Executive Officer
($135,000); Nat Stricklen, Senior Vice President,
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Sales and Marketing, ($75,000); Norm Smith, Chief Financial Officer ($75,000);
Krishan Puri, Executive Vice President ($100,000); Gia Bokuchava, Ph.D., Chief
Technical Officer ($90,000); Roger Nebel, Vice President ($100,000); and Carl
Peede, Chief Operating Officer ($115,000). Pursuant to the employment agreements
with Dr. Bokuchava and Mr. 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.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
the Named Executive Officer during the year ended December 31, 1997:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF GRANTED RATES OF STOCK PRICE
SECURITIES TO EXERCISE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES OR BASE TERM(2)
OPTIONS FISCAL PRICE PER EXPIRATION -----------------------
EXECUTIVE OFFICER GRANTED(1) YEAR SHARE DATE 5% 10%
- ----------------- ---------- ---------- --------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Harvey Sax........... 10,000 1.64% $4.06 November 4, 2007 25,533 64,706
Krishan Puri......... 5,000 $6.00 June 18, 2007
20,000 $4.06 November 4, 2007
------
25,000 4.10% 69,933 177,224
Roger Nebel.......... 5,000 $6.00 May 6, 2007
5,000 $6.00 June 18, 2007
10,000 $4.06 November 4, 2007
------
20,000 3.28% 63,267 160,330
Gia Bokuchava,
Ph.D. ............. 5,000 $6.00 June 18, 2007
20,000 $4.06 November 4, 2007
------
25,000 4.10% 69,933 177,224
</TABLE>
OPTION EXERCISES IN LAST FISCAL AND YEAR-END OPTION VALUES
The following table sets forth the aggregate dollar value of all options
exercised, and the total number of unexercised options held, on December 31,
1997 by the Named Executive Officer:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31,1997 DECEMBER 31,1997(1)
ON VALUE --------------------------- ---------------------------
EXECUTIVE OFFICER EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey Sax............... 0 0 0 10,000 0 $115,025
Krishan Puri............. 0 0 0 25,000 0 389,063
Roger Nebel.............. 0 0 0 20,000 0 311,250
Gia Bokuchava, Ph.D...... 0 0 0 25,000 0 389,063
</TABLE>
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
36
<PAGE> 38
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.
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 600,000 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 April 22, 1998, options to purchase 557,160 shares of Common Stock
were outstanding under the Stock Option Plan at exercise prices ranging from
$2.18 to $8.06 per share and at a weighted average exercise price of $4.58 per
share. All outstanding options vest 25% per year from their date of grant.
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 Directors"). 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.
37
<PAGE> 39
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, Dr. Abowd 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 February 1998, Mr. Thomas was granted
an option under the Non-Employee Directors Plan to purchase 10,000 shares of
Common Stock at an exercise price of $2.18 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 Section 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 at a
date to be determined by the Board of Directors (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.
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 September 30, 1997, approximately 40 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.
38
<PAGE> 40
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. This plan was implemented in March 1998. In general, all employees of
the Company will be eligible to participate. The 401(k) Plan includes a salary
deferral arrangement pursuant to which participants may contribute amounts not
to exceed limitations imposed by the Code. 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. Separate accounts are 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.
CERTAIN TRANSACTIONS
During the period December 1994 through December 1995, Harvey W. Sax, the
Company's President and Chief Executive Officer, loaned a total of approximately
$63,497 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 used approximately $56,000 of the net proceeds of its initial public
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 February 1996, the Company (i) sold for $.0001 per share 335,052 shares
to Margery Germain; and (ii) 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, in May, 1997 the Company issued Mr. Germain
33,333 shares of Common Stock in repayment of the $200,000 outstanding principal
balance of this note.
39
<PAGE> 41
Mr. David A. Blech, Mrs. Esther Blech and the Edward A. Blech Trust
(collectively the "Blech Interests") have agreed in writing with the Nasdaq
Stock Market, Inc. that, for a period of three years from the date of their
original purchases of securities from 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 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. To the best of the Company's knowledge and belief, the Blech
Interests beneficially own less than 5% of the Common Stock.
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. Gia Bokuchava, Ph.D., Chief Technical Officer and a director,
and Krishan Puri, Executive Vice President and a director, purchased 39,559 and
29,669 shares of Common Stock, respectively, in this transaction. Mr. Vinod
Keni, a former director, purchased 3,955 shares in this transaction. The Company
has agreed with Mr. Keni that all 11,865 options to acquire Common Stock held by
Mr. Keni (at a weighted average exercise price of $5.16 per share) shall
continue to vest as if Mr. Keni were still employed by the Company. The Company
also agreed to cancel and forgive indebtedness of approximately $18,000
represented by the promissory note given by Mr. Keni to purchase such 3,955
shares and to give Mr. Keni a cash payment to cover Mr. Keni's estimated tax
liability from such cancellation of indebtedness.
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
40
<PAGE> 42
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.
RECENT TRANSACTIONS
INSURERATE
In January 1998, the Company formed InsureRate, Inc. ("InsureRate") for the
purpose of providing Internet web development and web hosting services to
entities engaged in the sale, marketing or underwriting of insurance and other
financial products and services. The Company has committed to loan InsureRate up
to $100,000 for the operation of InsureRate's business, including the purchase
of machinery, equipment, fixtures and furnishings, leasehold improvements and
other necessary business expenses and working capital needs. The unpaid
principal balance of this loan will bear interest at the Applicable Federal
Rate. The outstanding principal balance advanced to InsureRate plus accrued
interest is payable in January 2008. InsureRate has the option to repay this
loan to HomeCom in either cash or in shares of common stock of InsureRate having
a value on the repayment date equal to the aggregate principal amount advanced
by HomeCom to InsureRate, together with interest thereon.
The Company, InsureRate, Jerome R. Corsi ("Corsi") and Hamilton Dorsey
Alston Company ("HDA") (a licensed insurance agency) are parties to an agreement
(the "Purchase Agreement") pursuant to which HDA purchased InsureRate common
stock for a total purchase price of $100,000. The Company and HDA concurrently
entered into a shareholders agreement which, among other things, provides that:
(i) the Company has a right of first refusal to purchase HDA's InsureRate stock
prior to a proposed sale of such stock by HDA to a third party unaffiliated with
HDA; (ii) HDA has the right to cause the Company to purchase from HDA all of
HDA's InsureRate stock at a purchase price equal to $100,000 at any time,
payable by HomeCom at its sole discretion either in the form of cash or shares
of Common Stock of HomeCom having a value equal to $100,000; provided, however,
that if HDA exercises such right within 30 days after the date on which
InsureRate's Internet web site is first open for public access through the World
Wide Web on the Internet, then the Company must pay the $100,000 in cash; and
(iii) the Company has the right to purchase from HDA 50% of HDA's InsureRate
stock at a purchase price equal to $50,000 at any time; provided that HDA may,
in its sole discretion, elect to receive the purchase price either in the form
of cash or shares of the Company's Common Stock.
InsureRate agreed to deposit the $100,000 received from HDA into an escrow
account. Pursuant to an escrow agreement with a third party escrow agent, HDA
had the sole and absolute discretion until 30 days after the first date on which
the InsureRate Internet web site is open for public access through the World
Wide web on the Internet, for any or no reason, to cause the escrow agent to
deliver to HDA the escrowed funds, without interest, upon receipt by the escrow
agent from HDA of the share certificate representing HDA's shares of InsureRate
stock. On April 2, 1998, HDA exercised its right under the shareholders
agreement to cause the Company to purchase from HDA all of ADA's InsureRate
stock for $100,000. Accordingly, the escrow funds were delivered to HDA on that
date. As a result, the Company owns 90% of InsureRate's Common Stock and Corsi
owns 10%.
HomeCom also granted to HDA a warrant to purchase 25,000 shares of the
Company's Common Stock for an exercise price of $3.70 per share. HDA may
exercise this warrant according to the following vesting schedule: (i) 8,333.33
shares are purchasable as of January 23, 1999; (ii) 8,333.33 shares are
purchasable as of January 23, 2000; and (iii) 8,333.33 shares are purchasable as
of January 23, 2001. This warrant expires on March 31, 2001 if not earlier
exercised.
SALE OF SERIES A PREFERRED STOCK
In December 1997, the Company issued 20,000 shares of its Series A
Preferred Stock to private investors (the "Series A Preferred Holders") for an
aggregate purchase price of $2,000,000. The Series A Preferred Stock was issued
and sold in December 1997 (the "Series A Preferred Sale") in transactions exempt
from the
41
<PAGE> 43
registration requirements of the Securities Act, to "accredited investors" (as
defined in Rule 501(a) under Regulation D of the Securities Act) under the
Securities Act of 1933, as amended (the "Securities Act"). Net proceeds to the
Company from the Series A Preferred Sale were approximately $1.8 million.
Pursuant to Registration Rights Agreements with the Series A Preferred Holders
(the "Series A Preferred Registration Agreements"), the Company agreed to file a
registration statement covering the shares of Common Stock issuable upon
conversion of the Series A Preferred Stock (the "Series A Preferred Registration
Statement"). The Series A Preferred Holders have agreed that they may not
convert on a non-cumulative basis (i) more than 25% of the Series A Preferred
Stock during any thirty (30) day period following the effective date (the
"Registration Effective Date") of the registration statement (the "Registration
Statement") filed with the Securities and Exchange Commission (the "Commission")
with respect to the offer and sale of shares (the "Conversion Shares") of the
Company's Common Stock issuable upon conversion of the Series A Preferred Stock.
The Series A Preferred Stock is convertible into a number of shares of Common
Stock equal to the quotient of (a) the product of the number of shares of Series
A Preferred Stock being converted multiplied by $100.00 divided by (b) the
then-applicable conversion price. The conversion price for the Series A
Preferred Stock (the "Series A Preferred Conversion Price") is the lesser of (i)
75% of the average closing bid price of the Company's Common Stock for the five
trading days ending on the day the Company actually receives a conversion
notice; or (ii) $3.50 (the "Fixed Conversion Price"). However, if the
Registration Statement is not declared effective by May 16, 1998, the Fixed
Conversion Price shall be $3.00 per share. The Series A Preferred Conversion
Price is subject to adjustment under certain circumstances. On May 8, 1998, the
closing bid price of the Common Stock on the Nasdaq SmallCap(TM) Market was
$4.5625 per share and the average of the closing bid price of the Common Stock
for the five trading days ending May 8, 1998 was $5.05 per share. See
"Description of Securities -- Series A Convertible Preferred Stock.")
In connection with the issuance and sale of the Series A Preferred Stock,
the Company granted the Series A Preferred Stock Warrants to the Series A
Preferred Holders to acquire an aggregate of 75,000 shares of Common Stock, with
warrants to purchase 62,500 shares of Common Stock having an exercise price per
share equal to $14.50625 and warrants to purchase 12,500 shares of Common Stock
having an exercise price per share equal to $15.825. The Company also granted
50,000 warrants to a placement agent at an exercise price of $15.825 per share.
The Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. See "Description
of Securities -- Warrants."
THE INSURANCE RESOURCE CENTER
On April 16, 1998, the Company acquired all of the outstanding capital
stock of The Insurance Resource Center, Inc. ("IRC") for 351,391 shares of the
Company's Common Stock. Pursuant to the Agreement and Plan of Reorganization,
dated April 15, 1998 (the "Reorganization Agreement"), the Company has agreed
that fifty percent of such shares (the "IRC Registration Shares") shall be
registered pursuant to a registration statement to be filed with the Commission
by June 30, 1998 and the remaining shares shall have certain piggyback
registration rights. In the event that the Registration Shares are not so
registered by June 30, 1998, then the Company shall pay to the former
Stockholders of IRC a penalty fee of ten percent (10%) per month of the original
number of shares of the Company's Common Stock to be so registered to be paid in
newly issued shares of the Company's Common Stock, which shall also then be
registered as provided in the Reorganization Agreement. IRC shall remain a
wholly-owned subsidiary of the Company. In addition, IRC has pursuant to an
employment agreement retained the services of Tim James Higham, one of the
former shareholders of IRC as Vice President of Insurance Sales.
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<PAGE> 44
PRINCIPAL AND SELLING 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; (iii) all executive officers and directors as a group; and
(iv) the Selling Securityholders, certain information with respect to the
beneficial ownership of the Common Stock as of May 8, 1998.
<TABLE>
<CAPTION>
COMMON PERCENTAGE NUMBER OF COMMON PERCENTAGE
STOCK OF COMMON SHARES OF STOCK OF COMMON
BENEFICIALLY STOCK COMMON BENEFICIALLY STOCK
OWNED BENEFICIALLY STOCK OWNED BENEFICIALLY
BEFORE OWNED BEFORE OFFERED AFTER OWNED AFTER
NAME OF BENEFICIAL OWNER(1) OFFERING(2) OFFERING HEREBY OFFERING(2) OFFERING(3)
- --------------------------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Harvey W. Sax(4)........................ 844,744 20.3% -- 844,744 15.5%
Nat Stricklen(5)........................ 68,170 1.6 -- 68,170 1.2
Krishan H. Puri(6)...................... 43,976 1.1 -- 43,976 *
Gia Bokuchava, Ph.D.(7)................. 40,059 1.0 -- 40,059 *
Roger J. Nebel(8)....................... 2,100 * -- 2,100 *
Gregory Abowd, Ph.D.(9)................. 5,000 * -- 5,000 *
Carl W. Peede(10)....................... -- * -- -- *
Norman H. Smith(11)..................... -- * -- -- *
Adar Equities, LLC(12).................. 400,000 9.6 -- 400,000 7.3
Mark Germain(13)........................ 350,885 8.4 -- 350,885 6.4
Margery Germain(14)..................... 350,885 8.4 -- 350,885 6.4
Tim James Higham........................ 179,209 4.3 -- 179,209 3.3
Cameron M. Harris & Company(23)......... 172,182 4.1 -- 172,182 3.2
FTS Worldwide Corporation(15)........... 57,143 1.4 57,143 -- *
Euro Factors International, Inc.(16).... 22,857 * 22,857 -- *
Beauchamp Finance(17)................... 15,238 * 15,238 -- *
COLBO(18)............................... 19,048 * 19,048 -- *
Dominion Capital Fund, LTD.(19)......... 484,822 11.7 -- -- *
Sovereign Partners, L.P.(20)............ 161,607 3.9 -- -- *
Ladenburg Thalmann & Co. Inc.(21)....... 100,000 2.4 -- 100,000 1.8
The Malachi Group, Inc.(22)............. 50,000 1.2 -- 50,000 *
All executive officers and directors as
a group (8 persons)................... 1,004,049 24.2% -- 1,004,049 18.4%
</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.
(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. Shares of Common Stock subject to options that are
currently exercisable or exercisable within sixty days of May 8, 1998 are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(3) The number and percentage of Common Stock beneficially owned after the
offering assumes that the remaining unconverted Debentures are converted
into an aggregate 114,286 shares at a Debenture Conversion Price of $2.625
per share, which is the Debenture Conversion Price that would be effective
if the Company received notice of conversion of the Debentures after the
close of trading on May 8, 1998. The post offering ownership also assumes
that the Series A Preferred Stock is converted into an aggregate of 571,429
shares of Common Stock at a Series A Preferred Conversion Price of $3.50,
which is the Series A Preferred Conversion Price that would be effective if
the Company received notice of conversion of the Series A Preferred Stock
after the close of trading on May 8, 1998 and further assumes the issuance
of 625,00 shares of Common Stock upon exercise of the Offered Warrants. The
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<PAGE> 45
Debenture Conversion Price and the Series A Preferred Conversion Price are
variable, and the number of shares issuable upon conversion of the
Debentures and the Series A Preferred Stock will increase if the average
closing bid price of the Company's Common Stock is less than $2.625 or
$3.50 per share for the three or five trading days immediately prior to
issuance, respectively. See "Description of Securities -- Convertible
Debentures."
(4) Excludes 10,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of May 8, 1998 at an exercise price of $4.06 per
share which is not currently exercisable and which becomes exercisable more
than 60 days following the date of the date of this Prospectus.
(5) Excludes 14,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.61 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(6) Excludes 25,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.45 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(7) Excludes 25,000 shares of Common Stock issuable upon the exercise of a
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.45 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(8) Includes 1,250 shares of Common Stock issuable upon the exercise of an
option outstanding as of May 8, 1998 at an exercise price of $6.00 per
share. Excludes 18,750 shares of Common Stock issuable upon the exercise of
options outstanding as of April 23, 1998 at a weighted average exercise
price of $5.07 per share which are not currently exercisable and which
become exercisable more than 60 days following the date of the date of this
Prospectus. Also excludes an indeterminate number of shares of Common Stock
which may be issued in connection with the Company's acquisition of HISS.
See "Certain Transactions."
(9) Includes 5,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of May 8, 1998 at an exercise price of $6.50 per
share which is currently exercisable. Excludes 5,000 shares of Common Stock
issuable upon the exercise of an option outstanding as of May 8, 1998 at an
exercise price of $6.50 per share which is not currently exercisable and
which becomes exercisable more than 60 days following the date of the date
of this Prospectus.
(10) Excludes 60,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $5.10 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(11) Excludes 25,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.84 per share, which are not currently exercisable and which become
exercisable more than 60 days following the date of this Prospectus.
(12) The address of this security holder is 1276 50th Street, Brooklyn, NY
11219. Includes 400,000 shares of Common Stock issuable upon the exercise
of currently exercisable warrants at an exercise price of $4.00 per share
for 200,00 of the shares of Common Stock issuable thereunder and $6.00 per
share for the remaining 200,000 shares of Common Stock issuable thereunder.
(13) The address of this stockholder is 81 Main Street White Plains, NY 10601.
Includes 335,052 shares of Common Stock owned by Margery Germain, the wife
of Mr. Germain, as to which shares Mr. Germain disclaims beneficial
ownership.
(14) The address of this stockholder is 6 Olmstead Road Scarsdale, NY 10583.
Includes 15,833 shares of Common Stock owned by Mark Germain.
(15) The address of this Selling Securityholder is 24 Route de Malagnov, Geneva,
Switzerland, CH 1208. Represents shares of Common Stock issuable upon
conversion of an aggregate $150,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.625.
(16) The address of this Selling Securityholder is 140 Birmensdorferstrasse,
Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable
upon conversion of an aggregate $60,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially
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<PAGE> 46
owned by this Selling Securityholder is estimated based upon an assumed
Debenture Conversion Price of $2.625.
(17) The address of this Selling Securityholder is 140 Birmensdorferstrasse,
Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable
upon conversion of an aggregate $40,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.625.
(18) The address of this Selling Securityholder is Szigetszentmiklos, Gyari Ut.
Hungary H-2310. Represents shares of Common Stock issuable upon conversion
of an aggregate $50,000 of Debentures held by this Selling Securityholder.
