<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 30, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
HOMECOM COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
---------------------
<TABLE>
<S> <C> <C>
DELAWARE 7371 58-2153309
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation Classification Code Number) Identification No.)
</TABLE>
BUILDING 14, SUITE 100, 3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(404) 237-4646
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------------
HARVEY W. SAX
CHIEF EXECUTIVE OFFICER
HOMECOM COMMUNICATIONS, INC.
BUILDING 14, SUITE 100, 3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(404) 237-4646
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
COPIES TO:
OBY T. BREWER III, ESQUIRE
MORRIS, MANNING & MARTIN, L.L.P.
1600 ATLANTA FINANCIAL CENTER
3343 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326
(404) 233-7000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================================
PROPOSED MAXIMUM
OFFERING PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE PRICE PER AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) SECURITY(2) OFFERING PRICE(2) REGISTRATION FEE(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.0001......... 2,004,310 $3.50 $7,015,085 $2,069.45
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</TABLE>
(1) The number of shares of Common Stock registered hereby represents (i)
1,379,310 shares of Common Stock that may be issued upon conversion of an
aggregate 20,000 shares of the Company's Series A Convertible Preferred
Stock; (ii) 125,000 shares of Common Stock issuable upon the exercise of
warrants granted in connection with the issuance of the Series A Preferred
Stock; (iii) 100,000 shares of Common Stock issuable upon the exercise of
warrants granted to the Company's underwriter in connection with its initial
public offering; and (iv) 400,000 shares of Common Stock issuable upon the
exercise of warrants granted by the Company in connection with the sale of
an aggregate $1,700,000 principal amount of the Company's 5% Convertible
Debentures due September 22, 2000. Pursuant to Registration Rights
Agreements between the Company and the holders of the Series A Preferred
Stock, the Company has agreed to register 1,379,310 shares of Common Stock.
Following conversion in full of the Series A Preferred Stock, the Company
intends to deregister any and all shares of Common Stock registered
hereunder that are not issued to a Selling Securityholder upon conversion of
the Series A Preferred Stock.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(i) of the Securities Act of 1933, as amended. On
January 28, 1998, the average of the closing bid and ask price, which is
quoted on the Nasdaq SmallCap(TM) Market under the symbol "HCOM," was $3.50
per share.
-------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THIS REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
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<PAGE> 2
PROSPECTUS
HOMECOM COMMUNICATIONS, INC.
(THE "COMPANY")
UP TO 1,379,310 SHARES OF COMMON STOCK ISSUABLE
UPON CONVERSION OF 20,000 SHARES OF THE COMPANY'S
SERIES A CONVERTIBLE PREFERRED STOCK
AND
UP TO 625,000 SHARES OF COMMON STOCK ISSUABLE
UPON THE EXERCISE OF WARRANTS
This Prospectus relates to the offering (the "Offering") of an aggregate
2,004,310 shares (the "Offered Shares") of the Company's common stock, par value
$.0001 per share ("Common Stock"). The Offered Shares may be offered and sold
from time to time by the holders named herein or by their transferees, pledgees,
donees or their successors (collectively, the "Selling Securityholders")
pursuant to this Prospectus. None of the Offered Shares are being sold by the
Company. The Offered Shares include (i) 1,379,310 shares (the "Series A
Preferred Conversion Shares") of the Company's Common Stock issuable upon
conversion of an aggregate 20,000 shares of the Company's Series A Convertible
Preferred Stock (the "Series A Preferred Stock"); (ii) 125,000 shares of Common
Stock issuable upon the exercise of warrants issued in connection with the sale
of the Series A Preferred Stock (the "Series A Preferred Stock Warrants"); (iii)
100,000 shares of Common Stock issuable upon the exercise of warrants (the
"Underwriter Warrants") granted to the Company's underwriter in connection with
its initial public offering; and (iv) 400,000 shares of Common Stock issuable
upon the exercise of warrants (the "Debenture Warrants") granted in connection
with the sale by the Company (the "Debenture Sale") of an aggregate $1,700,000
principal amount of the Company's 5% Convertible Debentures due September 22,
2000 (the "Debentures"). The Series A Preferred Stock Warrants, the Underwriter
Warrants and the Debenture Warrants are collectively referred to in this
Prospectus as the "Offered Warrants." See "Description of Securities."
In December 1997, the Company issued 20,000 shares of its Series A
Preferred Stock to private investors (the "Series A Preferred Holders") for an
aggregate purchase price of $2,000,000. The Series A Preferred Stock was issued
and sold in December 1997 (the "Series A Preferred Sale") in transactions exempt
from the registration requirements of the Securities Act, to "accredited
investors" (as defined in Rule 501(a) under Regulation D of the Securities Act)
under the Securities Act of 1933, as amended (the "Securities Act"). Net
proceeds to the Company from the Series A Preferred Sale were approximately $1.8
million. Pursuant to Registration Rights Agreements with the Series A Preferred
Holders (the "Series A Preferred Registration Agreements"), the Company agreed
to file on or before January 31, 1998 a registration statement covering the
shares of Common Stock issuable upon conversion of the Series A Preferred Stock
(the "Series A Preferred Registration Statement"). The Series A Preferred
Holders have agreed that they may convert (i) not more than one-half of the
Series A Preferred Stock at any time on or after the 30th day following the
effective date (the "Debenture Registration Effective Date") of the registration
statement (the "Debenture
---------------
continued on following page
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 5.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED , 1998
<PAGE> 3
continued from previous page
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Registration Statement") filed with the Securities and Exchange Commission (the
"Commission") with respect to the offer and sale of shares (the "Debenture
Conversion Shares") of the Company's Common Stock issuable upon conversion of
the Debentures; and (ii) the second one-half of the Series A Preferred Stock at
any time on or after the 60th day following the Debenture Registration Effective
Date. However, the Series A Preferred Holders also have agreed that they may not
convert any of the Series A Preferred Stock until on or after the later of 30
days after the Debenture Registration Effective Date or February 27, 1998. The
Series A Preferred Stock is convertible into a number of shares of Common Stock
equal to the quotient of (a) the product of the number of shares of Series A
Preferred Stock being converted multiplied by $100.00 divided by (b) the
then-applicable conversion price. The conversion price for the Series A
Preferred Stock (the "Series A Preferred Conversion Price") is the lesser of (i)
80% of the average closing bid price of the Company's Common Stock for the five
trading days ending on the day the Company actually receives a conversion
notice; or (ii) $14.50625. The Series A Preferred Conversion Price is subject to
adjustment under certain circumstances. On January 27, 1998, the closing bid
price of the Common Stock on the Nasdaq SmallCap(TM) Market was $3.59375 per
share and the average of the closing bid price of the Common Stock for the five
trading days ending January 27, 1998 was $3.625 per share. See "Description of
Securities -- Series A Convertible Preferred Stock."
In connection with the issuance and sale of the Series A Preferred Stock,
the Company granted the Series A Preferred Stock Warrants to the Series A
Preferred Holders to acquire an aggregate of 75,000 shares of Common Stock, with
warrants to purchase 62,500 shares of Common Stock having an exercise price per
share equal to $14.50625 and warrants to purchase 12,500 shares of Common Stock
having an exercise price per share equal to $15.825. The Company also granted
50,000 warrants to a placement agent at an exercise price of $15.825 per share.
The Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. See "Description
of Securities -- Warrants."
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter, Ladenburg Thalmann & Co. Inc.,
the Underwriter Warrants to acquire 100,000 shares of the Company's Common Stock
at an exercise price of $7.20 per share. The exercise price of the Underwriter
Warrants is subject to adjustment under certain circumstances. The Underwriter
Warrants expire on May 12, 2002 if not earlier exercised. See "Description of
Securities -- Warrants."
In connection with the completion of the Debenture Sale of the Debentures,
the Company issued the Debenture Warrants to acquire an aggregate 400,000 shares
of Common Stock. Of the Debenture Warrants, warrants to acquire an aggregate
200,000 shares are exercisable at a price of $4.00 per share, and warrants to
acquire an aggregate 200,000 shares are exercisable at a price of $6.00 per
share. The exercise price of the Debenture Warrants is subject to adjustment. If
not earlier exercised, the Debenture Warrants expire on October 27, 2000. See
"Description of Securities -- Warrants."
The Selling Securityholders have informed the Company that the Offered
Shares may be offered from time to time in brokerage transactions (which may
include block transactions) on any exchange or market on which such securities
are listed or quoted, as applicable, in negotiated transactions, through a
combination of such methods of sale, or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
prevailing market prices or at negotiated prices. The Selling Securityholders
may effect such transactions by selling the Offered Shares directly or to or
through broker-dealers, who may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders and/or the
purchasers of the Offered Shares for whom such broker-dealers may act as agents
or to whom they may sell as principals, or both (which compensation as to a
particular broker-dealer might be in excess of customary commissions). The
Selling Securityholders will receive all of the net proceeds from the sale of
the Offered Shares and will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the Offered Shares. The Company
is responsible for payment of all other expenses incident to the offer and sale
of the Offered Shares. The Company will not receive any of the proceeds from the
sale of the Offered Shares by the Selling Securityholders. However, the Company
will receive the proceeds of the exercise prices payable by the Selling
Securityholders upon the exercise of any of the Offered Warrants. The aggregate
exercise price for all of the Offered Warrants is $4,615,703. Since the exercise
prices of the Offered Warrants is significantly higher than the current trading
price of the Common Stock, there can be no assurance that the Offered Warrants
will ever be exercised. If exercised, the proceeds to the Company will be used
for working capital and general corporate purposes.
The Selling Securityholders, and intermediaries through whom such
securities are sold, may be deemed underwriters within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in connection with, (i) the Company's financial statements and
notes thereto included elsewhere in this Prospectus; and (ii) the exhibits filed
with the registration statement of which this Prospectus is a part. Unless
otherwise indicated, the information in this Prospectus does not give effect to
the conversion of the Debentures, the conversion of the Series A Preferred Stock
or the exercise of the Offered Warrants.
THE COMPANY................ HomeCom Communications, Inc. ("HomeCom" or the
"Company"). HomeCom develops and markets
specialized software applications and products and
provides services that enable businesses to use the
Internet and Intranets to obtain and communicate
important business information, conduct commercial
transactions and improve business productivity.
HomeCom provides Internet/Intranet solutions in
three areas: (i) customized software applications
design, development and integration including,
World Wide Web site development; (ii) Internet
outsourcing services; and (iii) security consulting
and integration services. HomeCom's objective is to
be a leading provider of business communications
solutions using Internet standard protocol
technologies.
