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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
COMMISSION FILE NUMBER 0-29204
HOMECOM COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 58-2153309
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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BUILDING 14, SUITE 100,
3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(Address of principal executive offices and zip code)
(404) 237-4646
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) and has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of November 5, 1998, there were 4,980,703 outstanding shares of the
Registrant's Common Stock, par value $.0001 per share.
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HOMECOM COMMUNICATIONS, INC.
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
(1) Balance Sheets as of September 30, 1998 and December 31,
1997...................................................... 2
(2) Statements of Operations for the three and nine months
ended September 30, 1998 and 1997......................... 3
(3) Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997............................... 4
(4) Notes to Financial Statements........................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................... 12
Signatures.................................................. 13
Exhibit Index............................................... 14
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
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SEPTEMBER 30, 1998 DECEMBER 31, 1997
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(UNAUDITED)
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,459,251 $ 3,187,948
Accounts receivable, net of allowance for uncollectible
accounts of $201,169 and $160,551 as of September 30,
1998 and December 31, 1997, respectively............... 620,159 470,839
Other receivables......................................... 163,947 --
----------- -----------
Total current assets.............................. 4,243,357 3,658,787
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 879,997 627,624
SOFTWARE DEVELOPMENT COSTS, NET............................. 8,631 31,778
DEPOSITS.................................................... 50,231 55,731
DEFERRED DEBT ISSUE COSTS................................... -- 248,359
INTANGIBLE ASSETS, NET...................................... 400,912 --
OTHER NON-CURRENT ASSETS.................................... 55,000 42,500
----------- -----------
Total assets...................................... $ 5,638,128 $ 4,664,779
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 597,031 $ 427,886
Accrued payroll liabilities............................... 263,027 264,180
Unearned revenue.......................................... 17,424 190,978
Current portion of obligations under capital leases....... 134,299 53,813
----------- -----------
Total current liabilities......................... 1,011,781 936,857
CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $122,778 AT
DECEMBER 31, 1997......................................... -- 1,577,222
OTHER LIABILITIES........................................... 66,356 119,141
OBLIGATIONS UNDER CAPITAL LEASES............................ 115,979 74,787
----------- -----------
Total liabilities................................. 1,194,116 2,708,007
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 15,000,000 shares
authorized, 4,980,703 and 2,956,396 shares issued and
outstanding at September 30, 1998 and December 31,
1997, respectively..................................... 498 295
Preferred stock, $.01 par value, 1,000,000 shares
authorized, 0 and 20,000 shares issued and outstanding
at September 30, 1998 and December 31, 1997,
respectively; participating; $0 and $2,000,000
liquidation value at September 30, 1998 and December
31, 1997, respectively................................. -- 200
Additional paid-in capital................................ 10,042,613 7,800,542
Subscriptions receivable.................................. (196,878) (337,501)
Accumulated deficit....................................... (5,402,221) (5,506,764)
----------- -----------
Total stockholders' equity........................ 4,444,012 1,956,772
----------- -----------
Total liabilities and stockholders' equity........ $ 5,638,128 $ 4,664,779
=========== ===========
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The accompanying notes are an integral part of these financial statements.
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HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
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THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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1998 1997 1998 1997
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NET SALES:
Service sales.............................. $ 553,196 $ 667,806 $2,172,225 $ 2,268,377
Equipment sales............................ 158,099 45,595 318,650 62,598
----------- ----------- ---------- -----------
Total net sales.................... 711,295 713,401 2,490,875 2,330,975
----------- ----------- ---------- -----------
COST OF SALES:
Cost of services........................... 490,076 557,799 1,351,065 1,252,507
Cost of equipment sold..................... 98,565 42,730 197,957 52,294
----------- ----------- ---------- -----------
Total cost of sales................ 588,641 600,529 1,549,022 1,304,801
----------- ----------- ---------- -----------
GROSS PROFIT................................. 122,654 112,872 941,853 1,026,174
----------- ----------- ---------- -----------
OPERATING EXPENSES:
Sales and marketing........................ 228,049 627,962 661,135 1,163,072
Product development........................ 198,973 177,961 367,778 375,977
General and administrative................. 1,208,385 1,381,769 3,510,436 2,739,374
Depreciation and amortization.............. 156,490 58,225 381,592 138,832
----------- ----------- ---------- -----------
Total operating expenses........... 1,791,897 2,245,917 4,920,941 4,417,255
----------- ----------- ---------- -----------
OPERATING (LOSS)............................. (1,669,243) (2,133,045) (3,979,088) (3,391,081)
OTHER EXPENSES (INCOME)
Gain on sale of division................... -- -- (4,402,076) --
Interest expense........................... 5,494 -- 444,023 53,665
Other expense (income), net................ (58,421) (37,096) (125,577) (56,999)
----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES............ (1,616,316) (2,095,949) 104,542 (3,387,747)
INCOME TAX PROVISION (BENEFIT)............... -- -- -- --
----------- ----------- ---------- -----------
NET INCOME (LOSS)............................ (1,616,316) (2,095,949) 104,542 (3,387,747)
PREFERRED STOCK DIVIDEND..................... -- -- (666,667) --
----------- ----------- ---------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS....... $(1,616,316) $(2,095,949) $ (562,125) $(3,387,747)
=========== =========== ========== ===========
BASIC AND DILUTED LOSS PER SHARE............. $ (0.33) $ (0.71) $ (0.14) $ (1.36)
=========== =========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING... 4,830,779 2,956,396 4,039,832 2,483,258
=========== =========== ========== ===========
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The accompanying notes are an integral part of these financial statements.