The number of shares of Common Stock represented as beneficially owned by
this Selling Securityholder is estimated based upon an assumed Debenture
Conversion Price of $2.625.
(19) The address of this shareholder is Bahamas Financial Centre, Third Floor,
Charlotte & Shirley Street, Nassau, Bahamas CB-13136. Represents shares of
Common Stock issuable upon conversion of an aggregate 15,000 shares of
Series A Preferred Stock. The number of shares of Common Stock represented
as beneficially owned by this shareholder is estimated based upon an
assumed Series A Preferred Conversion Price of $3.50. Also includes 56,250
shares of Common Stock issuable upon the exercise of warrants at a weighted
average exercise price of $14.72604 per share.
(20) The address of this shareholder is Bahamas Financial Centre, Third Floor,
Charlotte & Shirley Street, Nassau, Bahamas CB-13136. Represents shares of
Common Stock issuable upon conversion of 5,000 shares of Series A Preferred
Stock held by the shareholder. The number of shares of Common Stock
represented as beneficially owned by this shareholder is estimated based
upon an assumed Series A Preferred Conversion Price of $3.50. Also includes
18,750 shares of Common Stock issuable upon the exercise of warrants at a
weighted average exercise price of $14.72604 per share.
(21) The address of this shareholder is 35th Floor, 590 Madison Avenue, New
York, NY 10022. Includes 100,000 shares of Common Stock issuable upon the
exercise of warrants at an exercise price of $7.20 per share.
(22) The address of this shareholder is Suite 1132, 3390 Peachtree Road NE,
Atlanta, GA 30326. Includes 50,000 shares of Common Stock issuable upon the
exercise of warrants at an exercise price $15.825 per share.
(23) The address of this shareholder is 6400 Fairview Road, P.O. Box 220748,
Charlotte, NC 28222-0748.
DESCRIPTION OF SECURITIES
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. As of May 8, 1998, the Company had issued and outstanding 4,154,965
shares of Common Stock and 20,000 shares of Series A Preferred Stock. As of such
date, there were 44 holders of record of shares of Common Stock and two holders
of record of the Series A Preferred Stock. As of May 8, 1998, the Company had
outstanding an aggregate $300,000 of its Debentures.
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.
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<PAGE> 47
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.
SERIES A CONVERTIBLE PREFERRED STOCK
The Company has designated 20,000 shares of its preferred stock as Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). In transactions
completed in December 1997, the Company issued 20,000 shares of the Series A
Preferred Stock for aggregate consideration of $2,000,000. See "Recent Sale of
Series A Preferred Stock." The shares of Series A Preferred Stock have the
designations, rights and preferences described below.
DIVIDENDS
The holders of the Series A Preferred Stock are entitled to receive
dividends pari passu, on an as-converted basis, with any dividend which shall be
declared and paid upon or set aside for the Common Stock in any year, when, as,
and if declared by the Board of Directors of the Company out of funds legally
available for that purpose, with each share of Series A Preferred Stock being
entitled to receive dividends based on the number of shares of Common Stock into
which a share of Series A Preferred Stock could be converted on the record date
for the dividend. Dividends shall be payable in cash, stock or otherwise in an
amount not less than the per share amount, if any, of any cash, stock, or other
dividend declared on the Common Stock during such fiscal year.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or not, the holders of Series A Preferred Stock shall be
entitled to receive, before any amount shall be paid to holders of Common Stock,
an amount per share equal to $100.00 for each outstanding share of Series A
Preferred Stock (as equitably adjusted for stock splits, combinations or similar
events and hereafter individually referred to as the "Original Issue Price")
plus, in each case, all declared and unpaid dividends, if any (such amount being
herein referred to as the "Series A Preference"). If, upon the occurrence of a
liquidation, dissolution or winding up, the assets and surplus funds distributed
among the holders of Series A Preferred Stock shall be insufficient to permit
the payment to such holders of the full amount of the Series A Preference, then
the entire assets and surplus funds of the Company legally available for
distribution shall be distributed ratably among the holders of Series A
Preferred Stock based upon the aggregate Original Issue Price of Series A
Preferred Stock held by each holder. If, upon the occurrence of a liquidation,
dissolution or winding up, after the payment to the holders of all series of
Preferred Stock of the full amount of the Series A Preference, assets or surplus
funds remain in the Company, all such remaining assets and surplus funds shall
be distributed ratably among the holders of the Common Stock. A liquidation,
dissolution or winding up of the Company shall be deemed to be occasioned by,
and to include, the Company's sale of all or substantially all of its assets or
the acquisition of the Company by another entity by means of merger,
consolidation or reorganization (other than a merger which solely effects a
change of domicile) or consolidation, where, after such merger or consolidation,
less than 50% of the surviving entity is held by persons who were stockholders
of the Company immediately before the merger, consolidation or reorganization.
VOTING RIGHTS
The holders of shares of Series A Preferred Stock have no voting rights.
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<PAGE> 48
CONVERSION
Each share of Series A Preferred Stock shall be convertible, at the option
of the holder thereof, into a number of shares of Common Stock equal to the
quotient of (a) the product of the number of shares of Series A Preferred Stock
being converted multiplied by $100 divided by (b) the then-applicable Conversion
Price. The Conversion Price shall equal the lesser of: (i) 75% of the average
closing bid price of the Common Stock for the five trading days ending on the
day the Company actually receives a conversion notice, or (ii) $3.00 (the "Fixed
Conversion Price". However, if the Registration Statement is not declared
effective by the Commission by May 16, 1998, then the Fixed Conversion Price
shall be $3.00 per share. Upon conversion, all declared and unpaid dividends on
the Series A Preferred Stock shall be paid, to the extent funds are legally
available therefor, either in cash or in shares of Common Stock of the Company,
at the election of the Company, wherein the shares of Common Stock shall be
valued at the Closing Price on the day the Company actually receives a
conversion notice. The Series A Preferred Stock shall be convertible on a
non-cumulative basis into shares of Common Stock according to the following
conversion table (the "Conversion Table" or "Gating Restrictions"): (i) the
first 25% at any time within thirty (30) days after the effective date (the
"Registration Effective Date") and thereafter no more than 25% of the Series A
Preferred Stock shall be convertible on a non-cumulative basis into shares of
Common Stock during any thirty (30) day period thereafter. However, in the event
that the Closing Price of the Common Stock as reported by NASDAQ or on other
securities exchanges or markets on which the Common Stock is listed for the
previous five (5) trading days is $3.50 or greater, the foregoing Gating
Restrictions shall not apply as long as the Closing Price for the previous five
(5) trading days is $3.50 or greater.
As long as there is no Material Default by the Company which remains
uncured by the Company within thirty (30) days from the date written notice is
sent to the Company from the holder of Debentures (excepting such material
default by virtue of the failure of the Company to register the shares of Common
Stock with the U.S. Securities Exchange Commission through and until June 30,
1998 pursuant to the Registration Rights Agreement), the holder of Debentures or
its affiliates shall not, directly or indirectly, engage in any short or other
hedging transaction, such as option writing, equity swaps or other types of
derivative transactions in the Common Stock or other securities of the Company
or acquire or establish any "put equivalent position" within the meaning of Rule
16a-1 promulgated under the 1934 Act. Material Default shall mean (i) the
failure of the Company to deliver, from time to time, Common Stock pursuant to a
valid Conversion Notice within 30 days of the Delivery Date or (ii) a failure of
the Company to cause the Registration Statement to become effective by June 30,
1998.
ANTIDILUTION ADJUSTMENTS
The number of shares of Common Stock issuable upon conversion of the Series
A Preferred Stock is subject to adjustment for stock splits, stock dividends,
any distribution payable in securities of the Company other than shares of
Common Stock and provision is not made for payment of such distribution to
holders of the Series A Preferred Stock on an as-converted basis or any change
of the Common Stock into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision, combination or consolidation of shares
provided for above).
REDEMPTION
The Company shall have the right to call for redemption all or any part of
the outstanding Series A Preferred Stock, at any time or from time to time,
including after receipt of a conversion notice, prior to the issuance shares of
Common Stock upon conversion of the Series A Preferred Stock. The redemption
price (the "Redemption Price") for each share of Series A Preferred Stock
redeemed shall be equal to (a) the sum of $100 per share, plus all accrued but
unpaid dividends thereon up to and including the Redemption Date (as defined
below), multiplied by (b) one hundred twenty-five (125%) percent. The Redemption
Price shall be payable in cash within ten business days following the date the
Company initiates the delivery of a redemption notice to the holders of Series A
Preferred Stock.
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<PAGE> 49
CONVERTIBLE DEBENTURES
GENERAL
The Debentures were issued under the Debenture Agreement between the
Company and the Selling Securityholders. The following summaries of certain
provisions of the Debentures and the Debenture Agreement do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Debentures and the Debenture Agreement, including
the definitions therein of certain terms which are not otherwise defined in this
Prospectus and those terms made a part of the Debenture Agreement.
The Debentures represent general unsecured debt obligations of the Company
and are convertible into Common Stock as described below under "-- Conversion of
Debentures." The Debentures will mature on September 22, 2000, unless earlier
converted into shares of Common Stock at the option of the holders upon written
notice to the Company. Upon maturity, the Company will pay the principal amount
of, and all accrued but unpaid interest on, the Debentures in cash or Conversion
Shares, at its option. The Debentures bear interest from the date of original
issue at the annual rate of 5%, payable on September 22, 2000.
CONVERSION OF DEBENTURES
The Debentures are convertible at the option of the holders. Pursuant to
certain amendments to the Debentures, dated as of April 8, 1998, the Purchasers
agree not to convert any portion of the remaining Debentures held by each of
them for a period beginning April 8, 1998 and ending May 8, 1998 and thereafter
not to convert more than 25% of the Remaining Debentures held by each of them in
any thirty (30) day period thereafter (the "Gating Restrictions"). The Debenture
Conversion Price is equal to the lessor of (a) a 25% discount from the closing
bid price of the Common Stock as reported by Nasdaq or other securities
exchanges or markets on which the Common Stock is listed for the previous three
trading days ending on the day preceding notice of conversion, or (b) $2.625 per
share. However, in the event that the closing bid price of the Common Stock as
reported by NASDAQ or on other securities exchanges or markets on which the
Common Stock is listed for the previous five (5) trading days is $3.50 or
greater, following May 8, 1998 the foregoing Gating Restrictions shall not apply
as long as the closing bid price for the previous five (5) trading days is $3.50
or greater. In addition, if the Common Stock is not traded on the NASDAQ
SmallCap Market or the electronic bulletin board, the foregoing Gating
Restrictions shall no longer apply. The Debenture Conversion Price is subject to
equitable adjustment by the Company upon the occurrence of certain events,
including, but not limited to: (i) forward and reverses stock splits; (ii)
dividend payments on shares of Common Stock; (iii) subdivision of shares of
Common Stock; (iv) combinations or reclassifications of Common Stock; and (v)
issuance of rights, warrants, options or the like. The Company is not required
to issue fractional shares of Common Stock upon conversion of the Debentures;
instead, the number of shares issuable shall be rounded to the nearest whole
share, with the fraction paid in cash at the discretion of the Company.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Debentures as being the occurrence of
one or more of the following: (i) any of the representations or warranties made
by the Company under the Debentures or the Debenture Agreement shall have been
incorrect when made in any material respect; (ii) the Company shall fail to
perform or observe in any material respect to any other covenant, term,
provision, condition, agreement or obligation of the Company under the
Debentures, the Registration Agreements and the Debenture Agreement, and such
failure shall continued uncured for a period of seven days after written notice
from the holder of the Debentures specifically describing such failure; (iii) a
trustee, liquidator or receiver shall be appointed for the Company or for a
substantial part of its property or business without its consent and shall not
be discharged within thirty days after such appointment; (iv) any governmental
agency or any court of competent jurisdiction at the instance of any
governmental agency shall assume custody or control of the whole or any
substantial portion of the properties or assets of the Company and shall not be
dismissed thirty calendar days thereafter; (v) bankruptcy reorganization,
insolvency or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or
against the Company,
48
<PAGE> 50
and if instituted against the Company, the Company shall by any action or answer
approve of, consent to or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed in any such
proceeding; or (vi) the Company's Common Stock is delisted from trading on The
Nasdaq SmallCap(TM) Market unless it is there upon admitted to trading on a
national stock exchange.
The Debentures provide that if any Event of Default shall have occurred and
be continuing, and in each and every such case, unless such Event of Default
shall have been waived in writing by the Holder of the Debentures (which waiver
shall not be deemed to be a waiver of any subsequent Event of Default) at the
option of the Holder and in Holder's sole discretion, the Holder may consider
the Debentures immediately due and payable, without presentment, demand, protest
or notice of any kind, all of which are expressly waived by the Company, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's rights and remedies provided in the Debentures or
any other rights or remedies afforded by law.
SATISFACTION AND DISCHARGE
The Debentures will cease to be of further effect at the earlier to occur
of when: (i) the Company has paid or caused to be paid the principal of, and
interest on the Debentures when the same has become due and payable upon
maturity; or (ii) all outstanding Debentures have been fully converted into
Conversion Shares.
MODIFICATIONS OF THE DEBENTURES
The Debentures provide that the Debentures nor any terms thereof shall be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the holders of the Debentures.
GOVERNING LAW
The Debentures provide that they shall be governed by, and construed in
accordance with, the laws of the State of New York.
WARRANTS
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter, Ladenburg Thalmann & Co. Inc.,
the Underwriter Warrants to acquire 100,000 shares of the Company's Common Stock
at an exercise price of $7.20 per share. The exercise price is subject to
adjustment under certain circumstances. The Underwriter Warrants expire on May
12, 2002 if not earlier exercised.
In connection with the completion of the Debenture Sale, the Company issued
to First Granite Securities, Inc., an entity designated by the holder of the
Debentures, the Debenture Warrants to acquire an aggregate 400,000 shares of
Common Stock (the "First Granite Debenture Warrants"). Of the Debenture
Warrants, warrants to acquire an aggregate 200,000 shares are exercisable at a
price of $4.00 per share and warrants to acquire an aggregate 200,000 shares are
exercisable at a price of $6.00 per share. The exercise price of the Debenture
Warrants is subject to adjustment. If not earlier exercised, the Debenture
Warrants expire on October 27, 2000. Pursuant to an agreement dated April 8,
1998, in the event that the Company agrees to adjust the exercise price of the
Series A Preferred Stock Warrants to an exercise price below $5.00 (the "Reduced
Exercise Price"), the Company has agreed to amend the exercise price of any
unexercised First Granite Debenture Warrants to the Reduced Exercise Price.
In connection with the completion of the sale of the Series A Preferred
Stock, the Company issued the Series A Preferred Stock Warrants. The Series A
Preferred Stock Warrants represent the right to acquire an aggregate 125,000
shares of Common Stock, with warrants to purchase 62,500 shares of Common Stock
having an exercise price per share equal to $14.50625 and warrants to purchase
the remaining 62,500 shares having an exercise price equal to $15.825. The
Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. The Company
intends to register the shares of Common Stock issuable upon exercise of the
Series A Preferred Stock Warrants together with the shares of Series A Preferred
Stock. See "-- Registration Rights."
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<PAGE> 51
In connection with the purchase of InsureRate common stock by HDA and as an
inducement for HDA to enter into the Web Development and Hosting Services
Agreement, HomeCom granted to HDA the InsureRate Warrants. The InsureRate
Warrants represent the right to purchase 25,000 shares of Common Stock of
HomeCom for an aggregate purchase price of $92,500. HDA may exercise its right
to purchase such shares subject to the following vesting schedule: (i) 8,333.33
shares are purchasable as of January 23, 1999; (ii) 8,333.33 shares are
purchasable as of January 23, 2000; and (iii) 8,333.33 shares are purchasable as
of January 23, 2001. The InsureRate Warrants expires on March 31, 2001 if not
earlier exercised.
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 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.
50
<PAGE> 52
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds of the sale of the
Conversion Shares offered hereby. The Conversion Shares may be sold from time to
time to purchasers directly by the Selling Securityholders. Alternatively, the
Selling Securityholders may from time to time offer the Conversion Shares
through brokers, dealers or agents who may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders and/or
the purchasers of the Conversion Shares for whom they may act as agent. The
Selling Securityholders and any such brokers, dealers or agents who participate
in the distribution of the Conversion Shares may be deemed to be "underwriters,"
and any profits on the sale of the Conversion Shares by them and any discounts,
commissions or concessions received by any such brokers, dealers or agents might
be deemed to be underwriting discounts and commissions under the Securities Act.
To the extent the Selling Securityholders may be deemed to be underwriters, the
Selling Securityholders may be subject to certain statutory liabilities of,
including, but not limited to, Sections 11, 12 and 17 of the Securities Act and
Rule 10b-5 under the Exchange Act.
The Selling Securityholders have advised the Company that the Conversion
Shares offered hereby may be sold from time to time in one or more transactions
at fixed prices, at prevailing market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The Conversion
Shares may be sold by one or more of the following methods, without limitation:
(a) a block trade in which the broker or dealer so engaged will attempt to sell
the Conversion Shares as agent but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker or
dealer as principal and resale by such broker or dealer for its account pursuant
to this Prospectus; (c) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; (d) an exchange distribution in accordance
with the rules of such exchange; (e) face-to-face transactions between sellers
and purchasers without a broker-dealer; (f) through the writing of options; and
(g) other. At any time a particular offer of the Conversion Shares is made, a
revised Prospectus or Prospectus Supplement, if required, will be distributed
which will set forth the aggregate amount and type of Conversion Shares being
offered and the terms of the offering, including the name or names of any
underwriters, dealers or agents, any discounts, commissions, concessions and
other items constituting compensation from the Selling Securityholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
Such Prospectus Supplement and, if necessary, a post-effective amendment to the
Registration Statement of which this Prospectus is a part, will be filed with
the Commission to reflect the disclosure of additional information with respect
to the distribution of the Securities. In addition, the Conversion Shares
covered by this Prospectus may be sold in private transactions or under Rule 144
rather than pursuant to this Prospectus.
To the best knowledge of the Company, there are currently no plans,
arrangement or understandings between any Selling Securityholders and any
broker, dealer, agent or underwriter regarding the sale of the Conversion Shares
by the Selling Securityholders. There is no assurance that any Selling
Securityholders will sell any or all of the Conversion Shares offered by it
hereunder or that any such Selling Securityholders will not transfer, devise or
gift such Conversion Shares by other means not described herein.
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M which may limit the timing of purchases and sales of any of the Conversion
Shares by the Selling Securityholders and any other such person. Furthermore,
Regulation M of the Exchange Act may restrict the ability of any person engaged
in the distribution of the Conversion Shares to engage in market-making
activities with respect to the particular Conversion Shares being distributed
for a period of up to five business days prior to the commencement of such
distribution. All of the foregoing may affect the marketability of the
Conversion Shares and the ability of any person or entity to engage in
market-making activities with respect to the Securities.