THE OFFERING............... This Prospectus relates to an aggregate 2,004,310
shares of Common Stock. The Offered Shares include
(i) 1,379,310 shares (the "Series A Preferred
Conversion Shares") of Common Stock issuable upon
conversion of an aggregate 20,000 shares of Series
A Convertible Preferred Stock; (ii) 125,000 shares
of Common Stock issuable upon the exercise of the
Series A Preferred Stock Warrants; (iii) 100,000
shares of Common Stock issuable upon the exercise
of the Underwriter Warrants; and (iv) 400,000
shares of Common Stock issuable upon the exercise
of the Debenture Warrants. See "Description of
Securities." The Selling Securityholders have
informed the Company that the Offered Shares may be
offered from time to time in brokerage transactions
(which may include block transactions) on any
exchange or market on which such securities are
listed or quoted, as applicable, in negotiated
transactions, through a combination of such methods
of sale, or otherwise, at fixed prices that may be
changed, at market prices prevailing at the time of
sale, at prices related to prevailing market prices
or at negotiated prices. The Selling
Securityholders may effect such transactions by
selling the Offered Shares directly or to or
through broker-dealers, who may receive
compensation in the form of discounts, concessions
or commissions from the Selling Securityholders
and/or the purchasers of the Offered Shares for
whom such broker-dealers may act as agents or to
whom they may sell as principals, or both (which
compensation as to a particular broker-dealer might
be in excess of customary commissions). The Selling
Securityholders will receive all of the net
proceeds from the sale of the Offered Shares and
will pay all underwriting discounts and selling
commissions, if any, applicable to the sale of the
Offered Shares. The Company is responsible for
payment of all other expenses incident to the offer
and sale of the Offered Shares. The Company will
not receive any of the proceeds from the sale of
the Offered Shares by the Selling Securityholders.
However, the Company will receive the proceeds of
the exercise prices payable by the Selling
Securityholders upon the exercise of any of the
Offered Warrants. The aggregate exercise price for
all of the Offered Warrants is $4,615,703. Since
the exercise prices of the Offered Warrants is
significantly higher than the current trading price
of
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<PAGE> 5
the Common Stock, there can be no assurance that
the Offered Warrants will ever be exercised. If
exercised, the proceeds to the Company will be used
for working capital and general corporate purposes.
SERIES A PREFERRED STOCK... In December 1997, the Company issued 20,000 shares
of its Series A Preferred Stock to the Series A
Preferred Holders for an aggregate purchase price
of $2,000,000. Net proceeds to the Company were
approximately $1.8 million. Pursuant to the Series
A Preferred Registration Agreements, the Company
agreed to file on or before January 31, 1998 the
Series A Preferred Registration Statement. The
Series A Preferred Holders have agreed that they
may convert (i) not more than one-half of the
Series A Preferred Stock at any time on or after
the 30th day following the effective date of the
registration statement filed with the Commission
with respect to the offer and sale of up to 850,000
of the Debenture Conversion Shares (the "Debenture
Registration Effective Date"); and (ii) the second
one-half of the Series A Preferred Stock at any
time on or after the 60th day following the
Debenture Registration Effective Date. However, the
Series A Preferred Holders also have agreed that
they may not convert any of the Series A Preferred
Stock until on or after the later of 30 days after
the Debenture Registration Effective Date or
February 27, 1998. The Series A Preferred Stock is
convertible into a number of shares of Common Stock
equal to the quotient of (a) the product of the
number of shares of Series A Preferred Stock being
converted multiplied by $100.00 divided by (b) the
then-applicable conversion price. The Series A
Preferred Conversion Price is the lesser of (i) 80%
of the average closing bid price of the Company's
Common Stock for the five trading days ending on
the day the Company actually receives a conversion
notice; or (ii) $14.50625. The Series A Preferred
Conversion Price is subject to adjustment under
certain circumstances. See "Description of
Securities -- Series A Convertible Preferred
Stock." On January 27, 1998, the closing bid price
of the Common Stock on the Nasdaq SmallCap(TM)
Market was $3.59375 per share and the average of
the closing bid price of the Common Stock for the
five trading days ending January 27, 1998 was
$3.625 per share.
The Company has received no firm commitment for the
conversion of any of the Shares of Series A
Preferred Stock. Consequently, there can be no
assurance that the Shares of Series A Preferred
Stock will be converted. Pursuant to the Series A
Preferred Registration Rights Agreement, the
Company has agreed to register 1,379,310 shares of
Common Stock. Following conversion in full or
redemption of the Series A Preferred Stock, the
Company intends to deregister any and all shares of
Common Stock registered hereunder that are not
issued to a Selling Securityholder upon conversion
of the Series A Preferred Stock. See "Risk
Factors -- Variability of Number of Shares of
Common Stock Issuable Upon Conversion of Debentures
and Series A Preferred Stock."
OFFERED WARRANTS........... In connection with the issuance and sale of the
Series A Preferred Stock, the Company granted the
Series A Preferred Warrants to the Series A
Preferred Holders to acquire an aggregate of 75,000
shares of Common Stock, with warrants to purchase
62,500 shares of Common Stock having an exercise
price per share equal to $14.50625 and warrants to
purchase 12,500 shares of Common Stock having an
exercise price per share equal to $15.825. The
Company also granted 50,000 warrants to a placement
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agent at an exercise price of $15.825 per share.
The Series A Preferred Stock Warrants will expire
on December 31, 2000 and are eligible to be
exercised at any time on or after June 23, 1998.
See "Description of Securities -- Warrants."
In connection with the completion with the
Company's initial public offering, the Company
granted its underwriter, Ladenburg Thalmann & Co.
Inc., the Underwriter Warrants to acquire 100,000
shares of the Company's Common Stock at an exercise
price of $7.20 per share. The exercise price is
subject to adjustment under certain circumstances.
The Underwriter Warrants expire on May 12, 2002 if
not earlier exercised.
In connection with the completion of the Debenture
Sale, the Company issued to First Granite
Securities, Inc., an entity designated by the
holders of the Debentures, the Debenture Warrants
to acquire an aggregate 400,000 shares of Common
Stock. Of the Debenture Warrants, warrants to
acquire an aggregate 200,000 shares are exercisable
at a price of $4.00 per share and warrants to
acquire an aggregate 200,000 shares are exercisable
at a price of $6.00 per share. The exercise price
of the Debenture Warrants is subject to adjustment.
If not earlier exercised, the Debenture Warrants
expire on October 27, 2000.
RISK FACTORS............... An investment in the securities offered hereby
involves a high degree of risk. See "Risk Factors
NASDAQ SMALLCAP(TM)
MARKET SYMBOL............ HCOM
RECENT SALE OF
DEBENTURES............... In September 1997, the Company completed the sale
of the Debentures. The Debentures were issued
pursuant to the terms of a 5% Convertible Debenture
Purchase Agreement dated effective as of September
19, 1997 (the "Debenture Agreement"). Principal and
interest on the Debentures is payable on September
22, 2000. The Debentures are convertible at the
option of the holders. The holders of the
Debentures have agreed, however, that they may
convert (i) not more than one-third of the
aggregate value of the Debentures at any time on or
after the sooner of the Debenture Registration
Effective Date or December 26, 1997; (ii) not more
than an additional one-third of the aggregate value
of the Debentures at any time on or after the
sooner of the 30th day following the Debenture
Registration Effective Date or January 25, 1998;
and (iii) the final one-third of the aggregate
value of the Debentures at any time on or after the
sooner of the 60th day following the Debenture
Registration Effective Date or February 24, 1998.
As a result of these agreements, two-thirds of the
aggregate value of the Debentures are convertible
at the option of the holders immediately as of the
date of this Prospectus and the balance of the
Debentures will become convertible on February 24,
1998. The Debentures are convertible at a
conversion price (the "Debenture Conversion Price")
which is the lesser of (a) 75% of the average
closing bid price of the Common Stock as
represented by Nasdaq or on other securities
exchanges or markets on which the Common Stock is
listed for the three trading days ending on the day
preceding notice of conversion, or (b) $4.00. The
number of shares issuable upon conversion of the
Debentures is equal to the aggregate principle
balance of the Debentures divided by the Debenture
Conversion Price. The offer and sale of the
Debenture Conversion Shares has been registered
pursuant to the Debenture Registration Statement
which
5
<PAGE> 7
was declared effective by the Commission on or
about February , 1998.
COMMON STOCK OUTSTANDING
BEFORE
OFFERING(1)(2)(3)........ 2,956,396
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF THE
DEBENTURE CONVERSION
SHARES(1)(3)(4).......... 3,559,166
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF
THE SERIES A PREFERRED
CONVERSION SHARES AND
COMMON STOCK ISSUABLE
UPON EXERCISE OF THE
OFFERED
WARRANTS(2)(5)(6)........ 4,271,051
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF THE
DEBENTURE CONVERSION
SHARES AND THE SERIES A
PREFERRED CONVERSION
SHARES AND CONVERSION
SHARES ISSUABLE UPON
EXERCISE OF THE OFFERED
WARRANTS (4)(5)(6)....... 4,873,821
- ---------------
(1) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 537,160 shares of Common Stock are
issuable upon the exercise of outstanding options granted at exercise prices
ranging from $3.69 to $8.06 per share and weighted average exercise price of
$4.75 per share; (ii) 300,000 shares reserved for issuance under the
Company's Non-Employee Directors Plan, of which options to acquire 10,000
shares of Common Stock are issuable upon the exercise of outstanding options
granted at an exercise price of $6.50 per share; (iii) 150,000 shares
reserved for issuance under the Company's Stock Purchase Plan, no shares
having been issued thereunder; (iv) 100,000 shares of Common Stock reserved
for issuance upon the exercise of the Underwriter Warrants at an exercise
price of $7.20 per share; (v) 400,000 shares of Common Stock that are
issuable upon the exercise of the Debenture Warrants, of which warrants to
acquire 200,000 shares are exercisable at an exercise price of $4.00 per
share and warrants to acquire 200,000 shares are exercisable at an exercise
price of $6.00 per share; (vi) 125,000 shares of Common Stock that are
issuable upon exercise of the Series A Preferred Stock Warrants, of which
warrants to acquire 62,500 shares are exercisable at a price equal to
$14.50625 per share and warrants to purchase the remaining 62,500 shares are
exercisable at a price of $15.825 per share; and (vii) 25,000 shares of
Common Stock that are issuable upon exercise of warrants (the "InsureRate
Warrants") granted in connection with the Company's organization of
InsureRate at an exercise price of $3.70 per share. See
"Management -- Incentive Plans," "Description of Securities -- Convertible
Debentures," "Description of Securities -- Series A Preferred Stock," and
"Description of Securities -- Warrants." Also excludes shares that may be
issued in connection with the Company's August 1996 acquisition of HomeCom
Internet Security Services, Inc. See "Certain Transactions."