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HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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NINE MONTHS ENDED SEPTEMBER 30,
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1998 1997
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 104,542 $(3,387,747)
Adjustments to reconcile net income (loss) to cash used in
operating activities:
Depreciation and amortization.......................... 381,592 153,033
Amortization of debt discount.......................... 122,778 --
Amortization of debt issue costs....................... 283,754 --
Forgiveness of subscriptions receivable................ 140,623 149,251
Gain on sale of division............................... (4,402,076) --
Provision for bad debts................................ 140,000 194,894
Deferred rent expense.................................. (52,784) (11,004)
Change in operating assets and liabilities:
Accounts receivable.................................. (216,146) (363,803)
Other receivables.................................... (163,947) --
Accounts payable and accrued expenses................ 176,343 (81,001)
Accrued payroll liabilities.......................... (1,153) (165,564)
Unearned revenue..................................... (181,542) 24,189
Other................................................ (28,167) (18)
----------- -----------
Net cash used in operating activities............. (3,696,183) (3,487,770)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment............. (345,278) (364,265)
Proceeds from sale of division............................ 4,500,000 --
Other..................................................... (46,540) (29,155)
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Net cash provided by (used in) investing
activities...................................... 4,108,182 (393,420)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs........................ (28,937) (438,867)
Payment of deferred debt issue costs...................... (35,395) (127,500)
Proceeds of issuance of convertible debentures............ 1,700,000
Proceeds from notes payable to stockholders............... -- 490,000
Repayment of notes payable to stockholders................ -- (1,335,581)
Repayment of note payable................................. -- (48,520)
Repayment of capital lease obligations.................... (76,364) (33,042)
Proceeds from sale of stock, net of underwriting discounts
and commissions........................................ -- 5,520,000
----------- -----------
Net cash provided by (used in) financing
activities...................................... (140,696) 5,726,490
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 271,303 1,845,300
CASH AND CASH EQUIVALENTS at beginning of period............ 3,187,948 332,377
----------- -----------
CASH AND CASH EQUIVALENTS at end of period.................. $ 3,459,251 $ 2,177,677
=========== ===========
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON CASH INVESTING AND
FINANCING ACTIVITIES:
During the nine month periods ended September 30, 1998 and 1997, capital
lease obligations of $198,043 and $21,800, respectively, were incurred when the
Company entered into leases on computer equipment.
During the nine months ended September 30, 1998, $1,700,000 of convertible
debentures were converted into 961,460 shares of common stock.
During the nine months ended September 30, 1998, the Company issued 351,391
shares of common stock for the net assets of The Insurance Resource Center, Inc.
During the nine months ended September 30, 1998, 20,000 shares of preferred
stock were converted into 711,456 shares of common stock.
The accompanying notes are an integral part of these financial statements.
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HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Article 10 of Regulation S-X of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the financial position and results of operations of
HomeCom Communications, Inc. (the "Company") for the interim periods presented.
All such adjustments are of a normal and recurring nature. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K.