Pursuant to the Registration Agreement entered into in connection with the
offer and sale of the Debentures by the Company, each of the Company and the
Selling Securityholders will be indemnified by the other against certain
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
51
<PAGE> 53
The Company has agreed to pay substantially all of the expenses incidental
to the registration, offering and sale of the Conversion Shares to the public
other than commissions, fees and discounts of underwriters, brokers, dealers and
agents.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Sims Moss Kline & Davis a Limited Liability Partnership,
Atlanta, Georgia.
EXPERTS
The balance sheets as of December 31, 1996 and 1997 and the statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997, included in this Registration
Statement, 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.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements, and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy
statements and other information can also be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements, and other information that
are filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval System. This Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission two Registration Statements on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statements") under the Securities Act with respect to the Offered Shares and
shares of Common Stock issuable upon conversion of the Debentures. This
Prospectus does not contain all of the information set forth in the Registration
Statements 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, the Debentures, the Series A
Preferred Stock and the shares of Common Stock offered by such Registration
Statements, reference is made to the Registration Statements and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statements, each such statement being
qualified in all respects by such reference. Copies of the Registration
Statements, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.
52
<PAGE> 54
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1996 and 1997............. F-3
Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997............................ F-4
Statements of Stockholders' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1997......... F-5
Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997............................ F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 55
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, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HomeCom Communications, Inc.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, 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. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 13, 1998
F-2
<PAGE> 56
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 332,377 $3,187,948
Accounts receivable....................................... 488,254 470,839
Other current assets...................................... 621 --
---------- ----------
Total current assets.............................. 821,252 3,658,787
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 359,260 627,624
SOFTWARE DEVELOPMENT COSTS, NET............................. 81,520 31,778
DEPOSITS.................................................... 57,527 55,731
DEFERRED DEBT ISSUE COSTS................................... -- 248,359
DEFERRED OFFERING COSTS..................................... 406,963 --
OTHER NON-CURRENT ASSETS.................................... -- 42,500
---------- ----------
Total assets...................................... $1,726,522 $4,664,779
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 649,794 $ 427,886
Accrued salaries and payroll taxes payable................ 309,377 235,103
Accrued vacation.......................................... 14,935 29,077
Current portion of notes payable to stockholders.......... 989,904 --
Current portion of note payable to bank................... 13,614 --
Unearned revenue.......................................... 133,170 190,978
Current portion of obligations under capital leases....... 15,140 53,813
---------- ----------
Total current liabilities......................... 2,125,934 936,857
CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $122,778......... -- 1,577,222
NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 55,677 --
NOTE PAYABLE TO BANK........................................ 47,032 --
OTHER LIABILITIES........................................... 73,424 119,141
OBLIGATIONS UNDER CAPITAL LEASES............................ 45,124 74,787
---------- ----------
Total liabilities................................. 2,347,191 2,708,007
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value, 15,000,000 shares
authorized, 1,923,063 and 2,956,396 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 192 295
Preferred stock, $.01 par value, 1,000,000 shares
authorized, 20,000 shares issued and outstanding at
December 31, 1997; participating; $2,000,000
liquidation value...................................... -- 200
Additional paid-in capital................................ 472,726 7,800,542
Subscriptions receivable.................................. (468,004) (337,501)
Accumulated deficit....................................... (625,583) (5,506,764)
---------- ----------
Total stockholders' equity (deficit).............. (620,669) 1,956,772
---------- ----------
Total liabilities and stockholders' equity
(deficit)....................................... $1,726,522 $4,664,779
========== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-3
<PAGE> 57
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET SALES:
Service sales............................... $ 327,574 $2,112,878 $ 2,792,306
Equipment sales............................. -- 185,977 86,322
---------- ---------- -----------
Total net sales..................... 327,574 2,298,855 2,878,628
---------- ---------- -----------
COST OF SALES:
Cost of services............................ 59,871 546,409 1,645,646
Cost of equipment sold...................... -- 128,938 68,974
---------- ---------- -----------
Total cost of sales................. 59,871 675,347 1,714,620
---------- ---------- -----------
GROSS PROFIT.................................. 267,703 1,623,508 1,164,008
---------- ---------- -----------
OPERATING EXPENSES:
Sales and marketing......................... 124,253 845,690 1,367,247
Product development......................... 20,239 78,887 435,810
General and administrative.................. 121,313 1,194,728 3,553,473
Depreciation and amortization............... 3,722 85,068 238,537
---------- ---------- -----------
Total operating expenses............ 269,527 2,204,373 5,595,067
---------- ---------- -----------
OPERATING LOSS................................ (1,824) (580,865) (4,431,059)
OTHER EXPENSES (INCOME)
Interest expense............................ 3,469 51,272 543,420
Other expense (income), net................. 147 (6,554) (93,298)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES...................... (5,440) (625,583) (4,881,181)
INCOME TAXES.................................. -- -- --
---------- ---------- -----------
NET LOSS...................................... $ (5,440) $ (625,583) $(4,881,181)
========== ========== ===========
BASIC AND DILUTED LOSS PER SHARE.............. $ (.00) $ (.34) $ (1.88)
========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 1,850,447 1,862,223 2,602,515
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-4
<PAGE> 58
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................... 0 0 1,000 $ 27,706
Net loss..................................... -- -- -- -- --
------ ---- --------- --------- ----------
BALANCE, December 31, 1995................... 0 0 1,000 27,706 0
Conversion from S to C Corporation........... $ (22,892)
Issuance of stock............................ 19,663 468,104
Net loss
Stock split and recapitalization to $0.0001
par value.................................. -- -- 1,902,400 (495,618) 495,618
------ ---- --------- --------- ----------
BALANCE, December 31, 1996................... 0 0 1,923,063 192 472,726
Conversion of note payable to common
shares..................................... 33,333 3 199,997
Issuance of common shares, net of offering
costs...................................... 1,000,000 100 4,672,489
Issuance of preferred shares, net of offering
costs...................................... 20,000 $200 1,799,052
Issuance of warrants and compensatory stock
options.................................... 89,611
Cancellation of subscriptions receivable
under employment agreements
Favorable conversion feature of convertible
debentures................................. 566,667
Net loss..................................... -- -- -- -- --
------ ---- --------- --------- ----------
BALANCE, December 31, 1997................... 20,000 $200 2,956,396 $ 295 $7,800,542
====== ==== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
SUBSCRIPTIONS ACCUMULATED TOTAL STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY (DEFICIT)
------------- ----------- -------------------
<S> <C> <C> <C>
BALANCE, December 31, 1994........................... -- $ (17,452) $ 10,254
Net loss............................................. -- (5,440) (5,440)
--------- ----------- -----------
BALANCE, December 31, 1995........................... 0 (22,892) 4,814
Conversion from S to C Corporation................... 22,892 --
Issuance of stock.................................... $(468,004) 100
Net loss............................................. (625,583) (625,583)
Stock split and recapitalization to $0.0001 par
value.............................................. -- -- --
--------- ----------- -----------
BALANCE, December 31, 1996........................... (468,004) (625,583) (620,669)
Conversion of note payable to common shares.......... 200,000
Issuance of common shares, net of offering costs..... 4,672,589
Issuance of preferred shares, net of offering
costs.............................................. 1,799,252
Issuance of warrants and compensatory stock
options............................................ 89,611
Cancellation of subscriptions receivable under
employment agreements.............................. 130,503 130,503
Favorable conversion feature of convertible
debentures......................................... 566,667
Net loss............................................. -- (4,881,181) (4,881,181)
--------- ----------- -----------
BALANCE, December 31, 1997........................... $(337,501) $(5,506,764) $ 1,956,772
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-5
<PAGE> 59
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (5,440) $(625,583) $(4,881,181)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation.............................................. 3,722 79,064 183,262
Amortization of assets under capital leases............... -- 6,004 55,275
Amortization of software development costs................ -- 2,662 218,576
Amortization of debt discount............................. -- -- 443,889
Amortization of debt issue costs.......................... -- -- 22,578
Provision for bad debts................................... 2,485 104,360 244,893
Cancellation of subscriptions receivable under employment
agreements.............................................. -- -- 130,501
Deferred rent expense..................................... -- 73,424 45,717
Change in operating assets and liabilities:
Accounts receivable..................................... (88,810) (506,289) (227,478)
Accounts payable and accrued expenses................... 14,287 316,641 (221,908)
Accrued salaries and payroll taxes payable.............. 25,010 284,367 (74,274)
Unearned revenue........................................ 42,479 90,691 57,808
Other................................................... (148) (41,266) (21,674)
-------- --------- -----------
Net cash used in operating activities.............. (6,415) (215,925) (4,024,016)
-------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment............ (33,737) (349,646) (387,209)
Software development costs................................ -- (84,182) (168,834)
-------- --------- -----------
Net cash used in investing activities.............. (33,737) (433,828) (556,043)
-------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common shares, net of underwriting
discounts and commissions............................... 100 5,520,000
Payment of deferred offering costs........................ -- (88,096) (415,448)
Proceeds from issuance of preferred shares and warrants... -- -- 2,000,000
Payment of preferred stock issue costs.................... -- -- (190,748)
Proceeds from issuance of convertible debentures and
warrants................................................ -- -- 1,700,000
Payment of deferred debt issue costs...................... -- -- (220,937)
Proceeds from note payable................................ -- 70,000 --
Repayment of note payable................................. -- (9,354) (60,646)
Proceeds from notes payable to stockholders............... 163,497 889,904 490,000
Repayment of notes payable to stockholders................ (2,705) (5,115) (1,335,581)
Repayment of capital lease obligations.................... -- (4,404) (51,010)
-------- --------- -----------
Net cash provided by financing activities.......... 160,792 853,035 7,435,630
-------- --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 120,640 203,282 2,855,571
CASH AND CASH EQUIVALENTS at beginning of period............ 8,455 129,095 332,377
-------- --------- -----------
CASH AND CASH EQUIVALENTS at end of period.................. $129,095 $ 332,377 $ 3,187,948
======== ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON
CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest.................. $ 3,469 $ 6,277 $ 56,365
======== ========= ===========
Capital lease obligations incurred during year on lease of
computer equipment........................................ -- $ 64,667 $ 119,346
======== ========= ===========
Conversion of notes payable to affiliate to common stock.... -- -- $ 200,000
======== ========= ===========
Issuance of warrants and compensatory stock options......... -- -- $ 89,611
======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
F-6
<PAGE> 60
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, has an accumulated deficit at December 31, 1997, and has used
substantial cash in its operations which raises substantial doubt about the
Company's ability to continue as a going concern. Management believes that
future debt and equity offerings, successful commercialization of its products
and services, and sales of non-strategic service lines will generate the
required capital necessary to continue as a going concern.
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.
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 $106,845 and $160,551 at December 31, 1996 and 1997,
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.
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
F-7
<PAGE> 61
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. Amortization of capitalized software development
costs totaled $2,662 and $218,576 in 1996 and 1997, respectively. These expenses
are included in cost of sales. As of December 31, 1997, software development
costs were $31,778, net of $221,238 of accumulated amortization.
DEFERRED DEBT ISSUE COSTS
Costs in connection with the Company's offering of convertible debentures
have been deferred and will be amortized over the term of the debt. As of
December 31, 1997, deferred debt issue costs were $248,359, net of amortization
of $22,578.
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.
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 accompanying balance sheet, represents the amount of billings
recorded on contracts in advance of services being performed.
ADVERTISING EXPENSES
All advertising costs are expensed when incurred. Advertising expenses were
approximately $211,000 and $724,000 for the years ended December 31, 1996 and
1997, respectively.
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. 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 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 $2,080,000 at
December 31, 1997 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.
F-8
<PAGE> 62
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated according to
the provisions of Statement of Accounting Standards No. 128, "Earnings per
Share" ("FAS 128"). Due to the net loss position of the Company for each of the
three years in the period ending December 31, 1997, the numerator and
denominator is the same for both basic and diluted EPS.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its components,
and is effective for fiscal years beginning after December 15, 1997. The
adoption of FAS 130 is not expected to have a material effect on the Company's
disclosures.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") was issued. FAS 131 is designed to improve the information provided in
financial statements about the different types of business activities in which
the enterprise engages and economic environments in which the enterprise
operates, and is effective for fiscal years beginning after December 15, 1997.
The adoption of FAS 131 is not expected to have a material effect on the
Company's disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions, and is effective for
transactions entered into in fiscal years beginning after December 31, 1997. The
adoption of SOP 97-2 is not expected to have a material effect on the Company's
financial statements.
In early 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 31,
1998. The adoption of SOP 98-1 is not expected to have a material effect on the
Company's financial statements.
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET:
Furniture, fixtures and equipment, net, are comprised of the following as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Furniture and fixtures...................................... $145,066 $191,107
Computer equipment.......................................... 238,317 579,486
Computer equipment under capital leases..................... 64,667 184,012
-------- --------
448,050 954,605
Less: accumulated depreciation and amortization............. (88,790) (326,981)
-------- --------
$359,260 $627,624
======== ========
</TABLE>
F-9
<PAGE> 63
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE:
Notes payable are comprised of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Convertible debentures (interest accrues at 5%; 19%
effective rate), payable September 22, 2000,
non-collateralized, convertible at the option of the
holders into shares of the Company's common stock, net of
unamortized discount of $122,778 (See note 6)............. -- $1,577,222
Promissory note payable to a spouse of a stockholder
(interest accrues at 8%); the Company issued 33,333 shares
in satisfaction of the principal amount payable under the
note in May 1997.......................................... $ 200,000 --
Promissory notes payable to stockholders and affiliates
(interest accrues at 8%), balance paid during May 1997.... 789,904 --
Promissory notes payable to a stockholder (interest accrues
at the prime rate plus 1%), balance paid during May
1997...................................................... 55,677 --
Promissory note payable to a bank (interest accrues at the
prime rate plus 1.5%), balance paid during May 1997....... 60,646 --
---------- ----------
1,106,227 1,577,222
Less current maturities of notes payable.................... 1,003,518 --
---------- ----------
$ 102,709 $1,577,222
========== ==========
</TABLE>
Future principal payments on notes payable at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ --
1999........................................................ --
2000........................................................ $1,700,000
2001........................................................ --
2002........................................................ --
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2003. During 1997, the Company entered into
several capital leases to purchase computer equipment.
F-10
<PAGE> 64
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1998........................................................ $ 62,136 $ 582,308
1999........................................................ 60,190 596,917
2000........................................................ 15,937 606,634
2001........................................................ 537 410,261
2002........................................................ -- 254,324
-------- ----------
Total minimum lease payments...................... 138,800 $2,450,444
==========
Less amount representing interest........................... (10,200)
--------
Present value of minimum lease payments..................... 128,600
Less: current portion....................................... (53,813)
--------
$ 74,787
========
</TABLE>
During May 1997, the Company executed five-year leases for new office space
in New York City, Vienna, Virginia and Atlanta, Georgia. The total amount of the
base rent payments is being charged to expense on a straight-line method over
the term of these leases. The Company has recorded a deferred credit to reflect
the excess of rent expense over cash payments since inception of the leases.
Rental expense under operating leases was $22,188, $226,700 and $506,844,
for the years ended December 31, 1995, 1996 and 1997, respectively.
Various legal proceedings may arise in the normal course of business.
Additionally, 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. 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.
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 26% and 15% of total revenues for the years ended December 31,
1996 and 1997, respectively. No company accounted for more than 10% of the
revenues of the Company during
F-11
<PAGE> 65
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997. The five most significant customer balances represented approximately 39%
and 26% of the accounts receivable balance at December 31, 1996 and 1997,
respectively.
6. EQUITY AND CONVERTIBLE DEBT 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. In addition, 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 recapitalization, 1,902,400
shares were issued and $495,618 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.
In May 1997, the Company completed an initial public offering of its common
stock. The Company issued 1,000,000 shares at an initial public offering price
of $6.00 per share. The total proceeds of the offering, net of underwriting
discounts, commissions and offering expenses, were approximately $4,700,000. The
Company used a portion of the proceeds from the initial public offering to repay
outstanding principal amounts of approximately $1,300,000 loaned to the Company
by stockholders and affiliates plus accrued interest of approximately $65,000.
The Company issued 33,333 shares of common stock as payment in full of the
outstanding principal balance of a $200,000 loan from an investor.
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter warrants to acquire 100,000 shares
of the Company's common stock at an exercise price of $7.20
F-12
<PAGE> 66
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
per share. The exercise price is subject to adjustment under certain
circumstances. These warrants expire on May 12, 2002 if not earlier exercised.
In September 1997, the Company issued $1,700,000 of 5% convertible
debentures due September 22, 2000. The debentures are convertible into shares of
the Company's common stock at the lesser of (a) 75% of the closing bid price of
the common stock on the Nasdaq SmallCap(TM) Market for the three trading days
preceding notice of conversion; or (b) $4.00. The number of shares issuable upon
conversion of the debentures is equal to the aggregate principal balance of the
debentures divided by the conversion price. Net proceeds to the Company from the
issuance of the debentures totaled approximately $1,500,000. Outstanding
principal and interest on the debentures is payable on September 22, 2000. The
debentures are convertible at the option of the holders. Due to the beneficial
conversion feature of the debentures, a portion of the proceeds ($566,667) has
been allocated to additional paid-in capital. The corresponding discount on the
debentures will be amortized over the period from the date the debentures first
become convertible as a non-cash charge to interest expense. Events of default
include, among others, the common stock of the Company being delisted from
trading on the Nasdaq SmallCap(TM) Market, unless it is there upon admitted to
trading on a national stock exchange, or waived by the holders. In connection
with the issuance of the debentures, the Company agreed to issue to a broker
designated by the purchaser of the debentures three-year warrants to acquire an
aggregate 400,000 shares of common stock. These warrants were issued in October
1997. Of these warrants, warrants to purchase an aggregate 200,000 shares of
common stock are exercisable at a price of $4.00 per share, and warrants to
purchase the remaining 200,000 shares of common stock are exercisable at a price
of $6.00 per share. If not earlier exercised, the warrants expire on October 27,
2000.
In December 1997, the Company issued 20,000 shares of its Series A
preferred stock for an aggregate purchase price of $2,000,000. Costs in
connection with the offering have been netted against the gross proceeds of the
offering. Net proceeds to the Company from the Series A preferred sale were
approximately $1,800,000.
