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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
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|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER: 0-29204
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HOMECOM COMMUNICATIONS, INC.
(exact name of registrant specified in its charter)
DELAWARE 58-2153309
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
BUILDING 14, SUITE 100
3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(Address of principal executive offices and zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (404) 237-4646
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered
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Common Stock, par value $0.0001 per share The Nasdaq SmallCap(TM) Market
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Securities registered pursuant to Section 12(g) of the Act:
None
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) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average of the closing bid and ask quotations
for the Common Stock on March 23, 1998 as reported by The Nasdaq Stock Market,
was approximately $3,540,000. The shares of Common Stock held by each officer
and director and by each person known to the company who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 23, 1998, Registrant
had outstanding 3,224,013 shares of Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement to be filed on or about
April 30, 1998, for the Annual Meeting of Shareholders to be held on or about
June 2, 1998 is incorporated by reference in Part III of this Form 10-K to the
extent stated herein.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION PAGE NO.
<S> <C> <C>
PART I
1. BUSINESS........................................................... 2
2. PROPERTIES......................................................... 10
3. LEGAL PROCEEDINGS.................................................. 11
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 11
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS.............................................. 11
6. SELECTED FINANCIAL DATA............................................ 11
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.............................. 12
8. FINANCIAL STATEMENTS............................................... 21
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.............................. 38
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................. 38
11. EXECUTIVE COMPENSATION............................................. 38
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT............................................ 39
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..................... 39
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.......................................... 39
SIGNATURES......................................................... 40
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PART I
ITEM 1. 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
ofbusiness 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.
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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 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.
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WEB SITES
A Web site is a collection of one or more electronic documents or "Web
pages," which may contain graphics, text, audio and video information, which is
available to a visitor accessing the Web site. Web sites can contain from one to
hundreds of pages, and can be searched, retrieved and viewed through the use of
widely available "browsers," such as Netscape Navigator or Microsoft Internet
Explorer. Using Web browser software, computer users can connect to a Web site
by entering the site's unique electronic Web address, known as its Universal
Resource Locator ("URL"). Users can navigate the Web sites by utilizing
hypertext link capabilities contained in Web pages. Hypertext links are active
areas on a Web page which, when selected by a user, automatically identify and
display a specific page, which can be located anywhere else on the Web, thus
enabling users to move from one Web page to another without specifying the
underlying URL address. Web sites can vary significantly in complexity and
interactivity. A simple Web site may display only text, and more complex sites
may display colored text, graphics, pictures, sound, animation, video and
database information.
The Company believes that increased processor speed, higher
telecommunications bandwidth (resulting in increased transmission speed) and the
development of software standards have led to the growing acceptance of the
Internet as a communications tool. As a result, many businesses are choosing to
re-engineer their distribution, logistics, customer service and marketing
functions into "Information Depots" accessible through their Web sites.
Consequently, the Company believes that there is an expanding market for
developers of sophisticated, graphically enhanced, interactive Web sites.
ENTERPRISE NETWORKS AND INTRANETS
As network technology has advanced, business-wide networking has
evolved. Organizations have developed local area networks ("LANs") and have
connected geographically dispersed LANs into wide area networks ("WANs"). Many
LANs employ proprietary communications software, such as Novell NetWare. Today,
in addition to proprietary protocols, an increasing number of businesses are
using the Internet protocol TCP/IP for communications. TCP/IP facilitates
communications over internal networks using Internet software tools and
applications. An Intranet is a TCP/IP network inside a company that links the
company's people and information in a way that makes information more accessible
and facilitates navigation through all the resources and applications of the
company's computing environment.
Enterprise networks have increasingly used high-cost leased data lines
to create private and secure LANs and WANs. Internet protocol network software
now allows organizations to use the Internet for a lower-cost communications
system by reducing long distance and leased line charges. Businesses now can
expand the reach of and access to their internal information systems and
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.
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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 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:
DEVELOPMENT AND MARKETING OF 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, 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.
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DEVELOPMENT AND INTEGRATION OF 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 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.
EXPANSION 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. However, the Company has
not entered into any 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.
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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
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 "Properties."
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. 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. 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.
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 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
numerouslarge 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
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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),"
"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 March 15, 1998, the Company employed 56 full-time employees, of whom
37 were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 7 were marketing and sales personnel
and 12 were involved in administration and finance.