(2) Excludes shares of Common Stock issued upon conversion of the Debentures.
(3) Excludes shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
(4) Assumes that all holders of Debentures elect to convert the Debentures into
an aggregate 602,770 shares of Common Stock at a Conversion Price of
$2.8203125 per share, which represents the Conversion Price that would be in
effect if the Company received notice of conversion after the close of
business on January 27, 1998. See "Description of Securities -- Convertible
Debentures."
(5) Assumes that all holders of the Series A Preferred Stock elect to convert
the Series A Preferred Stock into an aggregate 689,655 shares of Common
Stock at a conversion price of $2.90 per share, which
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<PAGE> 8
represents the Series A Preferred Conversion Price that would be in effect
if the Company received notice of conversion after the close of business on
January 27, 1998. See "Description of Securities -- Series A Convertible
Preferred Stock."
(6) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 537,160 shares of Common Stock are
issuable upon the exercise of outstanding options granted at exercise prices
ranging from $3.69 to $8.06 per share and weighted average exercise price of
$4.75 per share; (ii) 300,000 shares reserved for issuance under the
Company's Non-Employee Directors Plan, of which options to acquire 10,000
shares of Common Stock are issuable upon the exercise of outstanding options
granted at an exercise price of $6.50 per share; (iii) 150,000 shares
reserved for issuance under the Company's Stock Purchase Plan, no shares
having been issued thereunder; and (iv) 25,000 shares of Common Stock that
are issuable upon exercise of the InsureRate Warrants. See
"Management -- Incentive Plans," "Description of Securities -- Convertible
Debentures," "Description of Securities -- Series A Preferred Stock," and
"Description of Securities -- Warrants." Also excludes shares that may be
issued in connection with the Company's August 1996 acquisition of HomeCom
Internet Security Services, Inc. See "Certain Transactions."
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 2 NINE MONTHS
(INCORPORATION) ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------ ------------------
1994 1995 1996 1997
--------------- ---------- ----------- ------------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... -- $ 327,574 $ 2,298,855 $ 2,330,975
Operating loss.......................... $ (17,452) (1,824) (580,865) (3,391,081)
Net loss................................ (17,452) (5,440) (625,583) (3,387,747)
Net loss per share...................... $ (.01) $ (.00) $ (.33) $ (1.36)
Weighted number of shares of Common
Stock and Common Stock equivalents
outstanding........................... 1,850,447 1,850,447 1,879,696 2,483,258
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 2, NINE MONTHS
(INCORPORATION) ENDED
TO DECEMBER 31, YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------- ------------------------ ------------------
1994 1995 1996 1997
--------------- ---------- ----------- ------------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ 8,455 $133,792 $(1,304,682) $ 1,961,870
Total assets............................ 10,254 247,382 1,726,522 3,723,473
Long-term obligations................... -- 160,792 147,833 1,244,775
Total liabilities....................... -- 242,568 2,347,191 2,118,381
Stockholders' equity (deficit).......... 10,254 4,814 (620,669) 1,605,092
</TABLE>
7
<PAGE> 9
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including without limitation, certain statements contained under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning the Company's expectations, beliefs, or strategies
regarding increased future revenues and operations and certain statements
contained under "Business" concerning the development and marketing of
customized Internet applications and security consulting services and the effect
of market conditions and competition. When used in this Prospectus, the words
"believes," "intends," "anticipates" and similar expressions are intended to
identify forward-looking statements. All forwarding statements included in this
Prospectus are based on information available to the Company on the date hereof,
and the Company assumes no obligation to update any such forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected or implied
by such forward-looking statements. Such risks and uncertainties include the
timing and acceptance of new product introductions, the actions of the Company's
competitors and business partners, and those discussed under the caption "Risk
Factors."
8
<PAGE> 10
RISK FACTORS
An investment in the securities offered hereby is speculative in nature and
involves a high degree of risk. In addition to other information contained in
this Prospectus, prospective investors should carefully consider the following
risk factors before purchasing the securities offered hereby.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; CONTINUING LOSSES. The
Company was incorporated in December 1994 and commenced sales in January 1995.
Consequently, the Company has only a limited operating history upon which to
base an evaluation of the Company and its prospects. The Company's prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving industries. To address these risks, the
Company must, among other things, respond to competitive developments, continue
to attract, retain and motivate qualified persons, and continue to upgrade and
commercialize products and services. There can be no assurance that the Company
will be successful in addressing such risks. The Company has incurred net losses
since its incorporation and as of September 30, 1997 had an accumulated deficit
of approximately $4.0 million. For the year ended December 31, 1996 and the nine
months ended September 30, 1997, the Company had negative cash flows from
operations of approximately $216,000 and $3.5 million, respectively. The Company
continues to incur operating losses and there can be no assurance that the
Company will ever achieve or sustain profitability.
RECENT REDUCTION OF STAFF AND OTHER EXPENSES; CONTINUING LOSSES. The
Company has experienced substantial change and expansion in its business and
operations since its incorporation in 1994 and expects to continue to experience
periods of rapid change. The Company's recent expansion of operating expenses
has placed significant demands on the Company's administrative, operational,
financial and other resources. Following completion of its initial public
offering, the Company expended considerable resources to expand its marketing
and sales programs, its product development staff, its accounting and internal
management systems and its other administrative and public relations
capabilities. These increases in expenditures were not followed by commensurate
increases in revenues, and during the quarter ended September 30, 1997, the
Company was forced to engage in substantial reductions in its personnel in order
to conserve operating capital. This reduction in staff has affected employee
morale and limited the Company's ability to increase sales to desired levels.
Notwithstanding the Company's efforts to limit its expenditures, its operating
costs continue to exceed revenues. If the Company cannot generate sufficient
revenues to offset its operating expenses or the Company's management otherwise
fails to manage the Company's growth effectively, the Company's business,
financial condition and operating results will be materially and adversely
affected. There can be no assurance that current management can operate the
Company's business adequately to achieve profitable operations. See
"Business -- Employees" and "Management."
NEED FOR ADDITIONAL FINANCING. The Company has substantially limited
sources of capital and continues to incur substantial operating losses. As of
September 30, 1997, the Company had net working capital of approximately $2.0
million. On December 23, 1997, the Company issued and sold 20,000 shares of
Series A Preferred Stock to the Series A Preferred Holders for aggregate net
proceeds of approximately $1.8 million. The proceeds will be used for general
working capital purposes. Because the Company expects to continue to incur
substantial operating losses, the Company will continue to use substantial sums
of cash in its operations for an indefinite period. Accordingly, the Company
will be required to obtain additional capital. No assurance can be given that
the Company will be successful in its efforts to obtain additional capital, or
that capital will be available on terms acceptable to the Company. If the
Company exhausts its current sources of capital and is not able to obtain
additional capital, the Company will be required to undertake certain steps to
continue its operations. Such steps may include immediate reduction of the
Company's operating costs and other expenditures, including potential reductions
of personnel and suspension of salary increases and capital expenditures. If
such measures are not sufficient, the Company may elect to implement other cost
reduction actions as the Company may determine are necessary and in the
Company's best interests. Any such actions undertaken may limit the Company's
opportunities to realize continued increases in sales and the Company may not be
able to reduce its costs in amounts sufficient to achieve break-even or
profitable operations. If the Company exhausts its sources of capital, and
subsequent cost reduction measures are not sufficient to allow
9
<PAGE> 11
the Company to achieve break-even or profitable operations, the Company will be
forced to seek protection from its creditors.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP(TM) MARKET;
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is listed
on The Nasdaq SmallCap(TM) Market. In order to continue to be included in The
Nasdaq SmallCap(TM) Market, the Company must satisfy continued listing standards
that will apply to the Company commencing in February 1998. These new criteria
will require the Company to maintain (i) either $2,000,000 in net tangible
assets (total assets less total liabilities, goodwill and other intangible
assets), $35,000,000 in market capitalization or $500,000 in net income for two
of the three immediately preceding years; (ii) at least 500,000 shares of public
float; (iii) market value of the public float of not less than $4,000,000; (iv)
a minimum bid price of not less than $1.00 per share; and (v) a minimum of 300
stockholders. The Company anticipates that it will satisfy the new maintenance
criteria when such criteria become applicable to the Company in February 1998.
There is, however, a substantial risk that the Company will not satisfy Nasdaq's
new maintenance criteria as of March 31, 1998. In particular, if the Company
continues to incur substantial losses (which is probable), the Company's net
tangible assets may fall below $2,000,000 as of March 31, 1998. In such event,
in order to satisfy Nasdaq's $2,000,000 net tangible asset requirement, the
Company may be required to request the conversion of a substantial portion of
the Debentures (which would have the result of reducing liabilities and
therefore increasing net tangible assets), over which the Company has no
control, or obtain additional equity financing. There can be no assurance that
the Company will be able to obtain additional equity financing on terms
satisfactory to the Company, or at all. Failure of the Company to meet Nasdaq's
current or new 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.
PRICE EROSION; CONTINUING DECLINE IN MARGINS. The market for Internet and
Intranet products and services is highly competitive and is characterized by
pressures to reduce prices, incorporate new capabilities and accelerate
completion schedules. Increased competition has resulted in significant price
competition, which in turn has resulted in significant reductions in the average
selling price of many of the Company's products and services, including its Web
site development and hosting services. The Company has not been able to offset
the effects of price reductions through an increase in the number of its
customers, higher revenue from enhanced services or cost reductions, and the
Company expects its margins to continue to decline.
INTENSE COMPETITION. The Company's current and prospective competitors
include many companies that have longer operating histories, longer customer
relationships and substantially greater financial, management, technical,
development, sales, marketing and other resources than the Company. Many
nationally known companies and regional and local companies across the country
are involved in Intranet and Intranet applications, including the development
and support of Web sites and Internet applications, and the number of these
companies is increasing. Companies competing directly or indirectly with the
Company include Web site service boutique firms, communications, telephone and
telecommunications companies, computer hardware and software companies,
established on-line services companies, advertising agencies,
10
<PAGE> 12
direct access Internet and Internet-services and access providers as well as
specialized and integrated marketing communication firms. The Company also
competes with the internal information technology departments of prospective
customers who are choosing whether to outsource design and support. The Company
competes on the basis of creative talent, price, reliability of services and
responsiveness. The Company's ability to compete in its markets is substantially
limited by its available working capital and its continuing operating losses.
See "Business -- Competition."