The Series A preferred stock is convertible at the option of the holder
into a number of shares of common stock equal to the quotient of (a) the product
of the number of shares of Series A preferred stock being converted multiplied
by $100.00 divided by (b) the then-applicable conversion price. The Series A
preferred conversion price is the lesser of (i) 80% of the average closing bid
price of the Company's common stock for the five trading days ending on the day
the Company actually receives a conversion notice; or (ii) $14.50625. The Series
A preferred conversion price is subject to adjustment under certain
circumstances. A discount of $500,000 results from an allocation of the proceeds
to the beneficial conversion feature. This discount is analogous to a dividend
and will be recognized as a return to the Series A preferred holders over the
minimum period such holders realize that return. The shares may be redeemed by
the Company at a price equal to 125% of the sum of the liquidation value of $100
per share plus all accrued and unpaid dividends.
In connection with the issuance and sale of the Series A preferred stock,
the Company granted the Series A preferred warrants to acquire an aggregate of
75,000 shares of Common Stock, with warrants to purchase 62,500 shares of common
stock having an exercise price per share equal to $14.50625 and warrants to
purchase 12,500 shares of common stock having an exercise price per share equal
to $15.825. The Company also granted 50,000 warrants to a placement agent at an
exercise price of $15.825 per share. The Series A preferred stock warrants will
expire on December 31, 2000.
The 625,000 warrants issued in 1997 were at a weighted average exercise
price and weighted average fair value of $7.39 and $.14, respectively. At
December 31, 1997, 550,000 of the warrants are exercisable.
7. STOCK OPTION PLANS
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
F-13
<PAGE> 67
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and consultants. The Company has reserved 600,000 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 1997, 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.
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.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation ("FAS 123"). This statement requires that companies with
stock-based compensation plans either recognize compensation expense based on
new fair value accounting method or continue to apply the provisions of
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" ("APB 25") and disclose pro forma net income and earnings per share
assuming the fair value method had been applied.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. The Company has recognized no
compensation expense for options issued to employees and non-employee directors.
For the year ended December 31, 1997, the Company recognized $4,611 in
compensation expense for stock issued to non-employees.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively: risk-free interest rate of 6.46%
and 5.93%; volatility factors of the expected market price of the Company's
common stock of 80% and 90%; and weighted average expected life of the options
of four and five years.
Had compensation cost for the Company's stock-based compensation plans been
determined under the provisions consistent with FAS 123, the Company's net loss
and loss per share for the years ended December 31, 1996 and 1997, would have
been the pro forma amounts listed below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Net Loss:
As reported............................................... $(625,583) $(4,881,181)
Pro forma................................................. (676,776) (5,025,199)
Basic and diluted loss per share:
As reported............................................... $ (0.34) $ (1.88)
Pro forma................................................. $ (0.36) $ (1.93)
</TABLE>
F-14
<PAGE> 68
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under all of the stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997
-------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 0 $ -- 220,543 $6.30
Granted.............................. 229,167 6.30 599,555 5.26
Exercised............................ 0 -- 0 --
Forfeited............................ (8,624) 6.19 (398,938) 5.80
------- --------
Outstanding at end of year........... 220,543 6.30 421,160 4.95
======= ========
Options exercisable at year end...... 0 3,090
======= ========
Shares available for future grant.... 79,457 178,840
======= ========
Weighted-average fair value of
options granted during the year.... $ 2.03 $ 3.71
======= ========
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICES SHARES REMAINING CONTRACTUAL LIFE
--------------- ------- --------------------------
<S> <C> <C>
$4.06 229,000 9.5
4.55 12,361 8.7
6.00 118,799 9.4
6.13 42,000 9.5
8.06 19,000 9.8
-------
421,160
=======
</TABLE>
At December 31, 1997, 3,090 shares are exercisable at a weighted-average
exercise price of $4.55.
8. ACQUISITION:
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a start-up company formed in
July 1996 to provide Internet and Intranet security system consulting services.
Consideration to the former holders of HISS's capital stock consisted of the
right to receive their pro rata share of four annual earnout payments to be paid
not later than March 31, 1998, 1999, 2000 and 2001. As of December 31, 1997, the
Company has a maximum potential liability under the earnout agreement of
approximately $113,000, payable in common stock or cash at the Company's option.
The ultimate earnout is not currently determinable due to HISS net income
limitations.
9. RELATED PARTY TRANSACTIONS:
The Company has entered into an employment agreement with its Chief
Executive Officer and principal stockholder which expires December 31, 2000.
Interest expense on notes payable to stockholders and affiliates of
stockholders was approximately $3,000, $45,000, and $51,000, in 1995, 1996, and
1997, respectively.
F-15
<PAGE> 69
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows, as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Temporary differences:
Allowance for uncollectibles.............................. $ 40,601 $ 61,009
Vacation accrual.......................................... 5,675 11,049
Depreciation.............................................. 4,820 2,317
Deferred rent expense..................................... 27,901 45,274
Software development expenses............................. (29,515) 55,599
--------- -----------
49,482 175,248
Net operating loss carryforward............................. 190,156 1,903,040
--------- -----------
Deferred tax asset.......................................... 239,638 2,078,288
Valuation allowance......................................... (239,638) (2,078,288)
--------- -----------
Net deferred tax asset............................ $ 0 $ 0
========= ===========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
income tax purposes of $5,008,001, of which $411,227 expire in 2011 and
$4,596,774 expire in 2012. Realization of these assets is contingent on having
future taxable earnings. In addition, certain stock transactions during the year
resulted in the Company incurring an ownership change as defined in Internal
Revenue Code Section 382. The result of this ownership change is to
substantially limit the utilization of the Company's net operating loss carry-
forwards in the future. Based on the cumulative losses in recent years and the
limitation and the use of the company's net operating losses management believes
that a full valuation allowance should be recorded against the deferred tax
asset. The income tax benefit differs from the amounts computed by applying the
Federal statutory rate of 34% to loss before taxes principally as a result of
the recording of the valuation allowance.
F-16
<PAGE> 70
======================================================
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. 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..................... 3
Forwarding-Looking Statements.......... 7
Risk Factors........................... 8
Use of Proceeds........................ 15
Price Range of Common Stock............ 15
Dividend Policy........................ 15
Selected Financial Data................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 23
Management............................. 33
Certain Transactions................... 39
Recent Transactions.................... 41
Principal and Selling Stockholders..... 43
Description of Securities.............. 45
Plan of Distribution................... 51
Legal Matters.......................... 52
Experts................................ 52
Available Information.................. 52
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
HOMECOM
COMMUNICATIONS,
INC.
UP TO
850,000
SHARES OF
COMMON STOCK
ISSUABLE UPON CONVERSION
OF AN AGGREGATE
$1,700,000
OF THE COMPANY'S
5% CONVERTIBLE DEBENTURES
DUE SEPTEMBER 22, 2000
---------------------
PROSPECTUS
---------------------
May 14, 1998
======================================================
<PAGE> 71
PART II
<TABLE>
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<S> <C>
Securities and Exchange Commission
registration fee..................... $ 2,069.45
Nasdaq SmallCap Market additional
listing fee.......................... 7,500.00
Accountants' fees and expenses......... 5,000.00
Legal fees and expenses................ 45,000.00
Blue Sky fees and expenses............. 5,000.00
Transfer Agent's fees and expenses..... 500.00
Printing and engraving expenses........ 2,500.00
Miscellaneous.......................... 2,430.55
----------
Total expenses......................... $70,000.00
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law (the "DGCL") permits a corporation to
eliminate or limit the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of duty of care or other duty
as a director, provided that no provision shall eliminate or limit the liability
of a director: (A) for an appropriation, in violation of his duties, of any
business opportunity of the corporation; (B) for acts or omissions which involve
intentional misconduct or a knowing violation of law; (C) for unlawful corporate
distributions; or (D) for any transaction from which the director received an
improper personal benefit. This provision pertains only to breaches of duty by
directors in their capacity as directors (and not in any other corporate
capacity, such as officers) and limits liability only for breaches of fiduciary
duties under Delaware corporate law (and not for violation of other laws, such
as the federal securities laws). The Company's Restated Certificate of
Incorporation (the "Restated Certificate") exonerates the Company's directors
from monetary liability to the extent permitted by this statutory provision.
The Company's Restated Certificate of Incorporation and Restated Bylaws
(the "Restated Bylaws") also provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including any action by or in the right of the
Company), by reason of the fact that such person is or was a director or officer
of the Company, or is or was serving at the request of the Company as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including reasonable attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding, if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Company (and with respect to any criminal
action or proceeding, if such person had no reasonable cause to believe such
person's conduct was unlawful), to the maximum extent permitted by, and in the
manner provided by, the DGCL.
Notwithstanding any provisions of the Company's Restated Certificate of
Incorporation and Restated Bylaws to the contrary, the DGCL provides that the
Company shall not indemnify a director or officer for any liability incurred in
a proceeding in which the director is adjudged liable to the Company or is
subjected to injunctive relief in favor of the Company: (1) for any
appropriation, in violation of his duties, of any business opportunity of the
Company; (2) for acts or omissions which involve intentional misconduct or a
knowing violation of law; (3) for unlawful corporate distributions; or (4) for
any transaction from which the director or officer received an improper personal
benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following list describes sales by the Registrant of securities in the
past three years which were not registered under the Securities Act.
II-1
<PAGE> 72
During the period from its formation in December 1994 through August 1996,
the Registrant has issued the securities set forth below which were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
All share amounts have been adjusted to reflect the Registrant's September 1996
recapitalization and 93.07 for 1 stock split.
1. In December 1994, in connection with the incorporation of the
Registrant, the Registrant issued and sold to its sole stockholder 93,070
shares of Common Stock for $27,706.
2. In February 1996, in connection with the recapitalization of the
Registrant, the Registrant issued and sold 707,332 shares of Common Stock
to its President, Chief Executive Officer and sole stockholder for a total
purchase price of $760.
3. In February 1996, the Registrant issued and sold 93,070 shares of
Common Stock to its Senior Vice President for a total purchase price of $10
upon the exercise of stock options granted in connection with the founding
of the Registrant.
4. Pursuant to a privately negotiated transaction with five investors,
the Registrant issued and sold to four of the investors in February 1996 an
aggregate of 893,472 shares of Common Stock for a total purchase price of
$96, and issued and sold to three of the investors in February, March and
May 1996 promissory notes in the aggregate principal amount of $499,904. In
May 1997, pursuant to the terms of such promissory notes, the Registrant
issued a total of 33,333 shares of Common Stock to the holders of such
notes in partial repayment of the principal amounts owed thereunder.
5. In August 1996, the Registrant issued an aggregate of 37,228 shares
of Common Stock to four members of its former Board of Advisors upon
exercise of warrants, for a total purchase price of $4.00.
6. In August 1996, the Registrant issued and sold an aggregate of
102,855 shares of Common Stock to six of its employees for a total purchase
price of $468,004.22, paid through delivery of 8% promissory notes, payable
25% per year, secured by the shares purchased thereby.
7. In August 1996, in connection with the Registrant's acquisition of
all of the stock of HomeCom Internet Security Services, Inc., a Delaware
corporation ("HISS"), the Registrant and the stockholders of HISS entered
into a Stock Purchase Agreement which provides that the Registrant may, at
its option, issue shares of its Common Stock as all or part of the earnout
payments to be paid to such former stockholders pursuant to the Stock
Purchase Agreement.
8. In September 1996, the Registrant granted stock options (i) to
three directors under its Non-Employee Directors Stock Option Plan to
purchase an aggregate of up to 30,000 shares of Common Stock and (ii) to 24
employees under its Stock Option Plan to purchase an aggregate of up to
79,167 shares of Common Stock.
9. In September 1997, the Registrant issued and sold 5% convertible
debentures (the "Debentures") to four private investors for an aggregate
purchase price of $1,700,000. The Debentures were issued pursuant to the
terms of a 5% Convertible Debenture Purchase Agreement dated effective as
of September 19, 1997 (the "Debenture Agreement"). Outstanding principal
and interest on the Debentures is payable on September 22, 2000. The
Debentures are convertible at the option of the holders. The Debentures are
convertible at a conversion price (the "Conversion Price") which is the
lesser of (a) 75% of the average closing bid price of the Common Stock as
represented by Nasdaq or on other securities exchanges or markets on which
the Common Stock is listed for the three trading days ending on the day
preceding notice of conversion, or (b) $2.625. The number of shares
issuable upon conversion of the Debentures is equal to the aggregate
principle balance of the Debentures divided by the Conversion Price. The
Conversion Price is subject to adjustment under certain circumstances. See
"Description of Securities -- Convertible Debentures". On May 8, 1998, the
closing price of the Common Stock, which is quoted on the Nasdaq
SmallCap(TM) Market under the symbol "HCOM," was $4.625 per share. In
connection with the issuance of the Debentures, the Registrant granted to
an entity designated by the investors aggregate warrants to acquire 400,000
shares of Common Stock, with warrants to acquire 200,000 of such shares
exercisable at a price of $4.00 per share and warrants to acquire the
remaining
II-2
<PAGE> 73
200,000 of such shares exercisable at a price of $6.00 per share. If not
earlier exercised, these warrants expire on October 27, 2000.
The holders of Debentures agree not to convert any portion of the
remaining Debentures held by each of them for a period of thirty (30) days
until May 8, 1998 and thereafter not to convert more than 25% of the
remaining Debentures held by each of them in any thirty (30) day period
thereafter (the "Gating Restrictions"). However, in the event that the
closing bid price of the Common Stock as reported by NASDAQ or on other
securities exchanges or markets on which the Common Stock is listed for the
previous five (5) trading days is $3.50 or greater, the foregoing Gating
Restrictions shall not apply as long as the closing bid price for the
previous five (5) trading days is $3.50 or greater. In addition, if the
Common Stock is not traded on the NASDAQ SmallCap Market or the electronic
bulletin board, the foregoing Gating Restrictions shall no longer apply.
10. In December 1997, the Registrant issued 20,000 shares of its
Series A Convertible Preferred Stock (the "Series A Preferred Stock") to
private investors (the "Series A Preferred Holders") for an aggregate
purchase price of $2,000,000. Net proceeds to the Registrant were
approximately $1.8 million. Pursuant to Registration Rights Agreements with
the Series A Preferred Holders (the "Preferred Registration Agreements"),
the Registrant agreed to file on or before January 31, 1998 a registration
statement covering the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock (the "Series A Preferred Stock Registration
Statement"). The Series A Preferred Holders have agreed that they may not
convert on a cumulative basis (i) more than 25% of the Series A Preferred
Stock during any thirty (30) day period following the effective date of
this registration statement (the "Registration Effective Date"). The Series
A Preferred Stock is convertible into a number of shares of Common Stock
equal to the quotient of (a) the product of the number of shares of Series
A Preferred Stock being converted multiplied by $100.00 divided by (b) the
then-applicable conversion price. The conversion price for the Series A
Preferred Stock (the "Series A Preferred Conversion Price") is the lesser
of (i) 75% of the average closing bid price of the Registrant's Common
Stock for the five trading days ending on the day the Registrant actually
receives a conversion notice; or (ii) $3.50 (the "Fixed Conversion Price").
However, if the Registration Statement is not declared effective by May 16,
1998, the Fixed Conversion Price shall be $3.00 per share. The Series A
Preferred Conversion Price is subject to adjustment under certain
circumstances. On May 8, 1998, the closing bid price of the Common Stock on
the Nasdaq SmallCap(TM) Market was $4.5625 per share and the average of the
Closing bid price of the Common Stock for the five trading days ending May
8, 1998 was $5.05 per share.
In connection with the issuance and sale of the Series A Preferred
Stock, the Registrant granted warrants to the Series A Preferred Holders to
acquire an aggregate of 75,000 shares of Common Stock, with warrants to
purchase 62,500 shares of Common Stock having an exercise price per share
equal to $14.50625 and warrants to purchase 12,500 shares of Common Stock
having an exercise price per share equal to $15.825. The Registrant also
granted 50,000 warrants to a placement agent at an exercise price of
$15.825 per share. These warrants to purchase an aggregate 125,000 shares
of Common Stock (the "Series A Preferred Stock Warrants") will expire on
December 31, 2000 and are eligible to be exercised at any time on or after
June 23, 1998. The Series A Preferred Stock Registration Statement will
cover (i) the shares of Common Stock issuable upon conversion of the Series
A Preferred Stock (which would be 571,429 shares assuming that the holders
of the Series A Preferred Stock had exercised their conversion privileges
after the close of business on May 8, 1998 which would have resulted in a
conversion price of $3.50 per share); (ii) 125,000 shares of Common Stock
issuable upon the exercise of the Series A Preferred Stock Warrants; (iii)
100,000 shares of Common Stock issuable upon the exercise of warrants
granted to the Registrant's underwriter in connection with its initial
public offering; and (iv) 400,000 shares of Common Stock issuable upon the
exercise of warrants granted in connection with the Registrant's sale of
the Debentures.
11. On April 16, 1998, the Company acquired all of the outstanding
capital stock of The Insurance Resource Center, Inc. ("IRC") for 351,391
shares of the Company's Common Stock. Pursuant to the Agreement and Plan of
Reorganization, dated April 15, 1998 (the "Reorganization Agreement"), the
Company has agreed that fifty percent of such shares (the "IRC Registration
Shares") shall be
II-3
<PAGE> 74
registered pursuant to a registration statement to be filed with the
Commission by June 30, 1998 and the remaining shares shall have certain
piggyback registration rights. In the event that the Registration Shares
are not so registered by June 30, 1998, then the Company shall pay to the
former stockholders of IRC a penalty fee of ten percent (10%) per month of
the original number of shares of the Company's Common Stock to be so
registered to be paid in newly issued shares of the Company's Common Stock,
which shall also then be registered as provided in the Reorganization
Agreement. IRC shall remain a wholly-owned subsidiary of the Company.
The sales and issuance of shares listed above were exempt from registration
under the Securities Act by virtue of Sections 4(2) and 3(b) thereof and in
reliance on Rule 701 and Regulation D promulgated thereunder. The recipients of
the above-described securities represented their intention to acquire the
securities for investment only and not with a view to distribution thereof.
Appropriate restrictive legends were affixed to stock certificates and warrants
issued in such transactions.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Restated Certificate of Incorporation of the Registrant.*
3.2 -- Restated Bylaws of the Registrant.*
3.3 -- Certificate of Designation of Series A Convertible Preferred
Stock.***
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Bylaws of the Registrant
defining rights of the holders of Common Stock of the
Registrant.*
4.2 -- Specimen Stock Certificate.*
4.3 -- Form of Warrant.*
5.1 -- Opinion of Sims Moss Kline & Davis LLP, Counsel to the
Registrant, as to the legality of the shares being
registered.++
10.1 -- HomeCom Communications, Inc. Stock Option Plan and form of
Stock Option Certificate.*
10.2 -- HomeCom Communications, Inc. Non-Employee Directors Stock
Option Plan and form of Stock Option Certificate.*
10.3 -- Employment Agreement between the Registrant and Harvey W.