9
<PAGE> 11
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 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.
ITEM 2. PROPERTIES.
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
10
<PAGE> 12
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.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material legal proceedings. From time
to time, the Company is involved in various routine legal proceedings incidental
to the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
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>
1997 HIGH LOW
- ----------------------------------------------- ------ ------
<S> <C> <C>
Second quarter (since May 8, 1997) ............ $ 7.25 $ 6.00
Third quarter ................................. 6.50 2.13
Fourth quarter ................................ 15.56 2.63
</TABLE>
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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of HomeCom Communications, Inc.
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes.
<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 ........ $ (0.01) $ (.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> 13
ITEM 7. 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 in the Company's Registration Statements
on Forms S-1 (File Nos. 333-12219 and 333-42599).
GENERAL
The Company generates revenues through Internet and Intranet customized
software application development, web site development, web site hosting
services, computer hardware resales, consulting services and fees charged for
the maintenance of web sites. Most customized software application projects are
generally completed within six to eight weeks, although certain past, current
and future projects have taken and are expected to take longer to complete.
Revenues on customized application and web site development 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, expenses substantially exceeded net sales as the Company
continued to develop its products and services, institute its marketing and
sales programs and implement the operational and administrative support
structure necessary to support its business. The Company anticipates that it
will continue to incur losses for an indefinite period as it develops its
products and markets and continues to build its corporate infrastructure.
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 period are substantially affected by the amount of services
requested by its customers. An unanticipated termination of a major project, a
client's decision not to pursue a new project or proceed to succeeding stages of
a current project, or the completion during a quarter of several major client
projects, could require the Company to pay underutilized employees and therefore
have a material adverse effect on the Company's results of operations and
financial condition.
RESULTS OF OPERATIONS
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.
12
<PAGE> 14
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 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.
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.
13
<PAGE> 15
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.
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 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.
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<PAGE> 16
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.
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<PAGE> 17
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.
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.
20
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Accountants................................................. 22
Balance Sheets as of December 31, 1996 and 1997................................... 23
Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1997....................................... 24
Statements of Stockholders' Equity (Deficit) for Each of
the Three Years in the Period Ended December 31, 1997............................. 25
Statements of Cash Flows for Each of the Three Years in........................... 26
the Period Ended December 31, 1997
Notes to Financial Statements..................................................... 27
</TABLE>
21
<PAGE> 19
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
22
<PAGE> 20
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
ASSETS: DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- -----------------
<S> <C> <C>
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
=========== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
<S> <C> <C>
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.
23
<PAGE> 21
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.
24
<PAGE> 22
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
======== ========= ========== ========= ===========
<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.
25
<PAGE> 23
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
26
<PAGE> 24
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.
27
<PAGE> 25
SOFTWARE DEVELOPMENT COSTS, NET
The Company capitalizes internal software development costs in
accordance with Statement of Financial Accounting Standards No. 86, "Accounting
For Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed". The
capitalization of these costs begins when a product's technological feasibility
has been established and ends when the product is available for general release
to customers. Amortization is computed on an individual product basis and is the
greater of (a) the ratio of current gross revenues for a product to the total
current and anticipated future gross revenues for the product or (b) the
straight-line method over the estimated economic life of the product.
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
28
<PAGE> 26
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.
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:
29
<PAGE> 27
<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>
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.
30
<PAGE> 28
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1997:
<TABLE>
<CAPTION>
Capital Leases Operating 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 1997. The five most significant customer
balances represented approximately 39% and 26% of the accounts receivable
balance at December 31, 1996 and 1997, respectively.
31
<PAGE> 29
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 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
32
<PAGE> 30
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 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
33
<PAGE> 31
"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>
Option activity under all of the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1996 1997
------------------------------ -----------------------------
Weighted-
Weighted-Average Average Exercise
Shares Exercise Price Shares 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>
34
<PAGE> 32
The following table summarizes information about fixed options
outstanding at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE REMAINING CONTRACTUAL
PRICES SHARES 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.
35
<PAGE> 33
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 of 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.
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.