NEW AND UNCERTAIN MARKET. The market for Internet and Intranet products
and services has only recently developed. Because this market is relatively new
and because current and future competitors are likely to introduce competing
Internet and Intranet products and services, it is difficult to predict the rate
at which the market will grow or at which new or increased competition will
result in market saturation. If the Internet and Intranet markets fail to grow,
grow more slowly than anticipated or become saturated with competitors, the
Company's business, financial condition and operating results will be materially
and adversely affected.
DEPENDENCE ON THE INTERNET. Although a portion of the sales of the
Company's products and services will depend upon growth of private Intranet
networks, sales of the Company's Internet related products and services will
depend in large part upon an adequate infrastructure for providing Internet
access and carrying Internet traffic. The Internet may not prove to be a viable
commercial marketplace because of inadequate development of the necessary
infrastructure or timely development of complementary products such as high
speed modems. Because global commerce and on-line exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace. There can be no assurance that the infrastructure
or complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if developed, that the Internet will become a
viable commercial marketplace. If the necessary infrastructure or complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, financial condition and
operating results will be materially and adversely affected.
RISK OF CHANGING TECHNOLOGY. The Internet software and services markets
are characterized by rapid technological change, evolving industry standards,
emerging industry competition and frequent new service, software and other
product introductions. The Company's future success will depend in significant
part on its ability to anticipate industry standards, continue to apply advances
in Internet and Intranet technologies, enhance its current services and
products, and develop and introduce new services and products on a timely basis.
The introduction of services and products embodying new technologies and the
emergence of new industry standards can render existing services and products
obsolete and unmarketable. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new services and
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these services or
products, or that its new services and products will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or products in a timely and cost-effective manner or to address
compatibility, inoperability or other issues raised by technological changes or
new industry standards, the Company's business, financial condition and
operating results will be materially and adversely affected. See
"Business -- Products and Services."
DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent
upon its senior management and the loss of any member of senior management could
have a material adverse effect upon the Company's business, financial condition
and operating results. No assurance can be given that the Company can retain its
senior management or other key personnel. Although the Company has entered into
employment agreements with each of its executive officers which contain
non-competition and non-disclosure provisions, the Company's ability to benefit
from them is uncertain because such provisions typically must be limited in
geographic scope to be enforceable. Restrictions limited in geographic scope may
not effectively prohibit competition with the Company because of the global
nature of the Internet. See "Management."
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<PAGE> 13
LENGTH OF SALES CYCLE. The development and implementation of interactive
Web sites and intranet software applications requires the Company to engage in a
lengthy sales cycle. The pursuit of sales leads typically involves an analysis
of the prospective customer's needs, preparation of a written proposal, one or
more presentations and contract negotiations. The Company often provides
significant education to prospective customers regarding the use and benefits of
Internet or Intranet technologies and products. Extensive Web site development
or licensing of the Company's products may also involve a substantial commitment
of capital by potential customers as well as the attendant delays frequently
associated with approving larger capital expenditures and reviewing new
technologies that affect key operations. If the Company's average sales cycle
continues to lengthen, the Company will face increased costs, potentially lower
profit margins and a potential inability to achieve targeted sales goals.
RISK OF DEFECTS. Web site services and other services based on software
and computing systems often encounter development and completion delays and the
underlying software may contain undetected errors or failures when introduced
and, in the case of Web sites, when the volume of traffic on a site increases.
In addition, there can be no assurance that errors found in the software
underlying a Web site or other project will not result in delays in completion,
commercial release or market acceptance of such Web site or other project.
Likewise, there can be no assurance that the Company will not incur
unanticipated costs to cure any defect or be obligated to refund money paid to
the Company or to pay for damages caused by any delay or defect. Software
applications and products as complex as those being developed by the Company may
contain undetected errors or failures when first introduced. If software errors
are discovered after introduction, the Company could experience delays and lost
revenues during the period required to correct these errors. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new applications, products or releases
after commencement of installation or shipment, resulting in loss of or delay in
receiving revenues.
SECURITY RISKS. The Company's software and equipment are vulnerable to
computer viruses or similar disruptive problems caused by customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. Although the Company attempts to limit its liability
to customers for these types of risks through contractual provisions, there can
be no assurance that these provisions will be enforceable.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company relies primarily
on a combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company has a registered service mark for
its logo, and has applied for federal registration of the names "HomeCom," "Post
On The Fly(TM)" and "Personal Internet Banker(TM)." Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop competing products and
services. In distributing its software products, the Company intends to rely
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as the laws of the United States. The
Company does not believe that any of its proposed products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
products. The Company expects that software product developers will increasingly
be subject to
12
<PAGE> 14
infringement claims as the number of products and competitors in electronic
commerce grows and the functionality of products in different industry segments
overlaps. Any such claims, with or without merit, could be time-consuming,
result in costly litigation, cause product shipment delays or require the
Company to enter into royalty or licensing agreements. Such royalty or licensing
agreements, if required, may not be available on terms acceptable to the
Company. In addition, Web site developers such as the Company face potential
liability for the actions of customers and others using their services,
including liability for infringement of intellectual property rights, rights of
publicity, defamation, libel, fraud, misrepresentation, unauthorized computer
access, theft, tort liability and criminal activity under the laws of the United
States, various states and foreign jurisdictions. An imposition of liability
could have a material adverse effect on the Company. See
"Business -- Intellectual Property Rights."
DILUTION. Purchasers of shares of Common Stock offered hereby will
experience immediate and substantial dilution in net tangible book value per
share. The number of shares of Common Stock that are issuable upon conversion of
the Debentures and the Series A Preferred Stock is variable based upon the
closing bid prices of the Company's Common Stock. Accordingly, the number of
shares issuable upon conversion of the Debentures or the Series A Preferred
Stock may increase significantly. See "Risk Factors -- Variability of Number of
Shares of Common Stock Issuable Upon Conversion of Debentures and Series A
Preferred Stock." In addition, the Company will be required to issue a
substantial number of additional shares of Common Stock in the future in order
to obtain additional financing. The issuance of any of the shares will have the
effect of increasing the dilution to new investors in this Offering.
FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's limited
operating history, the Company does not have historical financial data for a
significant number of periods on which to base planned operating expenses.
Accordingly, the Company's expense levels are based in part on its expectations
as to future revenues and to a large extent are fixed. However, the Company
typically operates with no significant backlog. As a result, quarterly sales and
operating results generally depend on the volume and timing of and ability to
perform services requested within the quarter, and are difficult to forecast.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenues shortfall. Accordingly, any significant shortfall of
demand for the Company's products and services in relation to the Company's
expectations would result in fluctuations in future quarterly operating results.
The Company may also experience significant fluctuations in future quarterly
operating results as the result of many factors, including demand for the
Company's products and services, introduction or enhancement of products by the
Company and its competitors, market acceptance of new products and services, mix
of products and services sold and general economic conditions. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of this offering, the
Company will have outstanding 3,646,051 shares of Common Stock (assuming full
conversion of the Series A Preferred Stock at a Series A Preferred Conversion
Price of $2.90, but assuming no exercise of the Offered Warrants), will have
outstanding options to purchase of 547,160 shares of Common Stock pursuant to
the Company's stock option plans at a weighted average exercise price of
approximately $4.80 per share, and will have outstanding warrants to acquire an
aggregate 650,000 shares at a weighted average exercise price of approximately
$7.24 per share. Additionally, the Company will have outstanding $1,700,000 of
the Debentures, which would be convertible into an aggregate 602,770 shares of
Common Stock if the Company had received notice of conversion after the close of
business on January 27, 1998, based on a Debenture Conversion Price of
$2.8203125 per share (which is determined as 75% of the average closing bid
price for the Company's Common Stock for the five trading days ended January 27,
1998). The number of shares of Common Stock issuable upon conversion of the
Debentures or the Series A Preferred Stock can increase significantly if the
price of the Company's Common Stock is lower than its current price for the
period preceding the date the Company receives notice of conversion of the
Debentures or the Series A Preferred Stock. See "Risk Factors -- Variability of
Number of Shares of Common Stock Issuable Upon Conversion of Debentures and
Series A Preferred Stock." Of the 3,646,051 shares outstanding after this
offering (assuming conversion of the Series A Preferred Stock but no exercise of
the Offered Warrants), approximately 1,689,655 shares (including the 689,655
shares assumed to be sold in this offering) will be freely tradable without
restriction or further
13
<PAGE> 15
registration under the Securities Act unless they are purchased by "affiliates"
of the Company as that term is defined in Rule 144 under the Securities Act. The
remaining 1,956,396 outstanding shares of Common Stock may be sold in the public
market only if registered or pursuant to an exemption from registration such as
Rule 144 or Rule 144(k) promulgated under the Securities Act. In addition, the
Company intends to file a registration statement on Form S-8 under the
Securities Act for the purpose of registering the potential sale of the 600,000
shares reserved for issuance under the Company's Stock Option Plan (of which
options to purchase 537,160 shares are outstanding), the 300,000 shares for
issuance under the Company's Non-Employee Directors Plan (of which options to
purchase 10,000 shares are outstanding) and the 150,000 shares reserved for
issuance under the Company's Stock Purchase Plan (of which no shares or purchase
rights have yet been granted). After the effective date of the that registration
statement, except for shares held by affiliates of the Company, shares purchased
pursuant to the foregoing stock option and purchase plans generally would be
available for resale in the public market.
VARIABILITY OF NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
DEBENTURES AND SERIES A PREFERRED STOCK. The number of shares of Common Stock
issuable upon conversion of the Debentures and Series A Preferred Stock is
essentially unlimited. If the price of the Common Stock as reported by the
Nasdaq SmallCap(TM) Market, declines to a price less than $3.59375 per share,
the Company will be required to issue substantially more than the 602,770 shares
assumed hereunder to be issuable upon conversion of the Debentures and
substantially more than the 689,655 shares assumed hereunder to be issuable upon
conversion of the Series A Preferred Stock. All shares issuable by the Company
upon conversion of the Debentures and the Series A Preferred Stock are subject
to effective registration statements filed with the Commission. Consequently,
all of such shares will be eligible for sale in the market place without
restriction, except to the extent that any of the selling holders are deemed to
be "affiliates" of the Company at the time of sale. No assurance can be given
that the trading price of the Company's Common Stock will not fall significantly
below $3.59375 per share, or that purchasers in this offering will not suffer
significant additional dilution as a result of any such decline in the price of
the Common Stock.
UNPAID BALANCE OF DEBENTURES ACCELERATES UPON DEFAULT. The unpaid balance
of the Debentures accelerates upon any default in the payment of the Debentures.
Consequently, if the Company defaults in the payment of any of the principle or
interest due or payable on the Debentures the value of the Common Stock may
decline.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO CONVERT
DEBENTURES. Holders of the Debentures will only be able to convert the
Debentures if (i) a current prospectus under the Securities Act relating to the
shares of Common Stock underlying the Debentures is then in effect, and (ii)
such shares of Common Stock are qualified for sale or exempt from qualification
under the applicable securities laws of the states in which they are offered.