Sax, dated January 1, 1996.*
10.4 -- Form of Employment Agreement entered into between the
Registrant and each of its executive officers except Harvey
W. Sax.*
10.5 -- Lease Agreement between Property Georgia OBJLW One
Corporation and the Registrant dated January 22, 1996.*
10.6 -- Lease and Services Agreement between Alliance Greensboro,
L.P. and the Registrant, dated June 25, 1996.*
10.7 -- Business Alliance Program Agreement between Oracle
Corporation and the Registrant, dated May 30, 1996, together
with the Sublicense Addendum, Application Specific
Sublicense Addendum, Full Use and Deployment Sublicense
Addendum and License Transfer Policy, each dated May 30,
1996.*
10.8 -- Network Enrollment Agreement between Apple Computer, Inc.
and the Registrant, effective May 1996.*
10.9 -- Member Level Agreement between Microsoft Corporation and the
Registrant, effective May 1996.*
10.10 -- Master Agreement for Internet Services and Products between
BBN Planet Corporation and the Registrant, dated February 1,
1996.*
</TABLE>
II-4
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.11 -- Authorized Business Partners Agreement between BBN Planet
Corporation and the Registrant, dated May 14, 1996.*
10.12 -- Stock Purchase Agreement between the Registrant and the
stockholders of HomeCom Internet Security Services, Inc.,
dated August 31, 1996.*
10.13 -- Form of Promissory Notes issued by the Registrant and held
by Mark Germain.*
10.14 -- Form of Promissory Notes issued by the Registrant and held
by Esther Blech and the Edward A. Blech Trust.*
10.15 -- Marketing Associate Solution Alliance Agreement dated
February 6, 1997 between the Registrant and Unisys
Corporation.*
10.16 -- Marketing Associate Agreement dated February 6, 1997 between
the Registrant and Unisys Corporation.**
10.17 -- Letter agreement dated January 16, 1997 between the
Registrant, David A. Blech, Esther Blech and the Edward A.
Blech Trust.*
10.18 -- HomeCom Communications, Inc. Employee Stock Purchase Plan.*
10.19 -- 5% Convertible Debenture Purchase Agreement dated effective
September 19, 1997 between the Registrant, Euro Factors
International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.20 -- Form of 5% Convertible Debenture issued by the Registrant
and held by Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.21 -- Registration Rights Agreement dated effective September 19,
1997 between the Registrant, Euro Factors International,
Inc., Beauchamp Finance, FTS Worldwide Corporation and
COLBO.***
10.22 -- Letter agreement dated September 23, 1997 between the
Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.23 -- Letter agreement dated September 27, 1997 between the
Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.24 -- Form of Warrant to purchase 200,000 shares of Common Stock
at an exercise price of $4.00 per share issued by the
Registrant to First Granite Securities, Inc.***
10.25 -- Form of Warrant to purchase 200,000 shares of Common Stock
at an exercise price of $6.00 per share issued by the
Registrant to First Granite Securities, Inc.***
10.26 -- Form of Securities Purchase Agreement between the
Registrant, Sovereign Partners, L.P. and Dominion Capital
Fund, LTD. dated as of December 23, 1997.***
10.27 -- Form of Registration Rights Agreement between the
Registrant, Sovereign Partners, L.P. and Dominion Capital
Fund, LTD. dated as of December 23, 1997.***
10.28 -- Form of Warrant to purchase 18,750 shares of Common Stock
issued by the Registrant to Sovereign Partners, L.P.***
10.29 -- Form of Warrant to purchase 56,250 shares of Common Stock
issued by the Registrant to Dominion Capital Fund, LTD.***
10.30 -- Common Stock Purchase Agreement dated January 23, 1998 by
and among InsureRate, Inc., the Registrant, Jerome R. Corsi
and Hamilton Dorsey Alston Company.***
10.31 -- Escrow Agreement dated as of January 23, 1998 by and among
InsureRate, Inc., Hamilton Dorsey Alston Company, the
Registrant, Jerome R. Corsi and SunTrust Bank, Atlanta.***
10.32 -- Shareholders Agreement dated January 23, 1998 by and among
Hamilton Dorsey Alston Company, the Registrant and
InsureRate, Inc.***
10.33 -- Web Development and Hosting Services Agreement dated January
23, 1998, by and among InsureRate, Inc. and Hamilton Dorsey
Alston Company.***
</TABLE>
II-5
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.34 -- Form of Warrant to purchase 25,000 shares of Common Stock
for an aggregate purchase price of $92,500 by the Registrant
to Hamilton Dorsey Alston Company.***
10.35 -- Loan Agreement dated January 23, 1998 by and between
InsureRate, Inc. and the Registrant.***
10.36 -- Form of Master Note issued by the Registrant to InsureRate,
Inc.***
10.37 -- Form of Warrant to purchase 50,000 shares of Common Stock
issued by the Registrant to The Malachi Group, Inc.+
10.38 -- Letter Agreement, dated April 8, 1998 by and among the
Company, Eurofactors International Inc., Blauchamp France,
FTS Worldwide Corporation and COLBO.****
10.39 -- Letter Agreement, dated April 8, 1998 by and between First
Granite Securities, Inc. and the Company.****
10.40 -- Letter Agreement, dated April 17, 1998 by and among
Sovereign Partners, L.P., Dominion Capital Fund and the
Company.****
10.41 -- Agreement and Plan of Reorganization by and among The
Insurance Resource Center, Inc., Tim Strong, James Higham,
Cameron M. Harris & Company and the Company, dated as of
April 15, 1998.
10.42 -- Employment Agreement by and between the Company and Tim
Higham, dated as of April 16, 1998.
21.1 -- List of Subsidiaries.***
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Sims Moss Kline & Davis LLP (included in Exhibit
5.1).
24.1 -- Powers of Attorney (included on signature page).
27.1 -- Financial Data Schedule (for SEC use only).**
</TABLE>
- ---------------
* Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-12219).
** Incorporated herein by reference to exhibit of the same number in the Form
10-K of the Registrant filed with the Commission on March 31, 1998.
*** Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant (Registration No. 333-42599).
**** Incorporated herein by reference to exhibit of the same number in Form 8-K
of the Registrant filed with the Commission on April 28, 1998.
+ Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-45383).
++ Incorporated herein by reference to exhibit of the same number in the
Form S-1 Registration Statement of the Registrant (Registration No.
333-52705).
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be
II-6
<PAGE> 77
reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table
in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1993 Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the 1933 Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-7
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia
on the 29th day of January, 1998.
HomeCom Communications, Inc.
By: /s/ HARVEY W. SAX
------------------------------------
Harvey W. Sax
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Harvey W. Sax and Norman H. Smith, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, January lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ NORMAN H. SMITH President and Chief Executive January 29, 1998
As Attorney-In-Fact Officer (Principal Executive
- ----------------------------------------------------- Officer)
Harvey W. Sax
/s/ NORMAN H. SMITH Executive Vice President and January 29, 1998
As Attorney-In-Fact Director
- -----------------------------------------------------
Nat Stricklen
/s/ NORMAN H. SMITH Executive Vice President and January 29, 1998
As Attorney-In-Fact Director
- -----------------------------------------------------
Krishan Puri
/s/ NORMAN H. SMITH Chief Technical Officer and January 29, 1998
As Attorney-In-Fact Director
- -----------------------------------------------------
Gia Bokuchava, Ph.D.
/s/ NORMAN H. SMITH Vice President and Director January 29, 1998
As Attorney-In-Fact
- -----------------------------------------------------
Roger Nebel
/s/ NORMAN H. SMITH Chief Financial Officer January 29, 1998
- -----------------------------------------------------
Norman H. Smith
/s/ NORMAN H. SMITH Director January 29, 1998
As Attorney-In-Fact
- -----------------------------------------------------
Gregory Abowd
</TABLE>
II-8
<PAGE> 1
AGREEMENT AND PLAN OF REORGANIZATION
among
THE INSURANCE RESOURCE CENTER, INC.,
TIMOTHY JAMES HIGHAM,
CAMERON M. HARRIS & COMPANY
and
HOMECOM COMMUNICATIONS, INC.
Dated as of April 15, 1998
<PAGE> 2
TABLE OF CONTENTS
THIS TABLE OF CONTENTS IS NOT PART OF THIS AGREEMENT BUT IS ATTACHED FOR
CONVENIENCE ONLY.
ARTICLE I EXCHANGE OF SHARES
Section 1.1 Method of Exchange 1
Section 1.2 Exchange Rate 1
Section 1.3 Allocation Between the Stockholders. 2
Section 1.4 Registration of HomeCom Shares. 2
Section 1.5 Additional Registration Rights 2
ARTICLE II REPRESENTATIONS AND WARRANTIES OF IRC AND THE STOCKHOLDERS
Section 2.1 Corporate Organization 3
Section 2.2 Authorization 4
Section 2.3 No Violation 4
Section 2.4 Subsidiaries and Investments 4
Section 2.5 Stock Record Book 4
Section 2.6 Title to Stock 4
Section 2.7 Options and Rights 5
Section 2.8 Financial Statements 5
Section 2.9 Employees 5
Section 2.10 Absence of Certain Changes 6
Section 2.11 Contracts 6
Section 2.12 Title and Related Matters 7
Section 2.13 Litigation 7
Section 2.14 Tax Matters 7
Section 2.15 Intellectual Property 8
Section 2.16 Commissions 8
Section 2.17 Disclosure 8
ARTICLE III REPRESENTATIONS AND WARRANTIES OF HOMECOM
Section 3.1 Corporate Organization 8
Section 3.2 Authorization 9
Section 3.3 No Violation 9
Section 3.4 Title to HomeCom Shares 9
Section 3.5 HomeCom Shares Outstanding 9
Section 3.6 Financial Statements 10
Section 3.7 Absence of Certain Changes 10
Section 3.8 Litigation 11
Section 3.9 Commissions 11
Section 3.10 Disclosure 11
ARTICLE IV OTHER AGREEMENTS
Section 4.1 Further Assurances 11
Section 4.2 Distributions and/or Expenditures of
<PAGE> 3
Cash and/or Assets. 11
Section 4.3 Tax Returns 12
Section 4.4 Continued Use of Product by CMH 12
Section 4.5 Continued Use of CMH Facilities
and Utilities. 12
Section 4.6 Noncompetition Agreement. 12
ARTICLE V CONDITIONS TO THE OBLIGATIONS OF HOMECOM
Section 5.1 Representations and Warranties 12
Section 5.2 Consents and Approvals 13
Section 5.3 No Material Adverse Change 13
Section 5.4 Secretary's Certificate 13
Section 5.5 Employment Agreement. 13
Section 5.6 Termination of Stockholders'
Agreement 13
Section 5.7 Resignations 13
Section 5.8 Closing Date Balance Sheet 13
Section 5.9 Maximum Amount of Total Issuance 13
Section 5.10 Legal Opinion. 14
Section 5.11 Other Documents 14
ARTICLE VI CONDITIONS TO THE OBLIGATIONS OF IRC AND THE STOCKHOLDERS
Section 6.1 Representations and Warranties 14
Section 6.2 Consents and Approvals 14
Section 6.3 Employment Agreement. 14
Section 6.4 Other Documents. 14
ARTICLE VII CLOSING
Section 7.1 Closing 15
Section 7.2 Exchange of Shares. 15
ARTICLE VIII SURVIVAL OF TERMS; INDEMNIFICATION
Section 8.1 Survival 15
Section 8.2 Indemnification by the Stockholders 15
Section 8.3 Indemnification by HomeCom 16
Section 8.4 Third Party Claims 17
ARTICLE IX GENERAL PROVISIONS
Section 9.1 Amendment and Modification 17
Section 9.2 Waiver 17
Section 9.3 Notices 18
<PAGE> 4
Section 9.4 Assignment 18
Section 9.5 Governing Law 19
Section 9.6 Counterparts 19
Section 9.7 Entire Agreement 19
Section 9.8 No Benefit 19
Section 9.9 Severability 19
Section 9.10 Expenses 19
Section 9.11 Tax Implications of Stock Exchange. 20
SCHEDULES
2.9 Payment of Wages and Other Compensation
2.10 Certain Changes
2.11 Contracts
2.12(a) Owned Property
2.12(b) Liens
2.12(c) Leased Property
2.15 Intellectual Property
3.5 HomeCom Stock Information
3.7 Certain Changes
3.8 HomeCom Litigation
EXHIBITS
A Higham Employment Agreement
B IRC Action by Unanimous Consent
<PAGE> 5
THIS AGREEMENT AND PLAN OF REORGANIZATION (this "AGREEMENT") is entered
into effective as of the 15th day of April, 1998, between and among HOMECOM
COMMUNICATIONS, INC., a Delaware corporation ("HOMECOM"), TIMOTHY JAMES HIGHAM,
a resident of the State of North Carolina ("HIGHAM"), CAMERON M. HARRIS &
COMPANY, a North Carolina corporation ("CMH")(Higham and CMH collectively
referred to hereinafter as the "STOCKHOLDERS" and individually as a
"STOCKHOLDER"), and THE INSURANCE RESOURCE CENTER, INC., a North Carolina
corporation ("IRC").
RECITALS
WHEREAS, Higham owns 510 shares of IRC $1.00 par value voting common
stock, and CMH owns 490 shares of IRC $1.00 par value voting common stock, the
1,000 shares constituting all of the issued and outstanding shares of capital
stock of IRC (the "IRC SHARES");
WHEREAS, IRC is in the business of designing Web sites and providing
other Internet services (the business of IRC is hereinafter referred to as the
"BUSINESS" or the "BUSINESS");
WHEREAS, it is the intention of the parties hereto that all of the IRC
Shares shall be acquired by HomeCom solely in exchange for HomeCom $.0001 par
value voting common stock in such numbers as described herein (the "HOMECOM
SHARES");
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereto agree as follows:
ARTICLE I.
EXCHANGE OF SHARES
SECTION I.1. Method of Exchange. At the Closing Date (as defined in
Section 7.1 hereof), on the terms and subject to the conditions set forth in
this Agreement, the Stockholders agree to deliver to HomeCom stock certificates
representing all of the IRC Shares, duly endorsed for transfer, free and clear
of all liens, encumbrances or restrictions of any kind ("Liens"). In exchange
for the IRC Shares, HomeCom will on the Closing Date issue and deliver HomeCom
Shares to the Stockholders. The number of HomeCom Shares to be issued and
delivered to the Stockholders shall be determined as provided in Section 1.2
below. The HomeCom Shares shall be allocated between the Stockholders as
provided in Section 1.3 below. The parties hereto agree that
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this exchange shall constitute a tax-free reorganization under IRC Section
368(a)(1)(B).
SECTION I.2. Exchange Rate. The number of HomeCom Shares for which the
IRC Shares shall be exchanged shall be determined as follows: At the Closing
Date, Seven Hundred Fourteen Thousand Dollars ($714,000) shall be divided by the
average closing price of a HomeCom Share on the Nasdaq Small Cap(TM) Market for
the period commencing on March 10, 1998 and ending on the day preceding the
Closing Date, determined by adding together the closing price of a HomeCom Share
for each day during such period, and dividing the result by the number of
trading days contained in such period (the number of HomeCom Shares so
determined shall be referred to hereinafter as the "TOTAL ISSUANCE"). HomeCom
shall pay any and all applicable stamp tax payable on the issuance of the
HomeCom Shares. The Total Issuance of HomeCom Shares shall be issued to the
Stockholders on the Closing Date.
SECTION I.3. Allocation Between the Stockholders. The HomeCom Shares
shall be allocated between the Stockholders pro-rata, with Higham receiving 51%
and CMH receiving 49%, respectively.
SECTION I.4. Registration of HomeCom Shares. At the Closing, the Total
Issuance shall consist of unregistered HomeCom Shares. As soon as practical
after the Closing, but in no event later than June 30, 1998, HomeCom shall cause
fifty percent (50%) of the HomeCom Shares issued to be registered pursuant to a
registration statement filed with and declared effective by the United States
Securities and Exchange Commission. If the HomeCom Shares are not so registered
by June 30, 1998, then HomeCom shall pay to the Stockholders a penalty fee of
ten percent (10%) per month of the original number of HomeCom Shares to be
registered, to be paid monthly in newly issued HomeCom Shares, which shall also
then be registered as provided herein.
SECTION I.5. Additional Registration Rights. With respect to that fifty
percent (50%) portion of the Total Issuance which is not required to be
registered as provided in Section 1.4 above, HomeCom agrees that if at any time
within one (1) year after the date hereof (the "Registration Rights Period")
HomeCom proposes to register any capital stock under the Securities Act of 1933,
as amended (the "ACT") involving an underwritten public offering, then HomeCom
shall give prompt written notice thereof to the Stockholders. Such notice shall
set forth the intended plan of distribution of the securities proposed to be
registered. Notwithstanding the foregoing, in the event that either Stockholder
is deemed an Affiliate for purposes of Rule 144 of the Act, then the
Registration Rights Period shall be extended an additional one (1) year.
Further, in the event that any
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Stockholder is unable to sell its HomeCom shares pursuant to Rule 144 of the Act
due to volume limitations, then the Registration Rights Period shall be further
extended to a maximum period of two and one-half (2 1/2) years from the date
hereof.
In the event the proposed registration of HomeCom Shares involves an
underwritten public offering, if the representative of the underwriters
participating in the sale and distribution of the HomeCom Shares covered by said
registration statement agrees that a number of outstanding HomeCom Shares (the
"Permissible Secondary Shares") may be included in the offering covered by the
registration statement, then HomeCom's notice shall afford each Stockholder an
opportunity to elect to include in such filing all or any part of the HomeCom
Shares then owned by such Stockholder. Each Stockholder shall have fifteen (15)
days after receipt of the HomeCom notice to notify HomeCom in writing of the
number of HomeCom Shares (the "Elected Shares") which such Stockholder elects to
include in the offering. The Elected Shares shall be included in the offering to
the extent permitted by the representative and pro-rata with those of all other
selling stockholders. If the aggregate number of Elected Shares that the
Stockholders desire to include in such filing exceeds the number of Permissible
Secondary Shares, then each Stockholder shall be entitled to include that number
of HomeCom Shares that bears the same ratio to the number of Permissible
Secondary Shares as the number of Elected Shares that such Stockholder desires
to include bears to the number of Elected Shares that all HomeCom stockholders
desire to include.
The inclusion in such filing of Elected Shares shall be upon the
condition that such Stockholder sell his HomeCom Shares to the underwriters on
the same terms and conditions as HomeCom. HomeCom shall afford the Stockholders
the right to participate in each underwritten registration until such time as
the Stockholders shall have had an opportunity (whether or not availed of) to
participate fully in effective registrations.