37
<PAGE> 34
11. SUBSEQUENT EVENTS (UNAUDITED):
Conversion of Debentures
As of March 26, 1998 the Company had received notices of conversion for
$700,000 of the Company's 5% Convertible Debentures, issued in September 1997
and totalling $1,700,000. Had these Debentures been converted prior to December
31, 1997, total liabilities and total stockholders' equity at that date would
have been approximately $2,059,000 and $2,504,000, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information required by this item is incorporated by reference
from the information contained in the Company's Proxy Statement for the Annual
Meeting of Shareholders expected to be filed with the Commission on or about
April 30, 1998 under the captions "Directors and Executive Officers."
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be included in the
Company's Proxy Statement for the Annual Meeting of Shareholders expected to be
filed with the Commission on or about April 30, 1998 under the caption
"Executive Compensation" and is incorporated by reference herein.
38
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders expected to be filed
with the Commission on or about April 30, 1998 under the caption "Security
Ownership of Certain Beneficial Owners and Management" and is incorporated by
reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this item will be included in the Company's
Proxy Statement for the Annual Meeting of Shareholders expected to be filed
with the Commission on or about April 30, 1998 under the caption "Certain
Transactions" and is incorporated by reference herein.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements, notes thereto and report of
independent accountants thereon, filed as part hereof, are listed in
Item 8.
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement scheduled have been omitted as the required
information is not applicable or the required information has been
incorporated in the consolidated financial statements and related
notes incorporated by reference herein.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
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.*
4.3 -- Form of Warrant.*
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.*
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***
10.27 -- 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.***
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.****
21.1 -- List of Subsidiaries.***
27.1-27.5-- Financial Data Schedules (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-Q/A of the Registrant filed with the Commission on December 18, 1997.
*** 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 the Form
S-1 Registration Statement of the Registrant filed with the Commission on
February 2, 1998.
(B) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K with respect to a press release
regarding the Company's completion of a $1.7 Million Private Placement, Cost
Cutting Measures and Larger than Expected Loss for the Third Quarter of 1997 on
October 9, 1997.
39
<PAGE> 36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Harvey W. Sax
-------------------------
Harvey W. Sax
President and
Date: March 31, 1998 Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Harvey W. Sax President; Chief Executive March 31, 1998
------------------------- Officer; Director
Harvey W. Sax
/s/ Carl Peede Senior Vice President and Chief March 31, 1998
------------------------- Operating Officer
Carl Peede
/s/ Nat Stricklen Vice President - Sales & March 31, 1998
------------------------- Marketing; Director
Nat Stricklen
/s/ Norman H. Smith Vice President - Chief Financial March 31, 1998
------------------------- Officer
Norman H. Smith
/s/ Krishan Puri Executive Vice President; March 31, 1998
------------------------- Director
Krishan Puri
/s/ Gia Bokuchava Chief Technical Officer; March 31, 1998
------------------------- Director
Gia Bokuchava, Ph.D.
/s/ Roger J. Nebel Vice President; Director March 31, 1998
-------------------------
Roger J. Nebel
/s/ Greg Abowd Director March 31, 1998
-------------------------