There can be no assurance that the Company will be able to maintain the
effectiveness of a current prospectus covering the shares of Common Stock
issuable upon conversion of the Debentures. See "Description of Securities."
SENIORITY OF SERIES A PREFERRED STOCK; STAGGERED BOARD; POSSIBLE
ANTI-TAKEOVER EFFECTS. The Board of Directors has authority to issue up to
1,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of the preferred stock
without further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. While the Company has no present intention to issue shares of preferred
stock, such issuance, while providing desired flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. See "Description of Capital
Stock-Series A Preferred Stock." In addition, the Company's Restated Certificate
of Incorporation provides that the Board of Directors be divided into three
classes of directors, with each class serving a staggered three-year term. The
division of the Board of Directors into three classes may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of the Company and may maintain the incumbency of the Board of Directors,
because such a division generally makes it more difficult for stockholders to
replace a majority of directors. See "Description of Securities -- Limitations
on Liability of Directors."
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<PAGE> 16
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY. The Company's Restated
Certificate of Incorporation provides, as permitted by Delaware law, that its
directors shall have no personal liability for certain breaches of their
fiduciary duties to the Company. In addition, the Company's Restated Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. These limitations on personal liability do not
apply to liabilities under federal securities laws. However, these provisions
may reduce the likelihood of derivative litigation against directors and may
discourage stockholders from bringing a lawsuit against directors for a breach
of their fiduciary duties. See "Description of Securities -- Limitations on
Liability of Directors."
GOVERNMENT REGULATION. The Telecommunications Act of 1996 (the "1996
Telecommunications Act"), which became effective on February 8, 1996, imposes
criminal liability on persons sending or displaying in a manner available to
minors indecent material on an interactive computer service such as the
Internet. The 1996 Telecommunications Act also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for those
activities. The constitutionality of these provisions was successfully
challenged in federal district court and ultimately found to be unconstitutional
by the United States Supreme Court in Reno v. American Civil Liberties Union.
Therefore, at the time of this Prospectus, the Company does not believe that it
is currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and believes that there are
currently few laws or regulations directly applicable to Web site service
companies. The Federal Communications Commission is studying the possible
regulation of the Internet. Any such regulations adopted by the Federal
Communications Commission may adversely impact the manner in which the Company
conducts its business. It is possible that a number of additional laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy, pricing and characteristics and quality of products and services.
The adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services, increase the Company's cost of doing business, cause the Company to
modify its operations, or otherwise have an adverse effect on the Company's
business, financial condition or operating results. Moreover, the applicability
to the Internet of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain. The Company cannot predict the impact,
if any, that future regulation or regulatory changes may have on its business.
In addition, Web site developers such as the Company face potential liability
for the actions of customers and others using their services, including
liability for infringement of intellectual property rights, rights of publicity,
defamation, libel, fraud, misrepresentation, unauthorized computer access,
theft, tort liability and criminal activity under the laws of the United States,
various states and foreign jurisdictions. Any imposition of liability could have
a material adverse effect on the Company. The Company's network services are
transmitted to its customers over dedicated and public telephone lines. These
transmissions are governed by regulatory policies establishing charges and terms
for communications. Changes in the regulatory environment relating to the
telecommunications and media industry, including regulatory changes which
directly or indirectly affect use of or access to the Internet or increase the
likelihood or scope of competition from regional telephone companies, could have
a material adverse effect on the Company.
15
<PAGE> 17
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of the shares of
Common Stock offered hereby by the Selling Securityholders that are issuable
upon conversion of the Series A Preferred Stock. However, the Company will
receive the proceeds of the exercise prices payable by the Selling
Securityholders upon the exercise of any of the Offered Warrants. The aggregate
exercise price for all of the Offered Warrants is $4,615,703. Since the exercise
prices of the Offered Warrants is significantly higher than the current trading
price of the Common Stock, there can be no assurance that the Offered Warrants
will ever be exercised. If exercised, the proceeds to the Company will be used
for working capital and general corporate purposes.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq SmallCap(TM) Market
under the symbol "HCOM." The following table shows for the periods indicated the
high and low sale prices for the Common Stock as reported by the Nasdaq
SmallCap(TM) Market.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
1997
Second quarter (since May 8, 1997).......................... $ 7.25 $6.00
Third quarter............................................... 6.50 2.13
Fourth quarter.............................................. 15.56 2.63
1998
First quarter (through January 27, 1998).................... 15.78 3.16
</TABLE>
On January 27, 1998, the last reported sale price of the Common Stock as
reported by the Nasdaq SmallCap(TM) Market was $3.59375 per share. As of January
27, 1998, there were 30 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
16
<PAGE> 18
SELECTED FINANCIAL DATA
The following selected historical financial data of HomeCom Communications,
Inc. for the years ended December 31, 1994, 1995 and 1996 have been derived from
the audited financial statements of the Company, including the balance sheets at
December 31, 1994, 1995 and 1996 and the related statements of operations and of
cash flows for each of the three fiscal years in the period ended December 31,
1996 and the related notes thereto included herein. The financial data as of
September 30, 1997 and for the nine months ended September 30, 1997 are derived
from unaudited condensed financial statements included herein, which include all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended September 30, 1997 are not necessarily indicative of results that may be
expected for future periods. The data should be read in conjunction with the
financial statements, related notes and other financial information included
herein.
<TABLE>
<CAPTION>
NINE MONTHS
DECEMBER 2 YEAR ENDED DECEMBER ENDED
(INCORPORATION) 31, SEPTEMBER 30,
TO DECEMBER 31, --------------------- -------------
1994 1995 1996 1997
--------------- -------- ---------- -------------
UNAUDITED
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales:
Service sales....................................... $ -- $327,574 $2,112,878 $ 2,268,377
Equipment sales..................................... -- -- 185,977 62,598
-------- -------- ---------- -----------
Total net sales.............................. -- 327,574 2,298,855 2,330,975
-------- -------- ---------- -----------
Cost of Sales:
Cost of services.................................... -- 59,871 546,409 1,252,507
Cost of equipment sold.............................. -- -- 128,938 52,294
-------- -------- ---------- -----------
Total cost of sales.......................... -- 59,871 675,347 1,304,801
-------- -------- ---------- -----------
Gross profit.......................................... -- 267,703 1,623,508 1,026,174
-------- -------- ---------- -----------
Operating expenses:
Sales and marketing................................. 1,045 124,253 845,690 1,163,072
Product development................................. -- 20,239 78,887 375,977
General and administrative.......................... 16,407 121,313 1,194,728 2,739,374
Depreciation and amortization....................... -- 3,722 85,068 138,832
-------- -------- ---------- -----------
Total operating expenses..................... 17,452 269,527 2,204,373 4,417,255
-------- -------- ---------- -----------
Operating Loss........................................ (17,452) (1,824) (580,865) (3,391,081)
Other expenses (income):
Interest expense, net............................... -- 3,469 51,272 53,665
Other expense (income), net......................... -- 147 (6,554) (56,999)
-------- -------- ---------- -----------
Loss before income taxes.............................. (17,452) (5,440) (625,583) (3,387,747)
Income taxes.......................................... -- -- -- --
-------- -------- ---------- -----------
Net loss.............................................. $(17,452) $ (5,440) $ (625,583) $(3,387,747)
======== ======== ========== ===========
Net loss per share.................................... $ (.01) $ (.00) $ (.33) $ (1.36)
======== ======== ========== ===========
Weighted average number of shares of Common Stock and
Common Stock equivalents outstanding................ 1,850,447 1,850,447 1,879,696 2,483,258
======== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------
1994 1995 1996 1997
--------------- -------- ---------- -------------
UNAUDITED
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................. $ 8,455 $133,792 $(1,304,682) $1,961,870
Total assets.......................................... 10,254 247,382 1,726,522 3,723,473
Long-term obligations................................. -- 160,792 147,833 1,244,775
Total liabilities..................................... -- 242,568 2,347,191 2,118,381
Stockholders' equity (deficit)........................ 10,254 4,814 (620,669) 1,605,092
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was incorporated in December 1994 and commenced sales in
January 1995 when it began marketing its Web site development and hosting
services. The Company markets its services through a direct sales force,
advertisement, referrals, and active business partner relationships with
organizations such as AT&T, Microsoft, Netscape and Unisys.
The Company generates revenues through Internet and Intranet customized
software applications, Web site development, Web site hosting services, computer
hardware resales, consulting services (including consulting on internet and
intranet security) and fees charged for the maintenance of Web sites. Most
customized software application projects are generally completed within six to
eight weeks, although certain past, current and future projects have taken and
are expected to take longer to complete. Revenues on customized application and
Web site projects are recognized using the percentage of completion method. Web
site maintenance and hosting revenues represent recurring revenues and are
deferred and recognized ratably over the period. Because the Company will
continue to develop and market new products and services, the results of
operations for the fiscal years ended December 31, 1995 and 1996 and for the
nine months ended September 30, 1997 are not necessarily indicative of future
operating results.
During the first nine months of 1997, custom Internet and Intranet
applications and integration services accounted for approximately 56% of the
Company's revenues, Internet outsourcing services generated approximately 33% of
the Company's revenues and Internet security services generated approximately 8%
of the Company's revenues.
During 1996 and the first nine months of 1997, expenses substantially
exceeded net sales as the Company expanded its products and services, increased
its marketing and sales staff and enhanced its operational and administrative
support structure to support anticipated increases in revenues. The anticipated
increases in revenues have not materialized and the Company has been forced to
substantially reduce its operating expenses. In the third quarter of 1997, the
Company reduced the number of its employees from approximately 100 to
approximately 50. As a result of this substantial reduction in its work force,
the Company faces issues involving employee morale and hiring. Notwithstanding
these reductions in operating expenses, the Company expects to continue to incur
operating losses for an indefinite period. See "Risk Factors -- Recent Reduction
of Staff and Other Expenses; Continuing Losses."
The Company's revenues and operating results have varied substantially from
period to period, and should not be relied upon as an indication of future
results. See "Risk Factors -- Potential Fluctuations in Quarterly Results." The
Company historically has operated with no significant backlog because its
services are provided as requested by customers. As a result, revenues in any
quarter are substantially affected by the amount of services requested by its
customers. Because the Company is incurring expenses in anticipation of future
revenue growth and a high percentage of the Company's expenses are relatively
fixed, a small variation in the timing of recognition of specific revenues could
cause significant variations in operating results from quarter to quarter.
18
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated.