HomeCom shall bear those certain expenses incurred in connection with a
registration as contemplated in this Section 1.5, including, without limitation,
all registration, filing, qualification, printer's and accounting fees incurred
in connection with such registration. The Stockholders shall pay any
underwriting commissions or discounts attributable to their respective Elected
Shares.
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ARTICLE II.
REPRESENTATIONS AND WARRANTIES OF IRC AND THE STOCKHOLDERS
IRC and the Stockholders hereby represent and warrant to HomeCom as
follows with respect to IRC (to the extent a representation is modified by a
knowledge requirement, it shall speak to the knowledge of each individual
Stockholder and of IRC):
SECTION II.1. Corporate Organization. IRC is a corporation duly
organized, validly licensed and existing and in good standing under the laws of
its jurisdiction of incorporation, with full corporate power and authority to
own, operate and lease its properties and to conduct its business as presently
conducted.
SECTION II.2. Authorization. The Stockholders and IRC each have full
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The Board of Directors of IRC has duly
authorized the execution, delivery and performance of this Agreement, and no
other corporate proceedings on IRC's part are necessary to authorize the
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby. This Agreement constitutes a legal, valid
and binding obligation of the Stockholders and IRC, enforceable against each
such party in accordance with its terms, subject to equitable considerations and
the effect of bankruptcy and other laws affecting the rights of creditors
generally.
SECTION II.3. No Violation. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby by
each of the Stockholders and IRC do not and will not (a) conflict with or result
in a breach of the terms, conditions or provisions of, or (b) constitute a
default or event of default under (with due notice, lapse of time or both): (i)
the charter or by-laws of IRC, or (ii) any agreement to which IRC or any of the
Stockholders is subject, or (iii) to the best knowledge of Stockholders, any
applicable law. All consents, authorizations, orders, filings and registrations
which IRC is required to obtain have been obtained or will be effective prior to
the Closing.
SECTION II.4. Subsidiaries and Investments. IRC has no interests,
subsidiaries or investments in any person.
SECTION II.5. Stock Record Book. The stock record book of IRC is
complete and correct in all material respects. No shares of capital stock of IRC
are currently reserved for issuance for any purpose or upon the occurrence of
any event or condition. There are 100,000 shares of common stock of IRC
authorized and no shares held in the treasury. The IRC Shares constitute all of
the issued and outstanding capital stock of IRC.
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SECTION II.6. Title to Stock. The IRC Shares have been duly authorized
and validly issued and are fully paid and nonassessable. The IRC Shares were
issued pursuant to applicable exceptions from registration under Federal
securities laws and the securities laws of the State of North Carolina and will
be exchanged pursuant to this Agreement free and clear of all Liens. The
Stockholders are the true and lawful owners of the IRC Shares. Upon the First
Issuance of the HomeCom Shares to the Stockholders in accordance with this
Agreement, the Stockholders will convey to HomeCom good and marketable title to
the IRC Shares, free and clear of all Liens whatsoever. The assignments,
endorsements, stock powers and other instruments of transfer delivered by the
Stockholders to HomeCom at the Closing will be sufficient to transfer the
Stockholders' entire interest, legal and beneficial, in the IRC Shares.
SECTION II.7. Options and Rights. There are no outstanding
subscriptions, options, warrants, rights, puts, calls, convertible securities or
other contracts by which IRC is bound to issue or to repurchase or otherwise
acquire shares of its capital stock, or pursuant to which any person has a right
to purchase or to acquire, through conversion or otherwise, shares of IRC's
capital stock. Except as otherwise disclosed on IRC's Financial Statements (as
hereinafter defined) there are no securities or other instruments containing
anti-dilution or similar provisions and there are no outstanding debt
instruments of any kind.
SECTION II.8. Financial Statements. The Stockholders have delivered to
HomeCom correct and complete copies of the unaudited balance sheet of IRC as of
December 31, 1997 and the related statement of income for the fiscal year
reporting period then ended (the "FINANCIAL STATEMENTS"). The Financial
Statements (a) have been prepared in accordance with the books and records of
IRC and (b) fairly present the financial condition and results of operations and
cash flows of IRC as of, and for the period ended on, such date. The Financial
Statements do not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein
in light of the circumstances in which they were made not misleading.
SECTION II.9. Employees.
(a) Payment of Wages and Other Compensation. IRC has paid or
made provision for the payment of all salaries and accrued wages, bonuses,
deferred compensation, accrued vacation and sick leave, and any other form of
accrued, but unpaid, compensation, and has complied in all material respects
with all applicable laws, rules and regulations relating to the employment of
labor, including those relating to wages, hours, collective
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bargaining and the payment and withholding of taxes, and has withheld and paid
to the appropriate governmental authority, or is holding for payment not yet due
to such authority, all amounts required by law or agreement to be withheld from
the wages or salaries of its employees. Schedule 2.9 sets forth all such unpaid
and accrued amounts.
(b) Employment Contracts. Except for the Employment Agreement of
Higham, which shall be superseded at closing, IRC is not a party to any
outstanding employment agreements or contracts (whether oral or written) with
officers or employees or others that are not terminable at will without penalty
or payment of any kind. Except as may be contained in the Web Site Development
and Hosting Services Agreement with IVANS, Inc., dated March 14, 1997, as
amended and as contained in the Employment Agreement to be entered into by
Higham contemporaneously herewith, there are no contracts, agreements or
understandings to which IRC or any of the Stockholders is a party or under which
any such entity or person is in any way bound which restricts or precludes such
persons or entities from competing in any geographic area or business segment.
SECTION II.10. Absence of Certain Changes. Except as set forth in
Schedule 2.10, since December 31, 1997, IRC's business has been operated in the
ordinary course, and there has been no: (a) material adverse change in the
business, properties, financial statements, business prospects, customers,
condition (financial or otherwise) or results of operations of IRC; (b) damage,
destruction or loss, whether covered by insurance or not, having a material
adverse effect on the business, properties, business prospects, condition
(financial or otherwise) or results of operations of IRC; (c) increase in the
compensation payable to or to become payable by IRC to its employees, officers,
directors, stockholders, consultants or independent contractors other than in
the ordinary course of business; (d) entry by IRC into any contract not in the
ordinary course of business; (e) entry into or renewal of any lease by IRC
without the prior written consent of HomeCom, (f) sale, assignment, lease,
distribution, disposal or transfer of any assets or properties of IRC except in
the ordinary course of business, or any theft, damage, removal or destruction of
such assets or properties or any casualty loss materially affecting IRC or its
business; or (g) amendment or termination of any of IRC's permits or material
contracts. Other than general industry events or trends, IRC and the
Stockholders know of no event, liability, development or circumstance which has
occurred or exists, or which is likely to occur or exist, with respect to IRC or
its business, properties, prospects, operations or financial condition, which
could be material to HomeCom's future operation of IRC.
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SECTION II.11. Contracts.
(a) Generally. Except as listed in Schedule 2.11, IRC is not a
party to any material (for purposes hereof, material is defined to involve
aggregate payments of $5,000 or more) agreement, contract, commitment,
instrument or other binding arrangement or understanding, whether written or
oral, relating to:
(i) The borrowing or loaning of money to or from any Person
or the mortgaging, pledging or otherwise placing a lien on any
asset of IRC;
(ii) A guarantee of any obligation;
(iii) The ownership, lease (whether as lessee or lessor) or
operation of any property, real or personal;
(iv) Sales, commissions, advertising or marketing;
(v) Unconditional purchase or payment obligations;
(vi) Restricting in any way the sale of the IRC Shares;
(vii) Tax obligations of any kind; or
(viii) Any other contract not of the type covered by any of
the foregoing items of this Section 2.11(a) requiring total
annual payments by IRC in excess of five thousand dollars
($5,000), other than the CMH loan to IRC which shall have been
repaid prior to Closing.
(b) Compliance. IRC is not in default or breach of any
contract to which it is subject (including, without limitation, those required
to be disclosed on Schedule 2.11). No event has occurred which with the passage
of time or the giving of notice or both would result in a material default,
breach or event of non-compliance by IRC under any contract to which it is
subject.
SECTION II.12. Title and Related Matters.
(a) Owned Property. Set forth in Schedule 2.12(a) is a
description of all real and personal property owned by IRC. IRC has valid and
marketable title to all such property, free and clear of all Liens, except as
set forth in Schedule 2.12(b).
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(b) Leased Property. Set forth in Schedule 2.12(c) is a
description of all real and personal property leased or used by IRC. Except as
otherwise set forth in Schedule 2.12(c), IRC's leases are in full force and
effect and are valid and enforceable in accordance with their respective terms.
There exists no event of default or event which constitutes or would constitute
(with notice or lapse of time or both) a default by IRC under any such lease.
All rent and other amounts due and payable with respect to each of IRC's leases
have been paid through the date of this Agreement.
SECTION II.13. Litigation.
(a) IRC is not engaged in or a party to, or threatened with, any
claim, controversy, investigation, legal action or other proceeding, whether or
not before any court, governmental or regulatory authority or administrative
agency;
(b) IRC is not a party to or subject to any judgment, decree or
order entered in any lawsuit or proceeding brought by any governmental agency or
by any other person against IRC; and
(c) Neither the Stockholders nor IRC knows of any valid basis
for any of the foregoing.
SECTION II.14. Tax Matters. As used herein, the term "TAX" or "TAXES"
means any income, ad valorem, estimated, sales, use, excise, franchise,
withholding, payroll, employment and other taxes, charges, fees, levies or other
assessments of any kind whatsoever (including interest, penalties, fines and
additions thereto) imposed by any taxing authority, federal, state, local or
foreign. IRC has timely filed all federal, state, local and foreign tax reports,
returns, information returns and any other documents required to be filed by it
(collectively, "TAX RETURNS") and has duly paid all Taxes shown to be due and
payable on such Tax Returns and all estimated or advance payments required by
law. All Taxes for periods ending on or prior to or including the Closing Date
have been fully paid or reserved against on the Financial Statements and on the
books of IRC. All Taxes which are required to be withheld or collected by IRC
have been duly withheld or collected and, to the extent required, have been paid
to the proper federal, state, local or foreign authorities or properly
segregated or deposited as required by applicable regulations. There are no
Liens for Taxes upon any property or assets of IRC, except for Liens for Taxes
not yet due and payable. Other than 1997 and 1998 Federal and State income taxes
and 1997 and 1998 personal property taxes, if any, there are no unpaid Taxes in
any material amount claimed to be due by
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the taxing authority of any jurisdiction and the Stockholders know of no basis
for any such claim.
SECTION II.15. Intellectual Property. Schedule 2.15 sets forth a complete
and accurate list of the proprietary rights owned or used by IRC. If necessary,
IRC owns or holds valid licenses to use all proprietary rights used in the
operation of its business as presently conducted and proposed to be conducted.
IRC and the Stockholders do not have any knowledge of any infringement by IRC of
the intellectual property rights of any other person, nor of any infringement by
any person of the intellectual property rights of IRC.
SECTION II.16. Commissions. There are and will be no claims for brokerage
commissions, finder's fees, fees for fairness opinions or financial advisory
services or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of the Stockholders or IRC.
SECTION II.17. Disclosure. Neither this Agreement nor any of the Schedules
attached hereto contains any untrue statement of a material fact or omits any
material fact necessary to make each statement contained in this Article II not
misleading.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF HOMECOM
HomeCom hereby represents and warrants to the Stockholders and IRC as
follows:
SECTION III.1. Corporate Organization. HomeCom is a corporation duly
organized, validly licensed and existing and in good standing under the laws of
its jurisdiction of incorporation, with full corporate power and authority to
own, operate and lease its properties and to conduct its business as presently
conducted.
SECTION III.2. Authorization. HomeCom has full power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The Board of Directors of HomeCom has duly authorized the
execution, delivery and performance of this Agreement, and no other corporate
proceedings on HomeCom's part are necessary to authorize the execution, delivery
and performance of this Agreement and the consummation of the transactions
contemplated hereby. This Agreement constitutes a legal, valid and binding
obligation of HomeCom, enforceable against it in accordance with its terms,
subject to
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equitable considerations and the effect of bankruptcy and other laws
affecting the rights of creditors generally.
SECTION III.3. No Violation. The execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated hereby by
HomeCom do not and will not (a) conflict with or result in a breach of the
terms, conditions or provisions of, (b) constitute a default or event of default
under (with due notice, lapse of time or both), or (c) require any
authorization, consent, approval, exemption or other action by, or notice to,
any person pursuant to (i) the charter or by-laws of HomeCom, or (ii) any
agreement to which HomeCom is subject, or (iii) to the best knowledge of
HomeCom, any applicable law. All consents, authorizations, orders, filings and
registrations which HomeCom is required to obtain have been obtained or will be
effective prior to the Closing.
SECTION III.4. Title to HomeCom Shares. HomeCom's authorized stock consists
of 15,000,000 shares, of which there are currently, as of March 31, 1998,
3,286,147 shares issued and outstanding. The issuance of the HomeCom Shares as
contemplated herein has been duly authorized, and when issued as contemplated
herein the HomeCom Shares will be validly issued, fully paid and nonassessable,
and the Stockholders will have good and marketable title thereto, free and clear
of all liens whatsoever. The HomeCom shares are presently trading on the Nasdaq
Small Cap(TM) Market and HomeCom is in full compliance with any and all
applicable rules and regulations under the Act applicable thereto and to the
issuance of its capital stock from time to time, including as part of this
transaction.
SECTION III.5. HomeCom Shares Outstanding. Except as set forth on Schedule
3.5, since March 10, 1998, except as contemplated in this Agreement (and except
that the numbers of authorized and issued shares of HomeCom stock is as at March
31, 1998), HomeCom:
(a) has not paid or declared, and through the Closing will not
pay or declare, any dividend or other distribution on HomeCom Shares;
(b) has not merged or consolidated with, or committed itself to
merge or consolidate with, any other corporation, and through the Closing will
not merge or consolidate with, or commit itself to merge or consolidate with,
any other corporation;
(c) has not split or committed itself to split the HomeCom
Shares, and through the Closing will not split, or commit itself to split, the
HomeCom Shares.
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SECTION III.6. Financial Statements. HomeCom has delivered to the
Stockholders and IRC correct and complete copies of the audited balance sheet of
HomeCom as of December 31, 1997 and the related statement of income for the
fiscal year reporting period then ended (the "HOMECOM FINANCIAL STATEMENTS").
The HomeCom Financial Statements (a) have been prepared in accordance with the
books and records of HomeCom and (b) fairly present the financial condition and
results of operations and cash flows of HomeCom as of, and for the period ended
on, such date.
SECTION III.7. Absence of Certain Changes. Except as set forth in Schedule
3.7 and except as disclosed on HomeCom's public filings with the United States
Securities and Exchange Commission (the "SEC Filings") (full and complete copies
of which have been delivered to IRC and the Stockholders prior to Closing),
since December 31, 1997, HomeCom's business has been operated in the ordinary
course of business, and there has been no: (a) material adverse change in the
business, properties, financial statements, business prospects, customers,
condition (financial or otherwise) or results of operations of HomeCom; (b)
damage, destruction or loss, whether covered by insurance or not, having a
material adverse effect on the business, properties, business prospects,
condition (financial or otherwise) or results of operations of HomeCom; (c)
increase in the compensation payable to or to become payable by HomeCom to its
employees, officers, directors, stockholders, consultants or independent
contractors other than in the ordinary course of business; (d) entry by HomeCom
into any contract not in the ordinary course of business; (e) entry into or
renewal of any lease by HomeCom not in the ordinary course of business, (f)
sale, assignment, lease, distribution, disposal or transfer of any assets or
properties of HomeCom except in the ordinary course of business, or any theft,
damage, removal or destruction of such assets or properties or any casualty loss
materially affecting HomeCom or its business; or (g) amendment or termination of
any of HomeCom's permits or material contracts.
SECTION III.8. Litigation.
(a) Except as set forth on Schedule 3.8 or in the SEC Filings,
HomeCom is not engaged in or a party to, or threatened with, any material claim,
controversy, investigation, legal action or other proceeding, whether or not
before any court, governmental or regulatory authority or administrative agency,
which is pertinent to this transaction and/or which is not in the ordinary
course of HomeCom's business;
(b) Except as set forth on Schedule 3.8, HomeCom is not a party
to or subject to any judgment, decree or order
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entered in any lawsuit or proceeding brought by any governmental agency or by
any other person against HomeCom; and
(b) HomeCom knows of no valid basis for any of the foregoing.
SECTION III.9. Commissions. There are and will be no claims for brokerage
commissions, finder's fees, fees for fairness opinions or financial advisory
services or similar compensation in connection with the transactions
contemplated by this Agreement based on any arrangement or agreement made by or
on behalf of HomeCom.
SECTION III.10. Disclosure. Neither this Agreement nor any of the Schedules
attached hereto contains any untrue statement of a material fact or omits any
material fact necessary to make each statement contained in this Article III not
misleading.
ARTICLE IV.
OTHER AGREEMENTS
The parties hereto further agree as follows:
SECTION IV.1. Further Assurances. On the terms and subject to the
conditions of this Agreement, the parties hereto shall use all reasonable
efforts at their own expense to take, or cause to be taken, all action, and to
do, or cause to be done, all things necessary, proper or advisable under
applicable law to consummate and make effective as promptly as possible the
transactions contemplated by this Agreement, and to cooperate with each other in
connection with the foregoing.
SECTION IV.2. Distributions and/or Expenditures of Cash and/or Assets. IRC
shall not have made since December 31, 1997 any distributions or payments of
cash or other assets of the Company except in the ordinary and customary
operations of the Company's business and except in repayment of an approximately
$67,000 loan from CMH to the Company. B. Tax Returns. The parties shall
cooperate in the preparation of all Tax Returns and reports and shall make
available all necessary records (including, but not limited to, accounting
records and accountants' work papers) and timely take all action necessary to
allow for the preparation and filing of all Tax Returns and reports. The parties
agree that the Stockholders shall have no obligation to prepare Tax Returns
pertaining to the operations of IRC after December 31, 1997 or to pay any Taxes
arising therefrom. The Stockholders will cooperate
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with and supply all information in their possession to HomeCom in the
preparation of IRC's 1998 Tax Returns.
SECTION IV.3. Continued Use of Product by CMH. Following the Closing, CMH
shall have the continuing right to use at no further cost IRC's Certificates
Direct product for as long thereafter as it shall desire, provided that such use
is solely for CMH's own purposes, and CMH does not re-sell or otherwise
distribute such product. Notwithstanding the foregoing, CMH shall be required to
pay the prevailing market rate charged from time to time by HomeCom and/or IRC
for upgrades to the product.
SECTION IV.4. Continued Use of CMH Facilities and Utilities. Following the
Closing, CMH shall permit IRC to use its current facilities and utilities for up
to thirty (30) days free of any charges, until such time as IRC shall have
physically removed its operations to HomeCom's Atlanta offices.