Greg Abowd, Ph.D.
/s/ Claude A. Thomas Director March 31, 1998
-------------------------
Claude A. Thomas
</TABLE>
40
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMECOM COMMUNICATIONS, INC. FOR THE TWELVE-MONTH PERIOD
ENDED DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 332,377
<SECURITIES> 0
<RECEIVABLES> 595,099
<ALLOWANCES> 106,845
<INVENTORY> 0
<CURRENT-ASSETS> 821,252
<PP&E> 448,050
<DEPRECIATION> 88,790
<TOTAL-ASSETS> 1,726,522
<CURRENT-LIABILITIES> 2,125,934
<BONDS> 102,709
0
0
<COMMON> 192
<OTHER-SE> (620,861)
<TOTAL-LIABILITY-AND-EQUITY> 1,726,522
<SALES> 185,977
<TOTAL-REVENUES> 2,298,855
<CGS> 128,938
<TOTAL-COSTS> 675,347
<OTHER-EXPENSES> 2,100,013
<LOSS-PROVISION> 104,360
<INTEREST-EXPENSE> 51,272
<INCOME-PRETAX> (625,583)
<INCOME-TAX> 0
<INCOME-CONTINUING> (625,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (625,583)
<EPS-PRIMARY> (0.34)
<EPS-DILUTED> (0.34)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMECOM COMMUNICATIONS, INC. FOR THE THREE-MONTH PERIOD
ENDED MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 9,435
<SECURITIES> 0
<RECEIVABLES> 900,639
<ALLOWANCES> 96,345
<INVENTORY> 0
<CURRENT-ASSETS> 816,095
<PP&E> 493,763
<DEPRECIATION> 126,816
<TOTAL-ASSETS> 1,804,868
<CURRENT-LIABILITIES> 2,594,261
<BONDS> 100,224
0
0
<COMMON> 192
<OTHER-SE> (995,511)
<TOTAL-LIABILITY-AND-EQUITY> 1,804,868
<SALES> 16,032
<TOTAL-REVENUES> 909,177
<CGS> 8,787
<TOTAL-COSTS> 340,893
<OTHER-EXPENSES> 933,783
<LOSS-PROVISION> (10,500)
<INTEREST-EXPENSE> 20,524
<INCOME-PRETAX> (374,650)
<INCOME-TAX> 0
<INCOME-CONTINUING> (374,650)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (374,650)
<EPS-PRIMARY> (0.19)
<EPS-DILUTED> (0.19)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMECOM COMMUNICATIONS, INC. FOR THE SIX-MONTH PERIOD
ENDED JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 2,519,019
<SECURITIES> 0
<RECEIVABLES> 1,118,230
<ALLOWANCES> 150,557
<INVENTORY> 0
<CURRENT-ASSETS> 3,523,374
<PP&E> 680,361
<DEPRECIATION> 169,397
<TOTAL-ASSETS> 4,195,718
<CURRENT-LIABILITIES> 1,120,483
<BONDS> 0
0
0
<COMMON> 295
<OTHER-SE> 2,984,828
<TOTAL-LIABILITY-AND-EQUITY> 4,195,718
<SALES> 17,003
<TOTAL-REVENUES> 1,617,574
<CGS> 9,564
<TOTAL-COSTS> 704,272
<OTHER-EXPENSES> 2,126,209
<LOSS-PROVISION> 45,129
<INTEREST-EXPENSE> 53,665
<INCOME-PRETAX> (1,291,798)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,291,798)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,291,798)
<EPS-PRIMARY> (0.57)
<EPS-DILUTED> (0.57)
</TABLE>
<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, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 2,177,677
<SECURITIES> 0
<RECEIVABLES> 876,218
<ALLOWANCES> 219,055
<INVENTORY> 0
<CURRENT-ASSETS> 2,835,476
<PP&E> 834,115
<DEPRECIATION> 227,276
<TOTAL-ASSETS> 3,723,473
<CURRENT-LIABILITIES> 873,606
<BONDS> 0
0
0
<COMMON> 295
<OTHER-SE> 1,604,797
<TOTAL-LIABILITY-AND-EQUITY> 3,723,473
<SALES> 62,598
<TOTAL-REVENUES> 2,330,975
<CGS> 52,294
<TOTAL-COSTS> 1,026,174
<OTHER-EXPENSES> 4,222,361
<LOSS-PROVISION> 194,894
<INTEREST-EXPENSE> 53,665
<INCOME-PRETAX> (3,387,747)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,387,747)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,387,747)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> (1.36)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMECOM COMMUNICATIONS, INC. FOR THE TWELVE-MONTH PERIOD
ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,187,948
<SECURITIES> 0
<RECEIVABLES> 631,390
<ALLOWANCES> 160,551
<INVENTORY> 0
<CURRENT-ASSETS> 3,658,787
<PP&E> 954,605
<DEPRECIATION> 326,981
<TOTAL-ASSETS> 4,664,779
<CURRENT-LIABILITIES> 936,857
<BONDS> 0
0
1,309,252
<COMMON> 295
<OTHER-SE> 647,225
<TOTAL-LIABILITY-AND-EQUITY> 4,664,779
<SALES> 86,322
<TOTAL-REVENUES> 2,878,628
<CGS> 68,974
<TOTAL-COSTS> 1,714,620
<OTHER-EXPENSES> 5,350,173
<LOSS-PROVISION> 244,894
<INTEREST-EXPENSE> 543,420
<INCOME-PRETAX> (4,881,181)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,881,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,881,181)
<EPS-PRIMARY> (1.88)
<EPS-DILUTED> (1.88)
</TABLE>