2. SALE OF HOSTAMERICA DIVISION
On June 9, 1998, HomeCom sold substantially all of the assets of
HostAmerica, its Web hosting division for non-financial services clients, to
Sage Acquisition Corp. for $4,500,000. Pursuant to the terms of the Asset
Purchase Agreement (the "Agreement"), the Company retained all of the accounts
receivable of HostAmerica existing as of May 31, 1998, certain hosting accounts,
and the right to perform hosting services in the future for companies engaged in
the financial services industry. The Agreement required the deposit of $250,000
of the proceeds to be held in escrow until May 1, 1999, for the purpose of
indemnifying Sage Acquisition Corp. for representations and warranties made by
the Company under the Agreement. Revenues from HostAmerica were $533,159 for the
nine months ended September 30, 1998.
3. ACQUISITION OF THE INSURANCE RESOURCE CENTER, INC.
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. IRC provides Internet development and hosting services
to the insurance industry. The Company has accounted for this acquisition as a
purchase transaction. Approximately $457,000 has been recorded as an intangible
asset and is being amortized over three years.
4. DEFINITIVE AGREEMENT AND PLAN OF MERGER WITH FIRST INSTITUTIONAL MARKETING,
INC.
On November 6, 1998 the Company signed a definitive agreement and plan of
merger (the "Merger Agreement") to acquire, among other things, all of the
outstanding shares of First Institutional Marketing, Inc. and certain of its
affiliates ("FIMI") for 1,252,174 shares of common stock. In addition, the
Company entered into employment agreements for an initial term of 3 years with
the three principals of FIMI, calling for them to continue in their current
roles for the acquired companies. The Merger Agreement is subject to certain
conditions, including regulatory and other approvals, as well as approval by the
Company's shareholders. The two companies expect final closing of the
transaction to be completed in approximately 60 to 90 days. FIMI's core business
is focused on the commercial banking industry and consists of introducing banks
to the sale of insurance and investment products, and training bank personnel to
market and sell leading insurance and investment products to their customers.
The Company intends to account for this acquisition as a purchase transaction.
5. BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No.128, "Earnings Per Share", effective December 31, 1997. Earnings (loss) per
common share ("EPS") was computed by dividing net income (loss) available to
common shareholders by the weighted average number of shares of common stock
outstanding for the period then ended. The effect of the Company's stock options
and convertible
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HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
securities was excluded from the computations for the three and nine months
ended September 30, 1998 and 1997, as it is antidilutive.
6. INCOME TAXES
There was no provision for or cash payment of income taxes for the three or
nine months ended September 30, 1998 and 1997, respectively, as the Company
anticipates a net taxable loss for the year ended December 31, 1998.
7. OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, some matters discussed
in this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company notes that a variety of
risk factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. Reference is made in particular to the
discussion set forth below in this report and set forth in the Company's Annual
Report on Form 10-K and to the Company's Registration Statements on Form S-1
(File Nos. 333-12219, 333-42599, 333-45383, and 333-56795).
GENERAL
HomeCom Communications, Inc. develops and markets specialized software
applications, products and services that enable consumers and financial
institutions to use the Internet and Intranets to obtain and communicate
important business information, conduct commercial transactions and improve
business productivity. HomeCom's principal mission is to establish an electronic
channel to consumers and business by providing secure, innovative,
Internet-based solutions to the banking, insurance and brokerage industries. As
a technology provider to this electronic channel, HomeCom intends to continually
enrich the content, host and maintain its own and third party software
applications, and provide strategic consulting to financial institutions on
electronic-commerce and marketing. HomeCom derives revenue from application
development, software licensing, and hosting fees.
HomeCom's solutions, which are built around Industry standards, are
designed to enable their clients to increase revenues, achieve distinct
competitive advantages, reduce costs, and improve customer support. The Company
employs full time multimedia artists, computer programmers, Internet security
experts, and network engineers. HomeCom provides Internet/Intranet solutions in
three areas: (i) the design, development and integration of customized software
applications, including World Wide Web site development and related network
outsourcing; (ii) the integration of HomeCom's existing software applications
into the client's operations; and (iii) security consulting and integration
services.
HomeCom employs a team of highly trained Internet/Intranet software
developers and multimedia and graphics professionals who design and develop
specialized Internet/Intranet software applications. These applications enable
companies to obtain and communicate vital business information, such as sales
reports, order status systems, employee directories and client account
information. The Company works closely with its customers to analyze and design
Internet-based software solutions that facilitate commercial transactions and
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 and Intranet applications and requirements. In
particular, the Company plans to leverage this knowledge to continue to develop
additional Internet-enabled applications for the financial services industry.