<TABLE>
<CAPTION>
DECEMBER 2 NINE MONTHS
(INCORPORATION) YEAR ENDED YEAR ENDED ENDED
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1994 1995 1996 1997
--------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales:
Service sales....................... -- 100.0% 91.9% 97.3%
Equipment sales..................... -- -- 8.1 2.7
----- ----- ----- ------
Total net sales............. -- 100.0 100.0 100.0
----- ----- ----- ------
Cost of sales:
Cost of services.................... -- 18.3 23.8 53.8
Cost of equipment sold.............. -- -- 5.6 2.2
----- ----- ----- ------
Total cost of sales......... -- 18.3 29.4 56.0
----- ----- ----- ------
Gross profit.......................... -- 81.7 70.6 44.0
----- ----- ----- ------
Operating expenses:
Sales and marketing................. -- 37.9 36.8 49.9
Product development................. -- 6.2 3.4 16.1
General and administrative.......... -- 37.1 52.0 117.5
Depreciation and amortization....... -- 1.1 3.7 6.0
----- ----- ----- ------
Total operating expenses.... -- 82.3 95.9 189.5
----- ----- ----- ------
Operating loss........................ -- (0.6) (25.3) (145.5)
----- ----- ----- ------
Other expenses (income)
Interest expense.................... -- 1.1 2.2 2.3
Other expense (income), net......... -- 0.0 (0.3) (2.5)
----- ----- ----- ------
Loss before income taxes.............. -- (1.7) (27.2) (145.3)
----- ----- ----- ------
Income taxes.......................... -- 0.0 0.0 0.0
----- ----- ----- ------
Net loss.............................. -- (1.7)% (27.2)% (145.3)%
===== ===== ===== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net Sales. Net sales increased 58.4% from $1,471,324 in the first nine
months of 1996 to $2,330,975 in the first nine months of 1997. Revenues from
service sales increased 72.0% from $1,318,675 in the first nine months of 1996
to $2,268,377 in the first nine months of 1997. This increase of $949,702 is
primarily attributable to increases in hosting revenues of approximately
$563,000, Web site development and customized applications revenues of
approximately $184,000 and security consulting revenue of approximately
$237,000. Revenues from equipment sales were $62,598 during the first nine
months of 1997 as compared to $152,649 during the first nine months of 1996.
Cost of Sales. Cost of sales for services increased from $271,887, or
18.5% of revenues in the first nine months of 1996 to $1,252,507, or 53.7% of
revenues in the first nine months of 1997. This increase reflects the Company's
significant increase in payroll costs associated with the hiring of additional
technical personnel. Increases in the Company's cost of sales as a percentage of
sales reflects the hiring of technical personnel to create available capacity
for anticipated revenue growth, which did not occur. The Company increased its
technical staff to approximately 60 persons in July 1997. Subsequently, the
Company reduced this staff to approximately 30 persons as of September 30, 1997.
Gross Profit. Gross profit decreased by $58,711 from $1,084,885 in the
first nine months of 1996 to $1,026,174 in the first nine months of 1997. Gross
profit margins decreased from 73.7% during the first nine
19
<PAGE> 21
months of 1996 to 44.0% during the first nine months of 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 include salaries,
variable commissions and bonuses for the sales force, advertisement and
promotional marketing materials, travel and telephone charges. Sales and
marketing expenses increased 185.0% from $408,131 in the first nine months of
1996 to $1,163,072 in the first nine months of 1997. This increase was primarily
attributable to an increase in advertising and marketing expenses. As a
percentage of net sales, these expenses increased from 27.7% in the first nine
months of 1996 to 49.9% in the first nine months of 1997. During the third
quarter of 1997, the Company implemented procedures intended to substantially
reduce advertising and marketing expenses.
Product Development. Product development expenses consist of personnel
costs required to conduct the Company's product development efforts. Management
believes that significant continuing investments in product development are
required to compete effectively in the Company's industry. As a consequence, the
Company has increased expenditures on product development primarily through the
employment of additional development personnel. Total expenditures for product
development were $405,132, or 17.4% of net sales in first nine months of 1997,
of which $29,155 were capitalized. This compares to total product development
expenditures of $117,068, or 8.0% of sales, in the first nine months of 1996, of
which $53,245 were capitalized. The product development staff was eight persons
in July 1997. Subsequently, the Company reduced its product development staff,
which was two persons at September 30, 1997.
General and Administrative. General and administrative expenses include
salaries for administrative personnel, rents, telephone charges, insurance and
other administrative expenses. General and administrative expenses increased
from $664,244 in the first nine months of 1996 to $2,739,374 in the first nine
months of 1997. As a percentage of net sales, these expenses increased from
45.1% in the first nine months of 1996 to 117.5% in the first nine months of
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 advertising, public relations and
other professional services.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment
and equipment under capital leases. Depreciation and amortization increased from
$52,835, or 3.6% of net sales in the first nine months of 1996 to $138,832, or
6.0% in the first nine months of 1997, reflecting increased expenditures on
capital equipment.
Interest Expense. Interest expense increased from $26,833 in the first
nine months of 1996 to $53,655 during the first nine months of 1997, principally
reflecting increased debt levels associated with notes payable to investors
entered into in 1996.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Sales. Net sales increased 601.8% from $327,574 in 1995 to $2,298,855
in 1996. Revenues from service sales increased 545.0% from $327,574 in 1995 to
$2,112,878 in 1996. This increase of $1,785,304 is primarily attributable to
increases in hosting revenues of $321,278, Web site development and customized
applications revenues of $1,159,205, and consulting and maintenance revenues of
$112,779. Revenues from equipment sales were $185,977 during 1996.
Cost of Sales. Cost of sales for services includes salaries for
programmers, technical staff and customer support. Cost of sales for services
increased from $59,871, or 18.3% of 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.
20
<PAGE> 22
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.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Sales. The Company was formed on December 2, 1994, and recognized no
revenues during 1994. During 1995, the Company had net sales of $327,574, with
associated cost of sales of $59,871.
Operating Expenses. For the year ended December 31, 1994, the Company had
operating expenses of $17,452, which consisted of $1,045 in marketing expenses
and $16,407 in general and administrative expenses. Operating expenses during
1995 were $269,527.
QUARTERLY RESULTS OF OPERATIONS
The following table presents the Company's net sales, gross profit,
operating loss and net loss for each of the seven quarters beginning January 1,
1996 and ending September 30, 1997. In the opinion of management, this
information includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation. The results of operations data
for any quarter are not necessarily indicative of the results to be expected for
any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1996 1996 1996 1997 1997 1997
--------- -------- ------------- ------------ --------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $272 $546 $654 $ 828 $ 909 $ 708 $ 713
Gross profit.................... 225 396 464 539 568 345 113
Operating income (loss)......... 12 (50) (66) (477) (355) (903) (2,133)
Net income (loss)............... 10 (65) (77) (495) (375) (917) (2,096)
</TABLE>
The Company's operations and related revenues historically have varied
substantially from quarter to quarter, and the Company expects these variations
to continue. Unanticipated variations in the number and timing of the Company's
projects or in employee utilization rates may cause significant variations in
revenues in any particular quarter. An unanticipated termination of a major
project, a client's decision not to pursue a
21
<PAGE> 23
new project or proceed to succeeding stages of a current project, or the
completion during a quarter of several major client projects, could require the
Company to pay underutilized employees and therefore have a material adverse
effect on the Company's results of operations and financial condition. See "Risk
Factors -- Potential Fluctuations in Quarterly Results."
LIQUIDITY AND CAPITAL RESOURCES
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 50 persons at September
30, 1997; and (ii) reductions in advertising, public relations and other
professional services.
The Company has substantially limited sources of capital. As of September
30, 1997, the Company had net working capital of approximately $2.0 million. On
December 23, 1997, the Company issued and sold 20,000 shares of Series A
Preferred Stock to the Series A Preferred Holders for aggregate net proceeds of
approximately $1.8 million. The proceeds will be used for general working
capital purposes. Because the Company expects to continue to incur substantial
operating losses, the Company will continue to use substantial sums of cash in
its operations throughout the remainder of this calendar year, and possibly for
an indefinite period thereafter. 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 assets. Any such actions undertaken may limit the Company's
opportunities to realize continued increases in sales and the Company may not be
able to reduce its costs in amounts sufficient to achieve break-even or
profitable operations. If the Company exhausts its sources of capital, and
subsequent cost reduction measures are not sufficient to allow the Company to
achieve break-even or profitable operations, the Company will be forced to seek
protection from its creditors.
Net cash used in operating activities was $3,487,770 for the nine month
period ended September 30, 1997. The Company has primarily financed its
operations to date through public and private sales of equity securities and
loans from its principal stockholders and affiliates. Net cash provided by
financing activities was $5,726,490 and $439,712 during the nine month periods
ended September 30, 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 the
Debentures resulting in net proceeds to the Company of approximately $1.5
million.
The Company spent $364,265 and $329,569 during the nine month periods ended
September 30, 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 September 30, 1997 consist primarily of leases on its Atlanta
and Washington, DC facilities. At September 30, 1997, there were no material
commitments for capital expenditures.
Accounts receivable, net of allowance for doubtful accounts, totaled
$657,163 as of September 30, 1997. Trade receivables are monitored by the
Company through ongoing credit evaluations of its customers'
22
<PAGE> 24
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.
HISS ACQUISITION
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a Delaware corporation formed
in July 1996 to provide Internet and Intranet security system consulting
services. In the transaction, the former holders of HISS's capital stock
received the right to receive their pro rata share of four annual earnout
payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each,
an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal
to 30% of HISS's gross revenues for the 12 month period ending December 31,
1997; provided, however, that (i) the amount of each Annual Earnout will be
limited to an amount (the "Profit Cap") equal to HISS's net profits for the
12-month period ended December 31 immediately preceding the payment date; (ii)
amounts not paid in a year as a result of the Profit Cap will be carried forward
to the subsequent year; and (iii) amounts not paid in the fourth year as a
result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in
whole or in part in cash or, at HomeCom's option, in shares of Common Stock
based upon the average trading price of the Common Stock for the ten trading
days immediately preceding payment of the Annual Earnout. An Annual Earnout will
not be paid if the recipient is then in violation of the non-solicitation and
non-competition provisions contained in the Stock Purchase Agreement to which
the former holders of HISS's capital stock are subject. Roger Nebel, Vice
President and a director of the Company, owned 48% of HISS's outstanding capital
stock and will be entitled to receive 48% of the Annual Earnouts. HISS was
merged with and into the Company on September 11, 1996. The Company currently
anticipates that any and all amounts earned under this Agreement shall be paid
in the form of shares of the Company's common stock, rather than cash. HISS's
gross revenues for the nine months ended September 30, 1997 were approximately
$237,000.