SECTION IV.5. Noncompetition Agreement. Higham agrees to execute and
deliver to HomeCom at Closing a Noncompetition Agreement.
ARTICLE V
CONDITIONS TO THE OBLIGATIONS OF HOMECOM
The obligations of HomeCom under this Agreement shall be subject to the
satisfaction of each of the following conditions unless waived in writing by
HomeCom:
SECTION V.1. Representations and Warranties. The representations and
warranties of the Stockholders and IRC contained in Article II hereof and
elsewhere in this Agreement and all information contained in any Exhibit,
Schedule or attachment hereto shall be true and correct in all material respects
when made and on the Closing Date as though then made. The Stockholders and IRC
shall have performed and complied in all material respects with all agreements,
covenants and conditions required by this Agreement to be performed and complied
with by them prior to the Closing Date. The Stockholders and IRC shall have
delivered to HomeCom a certificate, dated the Closing Date, in a form reasonably
satisfactory to HomeCom, certifying to the foregoing.
SECTION V.2. Consents and Approvals. The parties shall have obtained all
consents required by all applicable corporate governance documents, regulations,
orders and contracts with respect to the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein.
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SECTION V.3. No Material Adverse Change. There shall have been no
material adverse change in the properties, revenues, Financial Statements,
business prospects, condition (financial or otherwise) or results of operations
of IRC since December 31, 1997.
SECTION V.4. Secretary's Certificate. HomeCom shall have received a
certificate, signed by the Secretary of IRC, dated the Closing Date, as to the
charter and by-laws of IRC and the resolutions adopted by the directors of IRC
in connection with this Agreement in a form reasonably satisfactory to HomeCom.
SECTION V.5. Employment Agreement. Higham shall have entered into an
Employment Agreement in the form attached hereto as Exhibit A (the "HIGHAM
EMPLOYMENT AGREEMENT").
SECTION V.6. Termination of Stockholders' Agreement. The Stockholders'
Agreement between and among the Stockholders and IRC, as dated effective July
19, 1995, shall be terminated effective as of the Closing, as provided in the
action by unanimous consent attached hereto as Exhibit B.
SECTION V.7. Resignations. All directors and officers of IRC, as well as
its registered agent in the State of North Carolina, shall have resigned,
effective as of the Closing.
SECTION V.8. Closing Date Balance Sheet. At or prior to the Closing, IRC
and the Stockholders shall present their best good faith estimate of the balance
sheet and working capital of IRC as of the Closing Date (the "ESTIMATED CLOSING
DATE BALANCE SHEET"). The Estimated Closing Date Balance Sheet shall reflect net
worth and working capital which shall be not less than as reflected on the
December 31, 1997 Financial Statements, except for approximately $67,000 of
indebtedness due by the Company to CMH, which shall have been repaid prior to
the Closing Date.
SECTION V.9. Maximum Amount of Total Issuance. The number of HomeCom
Shares constituting the Total Issuance, as calculated in Section 1.2 hereof,
shall not exceed Three Hundred Fifty-Seven Thousand and No/100 (357,000) shares
of HomeCom capital stock. In the event of the failure of such condition, HomeCom
shall have the option in its sole and absolute discretion of terminating this
Agreement, with no resulting penalty or monetary obligation to IRC or the
Stockholders, including but not limited to those set forth in Article IX hereof.
SECTION V.10. Legal Opinion. IRC and the Stockholders shall have caused
their counsel, Underwood Kinsey Warren &
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Tucker, P.A., to deliver its legal opinion, reasonably satisfactory to counsel
for HomeCom.
SECTION V.11. Other Documents. HomeCom shall have been furnished with
such other and further documents and certificates as HomeCom shall reasonably
request to evidence compliance with the conditions set forth in this Agreement.
ARTICLE VI.
CONDITIONS TO THE OBLIGATIONS OF IRC AND THE STOCKHOLDERS
The obligations of IRC and the Stockholders under this Agreement shall
be subject to the satisfaction of each of the following conditions unless waived
in writing by the Stockholders:
SECTION VI.1. Representations and Warranties. The representations and
warranties of HomeCom contained in Article III hereof and elsewhere in this
Agreement and all information contained in any Exhibit, Schedule or attachment
hereto shall be true and correct in all material respects when made and on the
Closing Date as though then made, except as expressly provided herein or
therein. HomeCom shall have performed and complied in all material respects with
all agreements, covenants and conditions required by this Agreement to be
performed and complied with by it prior to the Closing Date. HomeCom shall have
delivered to IRC and the Stockholders a certificate, dated the Closing Date, in
a form reasonably satisfactory to IRC and the Stockholders, certifying to the
foregoing.
SECTION VI.2. Consents and Approvals. The parties shall have obtained all
consents required by all applicable corporate governance documents, regulations,
orders and contracts with respect to the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated herein.
SECTION VI.3. Employment Agreement. Higham shall have entered into the
Higham Employment Agreement.
SECTION VI.4. Other Documents. IRC shall have been furnished with such
other and further documents and certificates as IRC shall reasonably request to
evidence compliance with the conditions set forth in this Agreement.
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<PAGE> 20
ARTICLE VII.
CLOSING
SECTION VII.1. Closing. Unless this Agreement shall have been terminated
or abandoned pursuant to the provisions of Articles V or VI hereof, a closing of
the transactions contemplated by this Agreement (the "CLOSING") shall be held on
April 16, 1998 (the "CLOSING DATE") in the offices of Sims Moss Kline & Davis,
LLP, the attorney for HomeCom, in Atlanta, Georgia, or on such other date and at
such other location as the parties hereto shall mutually agree upon.
SECTION VII.2. Exchange of Shares. On the Closing Date, (i) the
Stockholders will assign and transfer to HomeCom good and valid title in and to
the IRC Shares, free and clear of all Liens, by delivering to HomeCom a stock
certificate or certificates representing all of the IRC Shares, duly endorsed
for transfer or accompanied by duly executed stock powers endorsed in blank with
requisite stock transfer tax stamps, if any, attached; (ii) HomeCom shall
deliver to each of the Stockholders duly executed certificates representing the
Total Issuance of HomeCom Shares, as provided in Sections 1.2 and 1.3 hereof.
Additionally, the parties shall deliver to each other all other documents
required under this Agreement to be delivered at or prior to the Closing.
ARTICLE VIII.
SURVIVAL OF TERMS; INDEMNIFICATION
SECTION VIII.1. Survival. All of the terms and conditions of this
Agreement, together with the representations, warranties and covenants contained
herein or in any instrument or document delivered or to be delivered pursuant to
this Agreement and the agreements of the parties to indemnify each other as set
forth in this Article VIII shall survive the execution of this Agreement and the
Closing notwithstanding any investigation heretofore or hereafter made by or on
behalf of any party hereto, and shall continue for two (2) years following the
Closing Date; provided, however, that with respect to any Taxes or Tax liability
of IRC for any period ending prior to or on December 31, 1997, the agreement of
the Stockholders to indemnify HomeCom and IRC shall survive until, and all
claims with respect thereto shall be made prior to, the expiration of the
applicable statute of limitations prescribed by the Internal Revenue Code of
1986, as amended, or any applicable state or local laws or regulations.
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<PAGE> 21
SECTION VIII.2. Indemnification by the Stockholders. After the Closing,
HomeCom and IRC shall be indemnified and held harmless by the Stockholders
against and in respect of any and all damage, loss, liability, cost or expense
resulting from, or in respect of, any of the following:
(a) Misrepresentation or Breach. Any material misrepresentation
or breach of warranty of IRC or the Stockholders, or nonfulfillment of any
obligation on the part of either IRC (to be performed on or prior to the
Closing) or the Stockholders under this Agreement, or contained in any Schedule
or Exhibit to this Agreement, or from any material misrepresentation in or
omission from any certificate, Schedule, Exhibit, related agreement, Financial
Statement or instrument delivered by or on behalf of the Stockholders or IRC
hereunder.
(b) Taxes. All Taxes of IRC attributable to any period ending
prior to or on December 31, 1997.
(c) Limitations. Notwithstanding anything herein to the
contrary, the Stockholders' obligation to indemnify IRC and HomeCom as provided
in this Article VIII shall be limited as follows:
(i) Each Stockholder shall be liable only for his or its
pro rata portion of any amount with respect to which an
indemnity claim is asserted hereunder. The failure or inability
of either Stockholder to pay his or its pro rata portion of such
claim shall in no way obligate the other Stockholder to pay all
or any part of such unpaid pro rata portion.
(ii) The maximum amount which each Stockholder shall be
obligated to indemnify hereunder, on a cumulative basis, shall
be equal to the value of the HomeCom Shares which have been
issued to such Stockholder at Closing hereunder . For purposes
of this Section 8.2 (c) (ii), the value of such HomeCom shares
as of the date they were issued to such Stockholder shall
control.
(iii) The Stockholders shall only indemnify HomeCom to
the extent such damage, loss, liability, cost or expense
exceeds, on a cumulative basis, Twenty-Five Thousand and No/100
Dollars ($25,000).
SECTION VIII.3. Indemnification by HomeCom. After the Closing, the
Stockholders shall be indemnified and held harmless by HomeCom against and in
respect of any and all damage, loss, liability, cost or expense resulting from,
or in respect of, any of the following:
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<PAGE> 22
(a) Misrepresentation or Breach. Any material misrepresentation
or breach of warranty of HomeCom, or nonfulfillment of any obligation on the
part of IRC (to be performed after the Closing) or HomeCom under this Agreement,
or contained in any Schedule or Exhibit to this Agreement or from any material
misrepresentation in or omission from any certificate, Schedule, Exhibit,
related agreement or instrument delivered by or on behalf of HomeCom hereunder.
(b) Taxes. All Taxes of IRC attributable to any period after
December 31, 1997.
(c) Limitations. Notwithstanding anything herein to the
contrary, HomeCom's obligation to indemnify the Stockholders as provided in this
Article VIII shall be limited as follows:
(i) The maximum amount which HomeCom shall be obligated
to indemnify the Stockholders hereunder, on a cumulative basis,
shall be equal to the aggregate value of the HomeCom Shares
which have been issued to the Stockholders at Closing. For
purposes of this Section 8.3(c)(i), the value of such HomeCom
shares as of the date they were issued to the Stockholders shall
control.
(ii) HomeCom shall only indemnify the Stockholders to
the extent such damage, loss, liability, cost or expense
exceeds, on a cumulative basis, Twenty-five Thousand and No/100
Dollars ($25,000).
SECTION VIII.4. Third Party Claims. In the event a party seeking
indemnification hereunder (the "INDEMNITEE") shall receive written notice of any
claim or proceeding against it that, if successful, might result in an
indemnifiable claim under this Article VIII, then the Indemnitee shall give the
party which may be liable for such indemnification hereunder (the "INDEMNITOR")
prompt written notice of such claim or proceeding and shall permit the
Indemnitor to participate in the defense of such claim or proceeding by counsel
of the Indemnitor's own choosing and at the Indemnitor's expense. In addition,
the Indemnitor, upon written request, and upon the Indemnitee's written consent
which shall be in its sole discretion, may assume control of the defense of any
such claim or proceeding, provided that the Indemnitee may participate in any
such defense as it may deem necessary or appropriate to protect its interests
and the Indemnitor shall assume the cost thereof.
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<PAGE> 23
ARTICLE IX.
GENERAL PROVISIONS
SECTION IX.1. Amendment and Modification. Subject to all applicable laws,
this Agreement may be amended, modified and supplemented at any time with
respect to any of the terms contained herein, by a written agreement signed by
all of the parties hereto.
SECTION IX.2. Waiver. The failure of any party hereto to comply with any
obligation, covenant, agreement or condition herein may be waived in writing by
the other parties hereto, but such waiver shall not operate as a waiver of, or
estoppel with respect to, any subsequent or other failure. Whenever this
Agreement requires or permits consent by or on behalf of any party hereto, such
consent shall be given in writing.
SECTION IX.3. Notices. All notices, claims, requests, demands or other
communications required or permitted hereunder shall be in writing and shall be
deemed to have been duly given when delivered by hand, by first class certified
mail, return receipt requested, with postage paid, or by receipted overnight
courier service to the intended recipient at the address specified below or at
such other address as shall be designated by such party in any notice to the
other parties.
Notices to HomeCom:
------------------
With a Copy to:
--------------
HomeCom Communications, Inc.
Sims Moss Kline & Davis,
LLP
Building 14, Suite 100
400 Northpark Town Center
3535 Piedmont Road
Suite 310
Atlanta, GA 30305
1000 Abernathy Road, N.E.
ATTN: Harvey Sax, President
Atlanta, GA 30328
ATTN: Raymond L. Moss, Esq.
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<PAGE> 24
Notices to Stockholders:
-----------------------
With a Copy to:
--------------
Timothy James Higham
Shirley J. Linn, Esq.
3141 Diamond Knot Circle
Underwood Kinsey Warren &
Tampa, FL 33607
Tucker, P.A.
Charlotte Plaza Building
201 S. College Street,
Suite 2020
Charlotte, NC 29244
Cameron M. Harris & Company
Shirley J. Linn, Esq.
P. O. Box 220748
Underwood Kinsey Warren &
Charlotte, NC 28222
Tucker, P.A.
ATTN: William A. Richard, Jr.
Charlotte Plaza Building
201 S. College Street,
Suite 2020
Charlotte, NC 28244
SECTION IX.4. Assignment. This Agreement and all of the provisions hereof
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor any
of the rights, interests or obligations hereunder shall be assigned by any of
the parties hereto without the prior written consent of the other parties;
provided, however, that HomeCom may, without the prior written consent of the
Stockholders or IRC, assign its rights hereunder and under any other contracts
or documents executed or delivered in connection herewith to an affiliate of
HomeCom, provided that HomeCom's ownership interest in such affiliate is at
least fifty percent (50%), and provided further that in the event of any such
assignment the IRC Shares shall nevertheless be exchanged for HomeCom Shares as
provided herein, and not for shares of such HomeCom affiliate.
SECTION IX.5. Governing Law. This Agreement shall be governed by the laws
of the State of Georgia, without regard to its principles of conflict of laws.
Any action or proceeding arising out of this Agreement may be brought against
any of the parties in the State of Georgia, Fulton County, or if it has or
-20-
<PAGE> 25
can acquire jurisdiction, in the Northern District of Georgia, and each party
consents to jurisdiction of such courts in any such action and waives any
objection to venue laid therein.
SECTION IX.6. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
SECTION IX.7. Entire Agreement. This Agreement embodies the entire
agreement and understanding of the parties hereto with regard to the subject
matter hereof and supersedes all prior agreements, representations, warranties,
promises, covenants, arrangements and understandings, oral or written, express
or implied, among the parties with respect to such subject matter. There are no
agreements, representations, warranties, promises, covenants, arrangements or
understandings among the parties with respect to such subject matter other than
those expressly set forth or referred to herein.
SECTION IX.8. No Benefit. This Agreement shall not be construed so as to
confer any right or benefit upon any person other than the signatories to this
Agreement and each of their respective successors and permitted assigns.
SECTION IX.9. Severability. The provisions of this Agreement shall be
separable and a determination that any provision of this Agreement is either
unenforceable or void shall not affect the validity of any other provision of
this Agreement.
SECTION IX.10. Expenses. Each of the parties hereto shall bear its own
expenses, including, without limitation, legal fees and expenses, with respect
to this Agreement and the transactions contemplated hereby. Notwithstanding the
foregoing, in the event the transactions contemplated by this Agreement are not
consummated due to the failure, without reasonable cause, of either the
Stockholders (collectively) or HomeCom to perform their respective conditions
precedent as detailed in Articles V or VI hereof, then such party shall pay
immediately the other party a break-up fee in the amount of Fifteen Thousand and
No/100 ($15,000) dollars.
SECTION IX.11. Tax Implications of Stock Exchange. HomeCom and the
Stockholders each acknowledge that they have sought legal and tax counsel with
respect to the tax implications of the transactions described in this Agreement
and each shall not hold or attempt to hold the other liable for any such
implications or for any implications which may differ from those explained to
them by their counsel, including any implications arising from the failure of
this transaction to qualify as a tax-free reorganization.
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<PAGE> 26
[This space left intentionally.]
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<PAGE> 27
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
(SEAL)
TIMOTHY JAMES HIGHAM
CAMERON M. HARRIS & COMPANY
ATTEST:
By:
Vice President
- ----------------------------------
Secretary
(Corporate Seal)
THE INSURANCE RESOURCE CENTER, INC.
ATTEST:
By:
President
- ----------------------------------
Secretary
(Corporate Seal)
HOMECOM COMMUNICATIONS, INC.
ATTEST:
By:
President
- ----------------------------------
Secretary
(Corporate Seal)
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<PAGE> 28
Schedule 2.9
Payment of Wages and Other Compensation
Accrued Vacation Not Yet Taken
- ------------------------------
Tim Higham 3.75 accrued vacation days
Kris Wells 2.50 accrued vacation days
Lee Booth 2.50 accrued vacation days
Tim Jackson 2.50 accrued vacation days
Tim Madigan 0.00 accrued vacation days
Greg Eckler 2.00 accrued vacation days
Matt Fury 2.00 accrued vacation days
Pay Period ends on the fifteenth (15th) day of each month, so IRC employees will
transfer to HomeCom's payroll as of April 16, 1998.
<PAGE> 29
Schedule 2.10
Certain Changes
None.
<PAGE> 30
Schedule 2.11
Material Contracts
None.
<PAGE> 31
Schedule 2.12(a)
Owned Property
See attached.
<PAGE> 32
Schedule 2.12(b)
Liens
None.
<PAGE> 33
Schedule 2.12(c)
Leased Property
None.
<PAGE> 34
Schedule 2.15
Intellectual Property
Tradenames Certificates Direct, Market Match, Agent Pro, Employee Pro,
Web Pro, and Job Pro, none of which has been registered with the Federal or any
State Trademark Office.
<PAGE> 35
Schedule 3.5
HomeCom Stock Information
<PAGE> 36
Schedule 3.8
HomeCom Litigation
None.
<PAGE> 37
EXHIBIT A
Higham Employment Agreement
See attached.
<PAGE> 38
EXHIBIT B
IRC Action by Unanimous Consent
See attached.
<PAGE> 39
I. AMENDMENT TO PURCHASE AGREEMENT. The parties hereto agree to amend the
Purchase Agreement in accordance with the follow:
1. Conversion Price. The definition of "Conversion Price" set forth in
Section 1 of the Purchase Agreement is amended to be and read as
follows:
""Conversion Price" means an amount equal to the lessor of (a) a
twenty-five (25%) percent discount from the average closing bid price
of the Common Stock as reported by NASDAQ or on other securities
exchanges or markets on which the Common Stock is listed for the
previous three (3) trading days ending on the day before the
Conversion Date, or (b) 2 5/8."