The Company has developed several advanced software products for the
banking industry. Personal Internet Banker(TM) and Harvey(TM)are a suite of
software modules which provide a scaleable financial software package that
enable a bank's customers to maintain personal banking and record their
preferences for Internet banking. The Harvey(TM) product provides one-to-one
marketing and banner advertising management based on expert financial rules set
that can be configured by the client. In addition, 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. It is also being designed to provide virtual
investor conferences and bulletin boards. The Company's Marketplace product
facilitates the creation and updating of an on-line store or catalog.
HomeCom's Internet security division ("HISS") provides advanced security
integration consulting services and develops Internet applications with high
levels of integrated security. HISS is staffed by Internet
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software and integration security consultants who possess a broad range of
Internet and Intranet security applications and integration experience with both
commercial and government users. HomeCom intends to market these advanced
services and applications both as part of a total package of Internet conversion
services and as a single service. This division's objective is to become a
leading provider of integrated security services and applications to large
business enterprises and to provide security services and integration to
HomeCom's clients.
The Company markets its products and services through its direct sales
force, print advertising and its own Web site. The Company also generates
customer leads through its business partner relationships with leading
technology companies such as AT&T, Microsoft, Netscape and Unisys.
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. 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. Moreover, unanticipated variations in the number and
timing of the Company's projects or in employee utilization rates may cause
significant variations in revenues in any particular quarter. An unanticipated
termination of a major project, a client's decision not to pursue a new project
or to proceed to succeeding stages of a current project, or the completion
during a quarter of several major client projects, could require the Company to
pay underutilized employees and therefore have a material adverse effect on the
Company's results of operations and financial condition.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 Compared to Three Months Ended September
30, 1997
Net Sales. Net sales decreased 0.3% from $713,401 in the third quarter of
1997 to $711,295 in the third quarter of 1998. Revenues from service sales
decreased 17.2% from $667,806 in the third quarter of 1997 to $553,196 in the
third quarter of 1998. This decrease of $114,610 is primarily attributable to
decreases in hosting revenues of approximately $190,000 due to the sale of
HostAmerica in June 1998, offset by increases in security consulting revenues of
approximately $33,000 and web applications development revenues of approximately
$43,000. Revenue from equipment sales increased from $45,595 in the third
quarter of 1997 to $158,099 in the third quarter of 1998. This increase of
$112,504 was attributable to increased sales of security hardware and software.
Cost of Sales. Cost of sales for services includes salaries for
programmers, technical staff and customer support. Cost of sales for services
decreased from $557,799, or 78.2% of revenues in the third quarter of 1997 to
$490,076, or 68.9% of revenues in the third quarter of 1998, reflecting
decreased service sales, primarily as a result of the sale of HostAmerica in
June 1998.
Gross Profit. Gross profit increased by $9,782 from $112,872 in the third
quarter of 1997 to $122,654 in the third quarter of 1998, primarily as a result
of increased product sales, offset by lower margins on service revenues due
largely to the sale of HostAmerica in June 1998. Gross profit margins increased
from 15.8% during the third quarter of 1997 to 17.2% during the third quarter of
1998. This increase as a percentage of revenues primarily reflects increased
margins on sales of security hardware and software.
Sales and Marketing. Sales and marketing expenses include salaries,
variable commissions and bonuses for the sales force, advertising and
promotional marketing materials, travel and telephone charges. Sales and
marketing expenses decreased 63.7% from $627,962 in the third quarter of 1997 to
$228,049 in the third quarter of 1998. This decrease was primarily attributable
to lower advertising costs. As a percentage of revenues, these expenses
decreased from 88.0% of revenues in the third quarter of 1997 to 32.1% of
revenues in the third quarter of 1998.
Product Development. Product development expenses consist of personnel
costs required to conduct the Company's product development effort. Management
believes that continuing investments in product development are required to
compete effectively in the Company's industry. Total expenditures for product
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development were $198,973, or 28.0% of net sales in the third quarter of 1998.
This compares to total product development expenditures of $177,961, or 24.9% of
sales in the third quarter of 1997.
General and Administrative. General and administrative expenses include
salaries for administrative personnel, rents, telephone charges, insurance and
other administrative expenses. General and administrative expenses decreased
from $1,381,769 in the third quarter of 1997 to $1,208,385 in the third quarter
of 1998. As a percentage of net sales, these expenses decreased from 193.7% in
the third quarter of 1997 to 169.9 % in the third quarter of 1998. This decrease
as a percentage of net sales primarily reflects decreases in operational and
administrative support personnel.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases, and intangible assets. Depreciation and
amortization increased from $58,225, or 8.2% of revenues in the third quarter of
1997 to $156,490, or 22.0% of revenues in the third quarter of 1998, reflecting
increased expenditures on capital equipment and amortization of intangible
assets associated with the acquisition of IRC. The Company expects additional
capital investments during the remainder of 1998 as it continues to develop the
infrastructure needed to support higher levels of operations. However, the
Company may choose to forego additional capital investments if sales do not
increase to the levels targeted by management.