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.
FAS 130 is effective for fiscal years beginning after December 15, 1997. The
effect on the Company's financial statements will be immaterial. The Company
will adopt FAS 130 on its effective date.
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. FAS 131 is effective for fiscal years beginning after December 15,
1997. Earlier application is encouraged. The Company will adopt FAS 131 on its
effective date. Such adoption will have no effect on net income of the Company.
23
<PAGE> 25
BUSINESS
GENERAL
HomeCom develops and markets specialized software applications and products
and provides services that enable businesses to use the Internet and Intranets
to obtain and communicate important business information, conduct commercial
transactions and improve business productivity. HomeCom provides
Internet/Intranet solutions in three areas: (i) customized software applications
design, development and integration including, World Wide Web site development;
(ii) Internet outsourcing services; and (iii) security consulting and
integration services. HomeCom's objective is to be a leading provider of
business communications solutions using Internet standard protocol technologies.
HomeCom employs a team of highly trained Internet/Intranet software
developers and multimedia and graphics professionals who design and develop
specialized Internet/Intranet software applications. These applications enable
companies to obtain and communicate vital business information, such as sales
reports, order status systems, employee directories and client account
information. The Company works closely with its customers to analyze and design
Internet-based software solutions that facilitate the interactive exchange of
business information. Through its experience in designing custom Internet
solutions for businesses, HomeCom believes that it has developed and continues
to develop in-depth knowledge concerning industry-specific Internet applications
and requirements. The Company plans to leverage this knowledge to develop
additional Internet-enabled applications targeted for vertical industries,
including banking and financial services, and telecommunications.
The Company believes that it has established a reputation as a provider of
sophisticated interactive Web sites. The Company has developed more than 100 Web
sites for clients in many diverse industries, including sites for AT&T, Synovus
Financial Corporation ("Synovus"), SouthTrust Bank Corporation ("SouthTrust"),
Norwest Corporation ("Norwest"), Marine Midland Bank ("Marine Midland"),
Rainforest Cafe, Incorporated ("Rainforest"), Excalibur Group, a joint venture
between Time Warner Cable and Time, Inc. ("Time Warner"), Brinker International
("Brinker"), Executrain Corporation ("Executrain"), American International
Underwriters ("AIG"), and American Family Life Assurance Corporation ("AFLAC").
The Company has a highly trained staff that is able to design Web sites ranging
from basic "inquiry only" sites to complex, interactive sites capable of
providing on-line commerce, database integration and manipulation and
sophisticated graphics, animation, sound and video. The Company uses its
proprietary Post On The Fly(TM) software in designing and developing many of its
Web sites.
HomeCom also provides Internet outsourcing services and presently hosts
more than 2,900 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), Under the terms of the Company's business partner
agreement with Unisys, HomeCom's suite of Personal Internet Banker(TM) software
will be marketed as optional software available to purchasers of Unisys'
Computer Systems Group enterprise server hardware. At the heart of HomeCom's
banking applications suite is its Personal
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Internet Banker(TM) software, a scaleable financial software package that
maintains a customer's personal banking history and preferences for Internet
banking.
HomeCom's Internet security division provides security consulting services
and solutions for businesses connecting to the Internet. The Company plans to
develop and integrate advanced value-added security 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 29 full-time software engineers design and develop
custom applications as well as run the Company's outsourcing services and design
Web sites. The Company's software engineers have experience with various
computer operating systems, including Sun Solaris, SGI's IRIX, Windows NT,
Digital's Unix on the Alpha platform, Intel's Pentium Pro on BSDI Unix, Hewlett
Packard's HP 9000 and Apple's Macintosh operating system. The software engineers
write software programs using various tools and languages, including Perl, JAVA,
CGI Programming, C and C++. The software engineers also have database expertise
in Oracle, Informix, Sybase and SQL, and many software development tools. The
Company's multimedia artists and engineers utilize many of the generally
available software programs and tools such as Adobe Photoshop, MacroMedia
Shockwave, RealAudio and VDOLive.
INDUSTRY OVERVIEW
THE INTERNET AND THE WORLD WIDE WEB
The Internet represents a global network of thousands of interconnected
computers and computer networks. By using the Internet, businesses, individuals,
educational institutions and government agencies communicate electronically to
access and share information and conduct business. Open communications on the
Internet are enabled by TCP/IP, an inter-networking protocol software standard.
Advances in microprocessor technology and the development of Web technologies,
such as Hypertext Markup Language ("HTML") technology (which allows users to
move directly from one Web site to another) and advanced graphical user
interface browser and search engine software, have made the Internet easier to
navigate and more accessible to a larger number of users and for a broader range
of applications. These recent technological advances have led to dramatic
increases in the use of the Internet by businesses and individuals.
The World Wide Web is a worldwide network of computer services that uses a
special communications protocol, Hypertext Transfer Protocol ("HTTP"), that
links different servers throughout the Internet and enables non-technical users
to move from Web site to Web site easily and to access information using browser
software. The development of the Web and Internet-based technologies has allowed
fundamental and structural changes in the way information is published,
distributed and retrieved, thereby lowering the cost of publishing information
and expanding its potential reach. By facilitating the publishing and exchange
of information, the Web dramatically increases the amount of information
available to users. Businesses are increasingly recognizing that the Internet
can enhance the delivery and exchange of information, both among their
geographically dispersed locations and employees and with their business
partners and customers. Businesses are also realizing that the Internet can
facilitate relatively inexpensive, standards-based and easy-to-use methods for
accessing and delivering business information, such as sales, marketing and
distribution data. As a result, many businesses are using Web sites as a new
medium for advertising, promotion, conferencing, technical support and exchange
of information.
WEB SITES
A Web site is a collection of one or more electronic documents or "Web
pages," which may contain graphics, text, audio and video information, which is
available to a visitor accessing the Web site. Web sites can contain from one to
hundreds of pages, and can be searched, retrieved and viewed through the use of
widely available "browsers," such as Netscape Navigator or Microsoft Internet
Explorer. Using Web browser
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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.
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
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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:
DEVELOP AND MARKET INDUSTRY-SPECIFIC APPLICATIONS
The Company develops specialized software applications and markets these
applications to large businesses. The Company intends to focus on
industry-specific applications such as banking, insurance and real estate sales
force data systems, financial institution client account access systems,
inventory order entry systems, human resources information directories, and
collaborative and groupware environments. The Company's goal is to develop a
reputation as a leading full-service Internet applications developer for
specific vertical industries, including banking and financial services, and
telecommunications.
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DEVELOP AND INTEGRATE ADVANCED SECURITY SERVICES
HomeCom's Internet security division provides advanced security integration
consulting services and develops Internet applications with high levels of
integrated security. HomeCom's Internet security division is staffed by Internet
software and integration security consultants with a broad range of Internet and
Intranet security applications and integration experience to both commercial and
government users. HomeCom intends to market these advanced services and
applications both as part of a total package of Internet conversion services and
as a single service. The Company's objective is to become a leading provider of
integrated security services and applications to large business enterprises and
to government agencies.
EXPAND BY ACQUISITION
The Internet/Intranet products and services market is highly fragmented.
The Company is one of numerous Internet software applications and advanced
multimedia developers who design, develop and provide Internet software products
and services. In addition, a substantial number of client/server developers,
database systems integrators and resellers provide services to established
clients but do not provide Internet-based solutions for those clients. The
Company will seek to make strategic acquisitions of companies that have
developed specific industry expertise or have existing relationships with large
businesses needing Internet/Intranet solutions. However, the Company has not
entered into any agreement or commitment and is not a party to any negotiations
for any such acquisition. 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
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for serving its customers, employers and suppliers, as well as its objectives
and marketing needs. Prices for the design of Web sites currently range from
$5,000 to more than $100,000.
The Company's staff of software engineers uses a variety of computer
operating systems, tools and language to develop Web sites. In particular, the
Company's software engineers have developed a high level of expertise using C,
C++, Perl, JAVA and CGI programming languages. These programmers write complex
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 the first nine months of 1996 and 1997, custom Internet and Intranet
applications and integration services (including hardware resales) accounted for
approximately 74% 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 2,900 Web sites. HomeCom's NOC is housed in Class A office space
with 24-hour manned on-premises security. Access to the NOC computer room is
key-card secured. HomeCom provides its Internet outsourcing services through
multiple leased T1 and T3 data lines. See "Facilities."
Because the Company is an established provider of these services, conducts
its operations using sophisticated technologies and operates in Class A office
space, it believes it can compete effectively to provide Internet outsourcing
services for large businesses. At the same time, because the Company prices its
outsourcing services competitively, it believes it can compete effectively for
the hosting services of small business and individuals.
The Company maintains the file servers for a customer's Web site for a
monthly fee. Presently, the monthly fees range from approximately $25 to $3,000.
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 the first nine months of 1996 and 1997, Internet outsourcing
services generated approximately 14% and 33%, respectively, of the Company's
total revenues.
INTERNET SECURITY SERVICES
In August 1996, HomeCom acquired an Internet security division to provide
security solutions for businesses connecting to the Internet. See "Certain
Transactions." The Company plans to develop and integrate advanced value-added
security features into its custom software applications and products, and
provide consulting and integration services to companies seeking to communicate
securely and transact business over the Internet.
The Company's objective is to provide its customers with a comprehensive
family of integrated network security solutions. The Internet security division
will assess the customer's needs and recommend and install "firewalls,"
encryption and authentication applications, other repudiation techniques and
secured networks.
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Management of the Internet security division has experience in performing
Internet security services for the federal government.
During the first nine months of 1996 and 1997, Internet security services
generated approximately 0% and 8%, respectively, of the Company's net sales.
SALES AND MARKETING
The Company markets its services through its direct sales force, print
advertising and its own Web site. The Company also generates customer leads
through its business partner relationships with leading technology companies
such as AT&T, Microsoft, Netscape and Unisys. The Company is focusing its
marketing on large businesses with industry-specific applications needs in areas
such as insurance and real estate sales force data systems, financial
institution client account access systems, inventory order entry systems, parts
databases and collaborative and groupware environments. The Company also
utilizes traditional print and media marketing strategies to enhance Company and
product name recognition.
CUSTOMERS
During 1996 and the first nine months of 1997, no customer accounted for
more than 10% of the Company's total net sales. Because substantially all of the
Company's customers have retained the Company for a single project, customers
from whom the Company generated substantial revenue in one quarter generally
have not been a substantial source of revenue in a subsequent quarter.