2. Restrictions on Conversion of Debenture. The Purchasers agree that not
to convert any portion of the Remaining Debentures held by each of
them for a period of thirty (30) days from the date hereof and
thereafter not to convert more than 25% of the Remaining Debentures
held by each of them in any thirty (30) day period thereafter (the
"Gating Restrictions"). However, in the event that the closing bid
price of the Common Stock as reported by NASDAQ or on other securities
exchanges or markets on which the Common Stock is listed for the
previous five (5) trading days is $3.50 or greater, the foregoing
Gating Restrictions shall not apply as long as the closing bid price
for the previous five (5) trading days is $3.50 or greater. In
addition, if the Common Stock is not traded on the NASDAQ SmallCap
Market or the electronic bulletin board, the foregoing Gating
Restrictions shall no longer apply. As used herein "Remaining
Debentures" shall mean those Debentures described in Exhibit "A"
attached hereto.
II. AMENDMENT TO DEBENTURE. The parties hereto agree to amend the Debenture in
accordance with the following:
1. Section 7 - Events of Default. Subparagraph (f) shall be amended and
restated as follows:
"The Issuer's Common Stock is delisted from trading on NASDAQ SmallCap
Market or the electronic bulletin board unless it is thereupon
admitted to trading on a national stock exchange."
III. DELIVERY OF SHARES OF COMMON STOCK SUBJECT TO CONVERSION NOTICE. Assuming
that this Agreement is duly executed and delivered by all parties as of the
date hereof, in the interest of settlement and compromise without admitting
liability, the Company agrees to issue instructions to its transfer agent to
honor the conversion notices of the Purchasers as attached as Exhibit "B hereto
(the "Conversion Notices") and to instruct the transfer agent as of the date
hereof to (i) issue such shares of Common Stock to the Purchasers in the
amounts set forth in the Conversion Notices (the "Conversion Shares") and (ii)
to give instructions to DWAC the Conversion Shares with an effective date as of
the date hereof.
<PAGE> 1
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into effective as of the
_________ day of ____________________, 1998 by and between The Insurance
Resource Center, Inc. ("IRC"), a North Carolina corporation, ("Company") and Tim
Higham, an individual.
For and in consideration of the agreement to employ Employee described
below, and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree as follows:
1. EMPLOYMENT. The Company agrees to employ Employee, and Employee agrees to
accept such employment, subject to the following terms and conditions.
2. DUTIES. Employee shall assume and perform the duties specified in Exhibit A.
Such duties may be revised from time to time at the sole discretion of the
Company. Employee agrees to devote his or her full time and energy to the
Company's business and shall not during the term of employment work or perform
services in any advisory or other capacity for any other individual or entity.
3. COMPENSATION. The Company shall pay to Employee the salary and additional
compensation, if any, described in Exhibit A as compensation for all the
services to be rendered by Employee and as such compensation may be modified by
the Company in its sole discretion from time to time. The Company's obligation
to pay Employee any compensation shall cease upon termination of Employee's
employment with the Company. Employee's annual or monthly salary shall be
prorated on a daily basis for the years or months, as the case may be, in which
Employee commences and terminates his or her employment relationship with the
Company.
4. TERM AND TERMINATION. This agreement shall be effective upon execution by the
parties and shall remain in full force and effect thereafter, until terminated
as provided herein. Either party may terminate this Agreement at any time for
any reason, whether for cause or not for cause, by providing written notice to
the other on or prior to the proposed date of termination. This Agreement shall
terminate immediately upon the death of Employee. Upon termination of employment
for any reason, Employee shall return immediately to the Company all documents,
property, and other records of the Company, and all copies thereof, within
Employee's possession, custody or control, including but not limited to any
materials containing any Trade Secrets or Confidential Information (as defined
below) or any portion thereof.
5. OWNERSHIP. For purposes of this Agreement, "Work Product" shall mean the
data, materials, documentation, computer programs, inventions (whether or not
patentable), and all works of authorship, including all worldwide rights therein
under patent, copyright, trade secret, confidential information, or other
property right, created or developed in whole or in part by Employee, whether
prior to the date of this Agreement or in the future while employed by the
Company (whether developed during work hours or not) and which either (i) relate
to the present or anticipated business, research, developments, tests, products,
work or activities of the Company or (ii) result from or are suggested by any
work Employee may do for the Company. All Work Product shall be considered work
made for hire by the Employee and owned by the Company. If any of the Work
Product may not, by operation of the law, be considered work made for hire by
Employee for the Company, or if ownership of all right, title, and interest of
the intellectual property rights therein
Page 1 of 6
<PAGE> 2
shall not otherwise vest exclusively in the Company, Employee hereby assigns to
the Company, and upon the future creation thereof automatically assigns to the
Company, without further consideration, the ownership of all Work Product. The
Company shall have the right to obtain and hold in its own name copyrights,
registrations, and any other protection available in the Work Product. Employee
agrees to perform, during or after Employee's employment, such further acts as
may be necessary or desirable to transfer, perfect, and defend the Company's
ownership of the Work Product that are reasonably requested by the Company.
6. LICENSE. To the extent that any preexisting materials are contained in the
materials Employee delivers to Company or Company's customers, Employee grants
to Company an irrevocable, nonexclusive, worldwide, royalty-free license to: (i)
use and distribute (internally or externally) copies of, and prepare derivative
works based upon, such preexisting materials and derivative works thereof, and
(ii) authorize others to do any of the foregoing.
7. TRADE SECRETS AND CONFIDENTIAL INFORMATION
(a) The Company may disclose to Employee certain Trade Secrets and Confidential
Information (defined below). Employee acknowledges and agrees that the
Trade Secrets and Confidential Information are the sole and exclusive
property of the Company (or a third party providing such information to the
Company) and that the Company or such third party owns all worldwide rights
therein under patent, copyright, trade secret, confidential information, or
other property right. Employee acknowledges and agrees that the disclosure
of the Trade Secrets and Confidential Information to Employee does not
confer upon Employee any license, interest or rights of any kind in or to
the Trade Secrets or Confidential Information. Employee may use the Trade
Secrets and Confidential Information solely for the benefit of the Company
while Employee is employed or retained by the Company. Except in the
performance of services for the Company, Employee will hold in confidence
and not reproduce, distribute, transmit, reverse engineer, decompile,
disassemble, or transfer, directly or indirectly, in any form, by any
means, or for any purpose, the Trade Secrets or Confidential Information or
any portion thereof. Employee agrees to return to the Company, upon request
by the Company, the Trade Secrets and Confidential Information and all
materials relating thereto.
(b) Employee's obligations under this Agreement with regard to the Trade
Secrets shall remain in effect for as long as such information shall remain
a trade secret under applicable law. Employee acknowledges that its
obligations with regard to the Confidential Information shall remain in
effect while Employee is employed or retained by the Company and for three
(3) years thereafter. As used herein, "Trade Secrets" means the trade
secrets of the Company and its subsidiaries and affiliates all as defined
in the Georgia Trade Secrets Act. As used herein, "Confidential
Information" means information of the Company and its subsidiaries and
affiliates, its licensors, suppliers, customers, or prospective licensors
or customers, other than Trade Secrets, that is of value to its owner and
is treated as confidential, including, but not limited to, technical or
non-technical data, formulas, patterns, compilations, programs, devices,
methods, techniques, drawings, processes, financial data, financial plans,
product plans, or a list of actual or potential customers or suppliers,
future business plans, licensing strategies, advertising campaigns,
information regarding executives and employees, and the terms and
conditions of this Agreement.
(c) Employee acknowledges that existing or prospective customers of the Company
may
Page 2 of 6
<PAGE> 3
be companies which are publicly traded and subject to various rules and
regulations of the Securities and Exchange Commission. Employee
acknowledges that the Company has a policy that no one associated with the
Company may trade in securities of any customer of the Company based on
material, nonpublic information concerning the customer. Additionally, the
Company expressly forbids the unauthorized disclosure of any nonpublic
information acquired by anyone associated with the Company relating to a
customer of the Company. Employee shall notify the Company prior to trading
the securities of any customer or in any Securities of the Company.
(d) Nothing contained herein shall be deemed to waive any of the Company's
rights or remedies under any applicable trade secrets acts, including, but
not limited to, the Georgia Trade Secrets Act.
8. CUSTOMER NON-SOLICITATION. Employee agrees that for a period of two (2) years
immediately following termination of Employee's employment with the Company for
any reason, including, without limitation, voluntary resignation from employment
by Employee ("Non-Solicitation Period"), Employee shall not, on Employee's own
behalf or on behalf of any person, firm, partnership, association, corporation
or business organization, entity or enterprise, solicit, contact, call upon,
communicate with or attempt to communicate with any customer or immediate
prospect of the Company, or any representative of any customer or immediate
prospect of the Company, with whom the Employee had Material Contact ("Material
Contact"), with a view to sale or providing of any deliverable or service
competitive or potentially competitive with any deliverable or service sold or
provided or under development by the Company during the time of two (2) years
immediately preceding cessation of Employee's employment with the Company,
provided that the restrictions set forth in this paragraph shall apply only to
customers or prospects of the Company, or representatives of customers or
prospects of the Company, with which Employee had substantial contact during
such two (2) year period. For the purposes of this agreement, "immediate
prospect" is defined as an entity with which the Company is engaged in
discussions that go beyond mere identification of the entity as a potential
customer. At a minimum, included within this definition are such events as
initial entity solicitation of the Company or initial Company solicitation of
the entity. The actions prohibited by this paragraph shall not be engaged in by
Employee directly or indirectly, whether as manager, salesperson, agent,
technical support, sales or service representative, developer, or otherwise. As
used herein, "Material Contact" means contact between Employee and each customer
or immediate prospect (A) with whom Employee dealt; (B) whose dealings with the
Company were coordinated or supervised by Employee; (C) about whom Employee
obtained Confidential Information in the ordinary course of business as a result
of Employee's association with the Company; or (D) who receives services
provided by the Company, the sale or provision of which results or resulted in
compensation, commissions or earnings for Employee, in each of cases (A) through
(D) within two years prior to the date of Employee's termination of employment.
9. NON-COMPETITION. Employee agrees that during the term of Employee's
employment and during the non-Solicitation Period, Employee shall not, within
thirty miles from the intersection of Roswell Road and Piedmont Road, the
nearest major intersection to the Company's principal place of business, on
Employee's own behalf or on behalf of any person, firm, partnership,
association, corporation or business organization, entity or enterprise, perform
services substantially similar to the activities described in Exhibit A for any
company or other entity that creates Web sites or develops Internet or Intranet
enabled computer software applications. The actions prohibited by this paragraph
shall not be engaged in by Employee directly or indirectly, whether as manager,
Page 3 of 6
<PAGE> 4
salesperson, agent, technical support, sales or service representative,
developer, or otherwise. Employee acknowledges that the Company provides
products and services to customers throughout the United States given the global
scope of the internet and that a more limited territorial restriction on the
non-competition provisions of this paragraph would not adequately protect the
legitimate interests of the Company. The provisions of this Section 9 and the
noncompetition provision contain in Section 3 of the Noncompetition Agreement,
dated of even date herewith between HomeCom Communications, Inc. and Employee,
shall apply after the term of Employee's employment only in the event that
Employee's termination from employment is for one or more of the following
reasons: (i) termination by the Company for a willful dishonesty toward or
deliberate injury or attempted injury to the Company; or (ii) termination by the
Company for moral turpitude; or (iii) termination by Company for a violation or
other failure of Employee to perform in accordance with any of the material
provisions of this Agreement; or (iv) termination by the Company for negligence
or disregard in the performance of the Employee's duties, or (v) voluntary
resignation or retirement from employment by Employee.
10. EMPLOYEE NON-SOLICITATION. During the Non-Solicitation Period, Employee
agrees that Employee shall not call upon, solicit, recruit, or assist others in
calling upon, recruiting or soliciting any person who is or was an employee of
the Company who is or was an employee of the Company within twelve months of
such solicitation or recruitment, for the purpose of having such person
terminate his employment with the Company or work in any other corporation,
association, entity, or business.
11. EQUITABLE RELIEF. The parties to this Agreement acknowledge that a breach by
Employee of any of the terms or conditions of this Agreement will result in
irrevocable harm to the Company and that the remedies at law for such breach may
not adequately compensate the Company for damages suffered. Accordingly,
Employee agrees that in the event of such breach, the Company shall be entitled
to injunctive relief or such other equitable remedy as a court of competent
jurisdiction may provide. Nothing contained herein will be construed to limit
the Company's right to any remedies at law, including the recovery of damages
for breach of this Agreement.
12. SEVERABILITY. In any provision or part of any provision of this Agreement is
held invalid or unenforceable by a court of competent jurisdiction, such holding
shall not affect the enforceability of any other provisions or parts thereof,
and all other provisions and parts thereof shall continue in full force and
effect.
13. NO DEFENSE. The existence of any claim, demand, action or cause of action
that Employee may have against the Company, whether predicated upon this
Agreement or otherwise, shall not constitute a defense to the enforcement by the
Company of any of the covenants contained in Sections, 5, 6, 7,8, 9 or 10
hereof.
14. WAIVER. The waiver by one party of a breach of any provision of this
Agreement by the other party shall not operate or be construed as a waiver of
any subsequent breach of the same or any other provision by the other party.
15. MISCELLANEOUS. This agreement shall not be amended or modified except by a
writing executed by both parties. This Agreement shall be binding upon and inure
to the benefit of the Company and its successors and assigns. Due to the
personal nature of this Agreement, Employee shall not have the right to assign
Employee's rights or obligations under this Agreement without the prior written
consent of Company. This Agreement shall be governed by the laws of the State of
Georgia without regard to its rules governing conflicts of law. Venue shall lie
in Superior Court of Fulton County, Georgia. The parties hereto acknowledge that
such Court has the jurisdiction to interpret and enforce the provisions of this
Agreement and the parties waive any and all objections which they may have as to
personal jurisdiction or venue in any of the above Courts. This agreement and
the attached
Page 4 of 6
<PAGE> 5
Exhibit represent the entire understanding of the parties concerning the subject
matter hereof and supersede all prior communications, agreements and
understandings, whether oral or written, relating to the subject matter hereof.
All communications required or otherwise provided under this Agreement shall be
in writing and shall be deemed given when delivered to the address provided
below such party's signature (as may be amended by notice from time to time), by
hand, by courier or express mail, return receipt requested, postage prepaid.
Exhibit A, attached hereto, is incorporated herein by reference.
Page 5 of 6
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
Signed: ____________________ Date:____________
Print Name: ____________________
____________________ Date:____________
Harvey Sax
CEO HomeCom Communications, Inc.
Page 6 of 6
<PAGE> 7
IV. MISCELLANEOUS
1. This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of Georgia.
2. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original as against any party whose signature
appears thereon, and all of such counterparts shall together constitute one and
the same instrument. This Agreement shall become binding when one or more
counterparts hereof, individually or taken together, shall bear the fax
signatures of all of the parties reflected hereon as the signatories. This
Agreement may be executed and delivered by fax (telecopier); any original
signatures that are initially delivered by fax shall be physically delivered
with reasonable promptness thereafter.
3. This Agreement shall become effective on the date the Company has
received an executed counterpart of this Agreement from each of the Purchasers.
4. Neither the execution of this Agreement nor anything herein contained
is intended to be, nor shall be construed to be, an admission by the Company or
its officers and directors, First Granite Securities, Inc. or the Purchasers of
any liability to the other, now, in the past or in the future, or an admission
of the existence of facts upon which liability could be based. This Agreement
is contractual and it has been entered into to compromise disputed claims and
to avoid the uncertainty and expense of further litigation.
5. This Agreement shall constitute the full and complete agreement
between the parties concerning its subject matter and fully supersedes any and
all other prior agreements or understandings between the parties regarding the
subject matter thereto. This Agreement shall not be modified or amended except
by written instrument signed by all of the parties hereto.
Very truly yours,
HomeCom Communications, Inc.
By: /s/ Harvey Sax
-----------------------------------
Harvey Sax, President
[SIGNATURES CONTINUED ON NEXT PAGE]
<PAGE> 8
[SIGNATURES CONTAINED FROM PREVIOUS PAGE]
Accepted and agreed to by the undersigned
Purchaser:
Eurofactors International Inc.
By:
----------------------------------------
Print Name:
--------------------------------
Print Title:
-------------------------------
Attest:
-------------------------------------
Print Name:
---------------------------------
Signed, sealed and delivered in the presence of:
- --------------------------------------------
Notary Public
My commission expires:
---------------------
[NOTARIAL SEAL]
<PAGE> 9
[SIGNATURES CONTAINED FROM PREVIOUS PAGE]
Accepted and agreed to by the undersigned
Purchaser:
Beauchamp Finance
By:
----------------------------------------
Print Name:
--------------------------------
Print Title:
-------------------------------
Attest:
-------------------------------------
Print Name:
---------------------------------
Signed, sealed and delivered in the presence of:
- --------------------------------------------
Notary Public
My commission expires:
---------------------
[NOTARIAL SEAL]
<PAGE> 10
[SIGNATURES CONTAINED FROM PREVIOUS PAGE]
Accepted and agreed to by the undersigned
Purchaser:
FTS Worldwide Corporation
By:
----------------------------------------
Print Name:
--------------------------------
Print Title:
-------------------------------
Attest:
-------------------------------------
Print Name:
---------------------------------
Signed, sealed and delivered in the presence of:
- --------------------------------------------
Notary Public
My commission expires:
---------------------
[NOTARIAL SEAL]
<PAGE> 11
[SIGNATURES CONTAINED FROM PREVIOUS PAGE]
Accepted and agreed to by the undersigned
Purchaser:
COLBO
By:
----------------------------------------
Print Name:
--------------------------------
Print Title:
-------------------------------
Attest:
-------------------------------------
Print Name:
---------------------------------
Signed, sealed and delivered in the presence of:
- --------------------------------------------
Notary Public
My commission expires:
---------------------
[NOTARIAL SEAL]
<PAGE> 12
[SIGNATURES CONTAINED FROM PREVIOUS PAGE]
Accepted and agreed to by the undersigned
Purchaser:
First Granite Securities, Inc.
By:
----------------------------------------
Print Name:
--------------------------------
Print Title:
-------------------------------
Attest:
-------------------------------------
Print Name:
---------------------------------
Signed, sealed and delivered in the presence of:
- --------------------------------------------
Notary Public
My commission expires:
---------------------
[NOTARIAL SEAL]
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1
(File No. 333-42599) of our report, which includes an explanatory paragraph
relating to the uncertainty of the Company's ability to continue as a going
concern, dated March 13, 1998, on our audits of the financial statements of
HomeCom Communications, Inc. We also consent to the reference to our firm under
the caption "Experts."
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
May 14, 1998