Interest Expense. Interest expense increased from $0 in the third quarter
of 1997 to $5,494 during the third quarter of 1998, principally reflecting
increased interest on capital lease obligations.
Nine Months Ended September 30, 1998 Compared to Nine Months Ended September
30, 1997
Net Sales. Net sales increased 6.9% from $2,330,975 in the first nine
months of 1997 to $2,490,875 in the first nine months of 1998. Revenues from
service sales decreased 4.2% from $2,268,377 in the first nine months of 1997 to
$2,172,225 in the first nine months of 1998 due to decreased web applications
development revenues of approximately $246,000, offset by increased security
consulting revenues of approximately $125,000. Revenue from equipment sales
increased from $62,598 in the first nine months of 1997 to $318,650 in the first
nine months of 1998. This increase of $256,052 was attributable to increased
sales of security hardware and software.
Cost of Sales. Cost of sales for services includes salaries for
programmers, technical staff and customer support. Cost of sales for services
increased from $1,252,507, or 53.7% of revenues in the first nine months of 1997
to $1,351,065, or 54.2% of revenues in the first nine months of 1998, reflecting
increased costs incurred by the Company for technical personnel hired in advance
of anticipated revenue growth, offset by costs eliminated due to the sale of
HostAmerica in June 1998.
Gross Profit. Gross profit decreased by $84,321 from $1,026,174 in the
first nine months of 1997 to $941,853 in the first nine months of 1998. Gross
profit margins decreased from 44.0% during the first nine months of 1997 to
37.8% during the first nine months of 1998. These decreases primarily reflect
increased costs incurred by the Company for technical personnel hired in advance
of anticipated revenue growth as well as lower margins due to the sale of
HostAmerica in June 1998.
Sales and Marketing. Sales and marketing expenses include salaries,
variable commissions and bonuses for the sales force, advertising and
promotional marketing materials, travel and telephone charges. Sales and
marketing expenses decreased 43.2% from $1,163,072 in the first nine months of
1997 to $661,135 in the first nine months of 1998. This decrease was primarily
attributable to a decrease in advertising and marketing activities. As a
percentage of revenues, these expenses decreased from 49.9% of revenues in the
first nine months of 1997 to 26.5% of revenues in the first nine months of 1998.
Product Development. Product development expenses consist of personnel
costs required to conduct the Company's product development effort. Management
believes that continuing investments in product development are required to
compete effectively in the Company's industry. Total expenditures for product
development were $367,778, or 14.8% of net sales in the first nine months of
1998, of which none were capitalized. This compares to total product development
expenditures of $405,132, or 17.4% of sales, in the first nine months of 1997,
of which $29,155 were capitalized.
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General and Administrative. General and administrative expenses include
salaries for administrative personnel, rents, telephone charges, insurance and
other administrative expenses. General and administrative expenses increased
from $2,739,374 in the first nine months of 1997 to $3,510,436 in the first nine
months of 1998. As a percentage of net sales, these expenses increased from
117.5% of net sales in the first nine months of 1997 to 140.9% of net sales in
the first nine months of 1998. This increase as a percentage of net sales
primarily reflects increases for operational and administrative support
personnel incurred to support anticipated growth, professional services for
investor relations, and accounting and legal support for the Company's
securities filings and acquisition and divestiture activities.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases, and goodwill. Depreciation and amortization
increased from $138,832, or 6.0% of revenues in the first nine months of 1997 to
$381,592, or 15.3% of revenues in the first nine months of 1998, reflecting
increased expenditures on capital equipment and the IRC acquisition. The Company
expects additional capital investments during 1998 as it continues to develop
the infrastructure needed to support higher levels of operations. However, the
Company may choose to forego additional capital investments if sales do not
increase to the levels targeted by management.
Other Income. During the nine months ended September 30, 1998, the Company
recorded a gain on the sale of its HostAmerica division of $4,402,076.
Interest Expense. Interest expense increased from $53,665 in the first
nine months of 1997 to $444,023 during the first nine months of 1998,
principally reflecting the amortization of the discount ($122,778) and debt
issue costs ($283,754) associated with the Company's 5% convertible debentures
issued in September 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company has substantially limited unused sources of capital. As of
September 30, 1998, the Company had net working capital of approximately $3.2
million. Management has undertaken steps to address the Company's ongoing cash
requirements including concentrating 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 additional debt and equity offerings.
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 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 business 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 $3,696,183 for the nine-month
period ended September 30, 1998. The Company has primarily financed its
operations to date through public and private sales of equity securities, and
loans from its principal stockholders and affiliates. 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
10
<PAGE> 12
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. Net proceeds from the sale of the debentures were
approximately $1.5 million. In December 1997, the Company issued 20,000 shares
of its Series A preferred stock for aggregate net proceeds of approximately $1.8
million. During 1998, the Company's 5% convertible debentures and its Series A
preferred stock were converted into 961,460 and 711,456 shares of common stock,
respectively. In June 1998, the Company sold its HostAmerica division to Sage
Acquisition Corp. for net proceeds of approximately $4,500,000.
The Company spent $345,278 and $364,265 during the nine-month periods ended
September 30, 1998 and 1997, 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 September 30, 1998 consist primarily of leases on its Atlanta,
Vienna, Virginia and New York City facilities.
Trade accounts receivable, net of allowance for doubtful accounts, totaled
$620,159 as of September 30, 1998. 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.
YEAR 2000 READINESS
Many existing computer programs were originally designed to use only two
digits to identify a year in date fields. As a result, date-sensitive software
applications may recognize a date using "00" as the year 1900 rather than the
year 2000. If not corrected, these applications could fail or produce erroneous
results when working with dates in the year 2000 and beyond. If not properly
addressed, Year 2000 issue could have a material effect on the Company's
financial position and future operating results. The Company primarily relies on
industry standard operating systems and applications for its internal systems
rather than proprietary software, and based on its review of its significant
internal programs and systems, has determined that they are substantially Year
2000 compliant. In addition, the Company is seeking confirmation from its
primary telecommunications service providers that they are developing and
implementing plans to become Year 2000 compliant. Information received to date
has indicated that such respondents are in the process of implementing
remediation procedures to ensure that their computer systems, services, or
products are Year 2000 compliant by December 31, 1999. However, the Company has
not undertaken an in-depth evaluation of such providers in relation to the Year
2000 issue. In addition, the Company cannot predict whether or not all of these
vendors' programs will be successful. To the extent that these vendors fail to
resolve any Year 2000 issues on a timely basis or in a manner that is compatible
with the Company's systems, that failure could have a material adverse effect on
the Company's financial position and future operating results. The Company is
using internal resources to identify and correct its systems for Year 2000
compliance, and expects any incremental costs associated with addressing this
issue to be minimal. The Company does not believe that the costs of addressing
Year 2000 issues will be material to its future operating results or financial
position.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
11
<PAGE> 13
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
None.
12
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HomeCom Communications, Inc.
<TABLE>
<S> <C>
Date: November 13, 1998 /s/ HARVEY SAX
--------------------------------------------------------
President and Chief Executive Officer
Date: November 13, 1998 /s/ NORM SMITH
--------------------------------------------------------
Vice President Finance and Administration
(Principal Financial Officer)
</TABLE>
13
<PAGE> 15
HOMECOM COMMUNICATIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<C> <S> <C>
27.1 -- Financial Data Schedule (For SEC Use only) 15
</TABLE>
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMECOM COMMUNICATIONS, INC. FOR THE NINE-MONTH PERIOD
ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 3,459,251
<SECURITIES> 0
<RECEIVABLES> 985,275
<ALLOWANCES> 201,169
<INVENTORY> 0
<CURRENT-ASSETS> 4,243,357
<PP&E> 1,468,951
<DEPRECIATION> 588,954
<TOTAL-ASSETS> 5,638,128
<CURRENT-LIABILITIES> 1,011,781
<BONDS> 0
0
0
<COMMON> 498
<OTHER-SE> 4,443,514
<TOTAL-LIABILITY-AND-EQUITY> 5,638,128
<SALES> 318,650
<TOTAL-REVENUES> 2,490,875
<CGS> 197,957
<TOTAL-COSTS> 1,549,022
<OTHER-EXPENSES> 4,773,266
<LOSS-PROVISION> 147,675
<INTEREST-EXPENSE> 444,023
<INCOME-PRETAX> 104,542
<INCOME-TAX> 0
<INCOME-CONTINUING> 104,542
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 104,542
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