FACILITIES
The Company occupies approximately 17,000 square feet in two office
buildings in Atlanta, Georgia under leases expiring in March 2001 and October
2002. These facilities serve as the Company's headquarters and computer center.
The Company also has an office in McLean, Virginia occupying approximately 6,000
square feet under a lease expiring in June 2002.
The Company's Internet services are maintained in its key-card
access-secured, dual Leibert air-conditioned NOC in Class A office space near
the Company's principal offices. Company personnel monitor server and network
functions on a 24 hour per day, 7 days per week basis. Back-up servers replace
production servers in the event of failure or down time. Tape back-ups are
performed on a daily basis and transported to secure off-site storage. Each
server is SNMP managed and utilizes devices located on a separate network to
notify network personnel by pager in the event of problems that are not
otherwise detected by HomeCom's own SNMP.
All power supplied to the NOC computer room is supplied by two separate
power substations through American Power Conversion Matrix UPS lines, with
back-up battery power. Telecommunications are provided to the computer room
through multiple leased T1 and T3 lines directly connected to the T3 Internet
provided by interexchange carriers. Each T1 and T3 line is provisioned on
separate local carrier fiber optics using the latest SONET and FDDI technology.
Telecommunications lines are provided through two physically diverse entrance
facilities. The Company has acquired and installed multiple Cisco routers for
connection to the Internet, which automatically redistribute traffic load in the
event of telecommunications failure.
The Company believes that the properties which it currently has under lease
are adequate to serve the Company's business operations for the foreseeable
future. The Company believes that if it were unable to renew the lease on either
of these facilities, it could find other suitable facilities with no material
adverse effect on the Company's business.
COMPETITION
The market for specialized Internet applications is highly competitive, and
the Company expects that this competition will intensify in the future. In
providing specialized software design and development, the Company competes with
numerous businesses that also provide software design and development services,
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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 numerous
large and small competitors that provide comparable outsourcing services. Such
competition includes BBN Planet, AT&T, MCI Communications Corporation ("MCI"),
IBM, EDS and WorldCom, Inc., as well as numerous regional Internet outsourcing
services providers.
The Company's security services division faces competition from many
sources, including companies that provide security consulting services and
companies that market specific Internet-based security solutions. Such
competitors include Digital Equipment Corporation, IBM, Andersen Consulting,
L.L.P. and EDS. In addition, many companies currently market Internet-based
application-specific software products that incorporate security and
confidentiality features and functions.
The Company believes that the rapid expansion of the market for Internet
software applications will foster the growth of many significant competitors
performing comparable services and offering comparable products to those offered
by the Company. The Company competes on the basis of creative talent, price,
reliability of services and responsiveness. Many of the Company's current and
prospective competitors have substantially greater financial, technical,
marketing and other resources than the Company. The Company believes that it
presently competes favorably with respect to each of its various service
offerings. There can be no assurance that the Company's present and proposed
products will be able to compete successfully with current or future competitors
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition and operating
results.
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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 January 27, 1998, the Company employed 46 full-time employees, of whom
29 were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 7 were marketing and sales personnel
and 10 were involved in administration and finance.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. The Company believes
that such insurance is adequate to cover potential claims relating to its
existing business activities.
GOVERNMENT REGULATION
The Telecommunications Act of 1996 (the "1996 Telecommunications Act"),
which became effective on February 8, 1996, imposes criminal liability on
persons sending or displaying in a manner available to minors indecent material
on an interactive computer service such as the Internet. The 1996
Telecommunications Act also imposes criminal liability on an entity knowingly
permitting facilities under its control to be used for those activities. The
constitutionality of these provisions was successfully challenged in federal
district
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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.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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<PAGE> 35
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company, their
ages as of September 30, 1997 and certain information about them are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harvey W. Sax........................... 46 President, Chief Executive Officer and Director
Nat Stricklen........................... 54 Senior Vice President and Director
Krishan H. Puri......................... 32 Executive Vice President and Director
Gia Bokuchava, Ph.D..................... 32 Chief Technical Officer and Director
Roger J. Nebel.......................... 44 Vice President and Director
Carl W. Peede........................... 50 Senior Vice President and Chief Operating Officer
Norman H. Smith......................... 34 Chief Financial Officer
Gregory Abowd, Ph.D.(1)................. 33 Director
</TABLE>
- ---------------
(1) Member of the Audit and Compensation Committees.
HARVEY W. SAX is a founder of the Company and has served as President and
Chief Executive Officer of the Company since January 1995 and as Chairman of the
Board of Directors since September 1997. He was Secretary of the Company from
December 1994 until January 1995. From October 1994 until December 1995, when he
began working as a full-time employee of the Company, Mr. Sax served as a Vice
President of Oppenheimer & Co., Inc. From February 1993 until September 1994,
Mr. Sax served as a Senior Vice President of D. Blech & Co. From July 1992 until
February 1993, Mr. Sax was a Vice President of PaineWebber, Inc. From January
1989 until July 1992, Mr. Sax was a Vice President of Bear, Stearns & Co. Inc.
Mr. Sax received a Bachelor of Arts degree from Emory University in 1972. Mr.
Sax has been a member of the Board of Directors since December 1994.
NAT STRICKLEN has served as Senior Vice President of the Company since
January 1996. Mr. Stricklen was President of the Company from December 1994
until January 1995, and Vice President and Secretary of the Company from January
1995 until January 1996. For more than 25 years prior to joining the Company in
December 1994, Mr. Stricklen was employed by IBM where from 1988 until November
1994 he was the senior product manager for the IBM Link product used for
electronic communication for IBM employees and business partners. Mr. Stricklen
was a member of the team that developed the original IBM Internet home page. Mr.
Stricklen received a Bachelor of Science degree in Data Processing and
Application Systems Design from Washington University in 1975. Mr. Stricklen has
been a member of the Board of Directors since December 1994.
KRISHAN H. PURI has served as Executive Vice President of the Company since
February 1996, and was a member of its former Board of Advisors from May 1995
until August 1996. From March 1994 until January 1996, Mr. Puri was a Senior
Management Consultant with Deloitte & Touche Consulting Group in its
telecommunications practice. From March 1992 until March 1994, Mr. Puri served
as a Senior Engineer for International Communications Network Services for
British Telecom and MCI's Concert joint venture in Atlanta, Georgia. From March
1990 until March 1992, Mr. Puri was a network analyst with Sprint Corporation, a
long distance telecommunications company. Mr. Puri received a Bachelor of
Science degree in Electrical Engineering from Georgia Institute of Technology in
1987 and a Master of Business Administration degree from Georgia State
University in 1992. Mr. Puri has been a member of the Board of Directors since
September 1996.
GIA BOKUCHAVA, PH.D., has served as the Company's Chief Technical Officer
since August 1995. Dr. Bokuchava served as a visiting professor at Emory
University from September 1994 until August 1995 and was employed by the
National Library of Medicine, assisting in the development of Internet based
applications, from January 1995 until August 1995. From July 1990 until
September 1994, Dr. Bokuchava was
34
<PAGE> 36
the Director of The Computer Center at the Institute of Mechanical Engineering
at Georgia Technical University, Tblisi, Georgia (formerly a part of the Soviet
Union). Dr. Bokuchava has taught computer science as a visiting associate
professor at the Universities of Moscow and China. Dr. Bokuchava received a
doctorate in theoretical physics from Georgia Technical University, Tblisi, in
1990. Dr. Bokuchava has been a member of the Board of Directors since September
1996.
ROGER J. NEBEL has served as Vice President of the Company since August
1996. From May 1991 until July 1996, Mr. Nebel was a Department Manager (May
1991 to February 1993) and Senior Manager -- Enterprise Assurance (March 1993 to
July 1996) for PRC, Inc., a subsidiary of Litton Industries, Inc., which
provides information technology consulting and systems integration services for
governments and businesses. Mr. Nebel received a Bachelor of Science degree in
Engineering from California Coast University in 1990 and a Master of Science
degree in Management from National-Louis University in 1993. Mr. Nebel has been
a member of the Board of Directors since September 1996.
CARL W. PEEDE has served as Senior Vice President and Chief Operating
Officer of the Company since November 1997. Mr. Peede joined HomeCom in June
1997 as Senior Vice President and General Manager of Software Products. From
June 1996 to April 1997, Mr. Peede was employed by NetManage, Inc., located in
Cupertino, California, where he was the Senior Vice President of Worldwide
Marketing. From September 1994 to May 1996, Mr. Peede was the Vice President of
Worldwide Marketing at Attachmate/DCA in Bellevue, Washington prior to joining
NetManage, Inc. From January 1993 to September 1994, Mr. Peede managed the
marketing effort for Wall Data, Inc., a high-growth company in Redmond,
Washington. He began his career in 1970 with AT&T Western Electric in Atlanta as
a Project Manager after graduating with a BSEE from Georgia Tech and an MBA from
Georgia State University, both in Atlanta, Georgia.
NORMAN H. SMITH has served as Chief Financial Officer of the Company since
May 1997. Before joining the Company, Mr. Smith was employed by First Image
Management Company, a division of First Data Corporation, from January 1990 to
May 1997. Mr. Smith served in a number of accounting and finance positions with
First Image, most recently as Executive Director of Finance for the Data
Acquisition Division based in Lexington, Kentucky. Prior to that, Mr. Smith was
employed by Deloitte & Touche as a Senior Accountant in its audit practice. Mr.
Smith received a Master of Business Administration from Xavier University in
1991 and a Bachelor of Business Administration from Eastern Kentucky University
in 1985.
GREGORY ABOWD, PH.D., has been an assistant professor in the College of
Computing at the Georgia Institute of Technology since August 1994, where he is
a member of the Software Systems Design Group. From October 1989 until August
1994, Dr. Abowd held post-doctoral positions with the Human Computer Interaction
Group at the University of York in England (October 1989 until September 1992)
and with the Software Engineering Institute and Computer Science Department at
Carnegie Mellon University (September 1992 until August 1994). From October 1989
until September 1992, Dr. Abowd was a student at the University of Oxford, where
he attended as a Rhodes Scholar. Dr. Abowd received a Bachelor of Science degree
in Mathematics from the University of Notre Dame in 1986 and a Master of Science
degree in Computation and a Doctorate of Philosophy in Computation from the
University of Oxford in 1987 and 1991, respectively. Dr. Abowd has been a member
of the Board of Directors since September 1996.
The Company's Board of Directors is divided into three classes. The Class I
director (Dr. Abowd) serves until the 1998 Annual Meeting of Stockholders, the
Class II directors (Dr. Bokuchava and Messrs. Puri and Nebel) serve until the
1999 Annual Meeting of Stockholders and the Class III directors (Messrs. Sax and
Stricklen) serve until the 2000 Annual Meeting of Stockholders. Upon election,
each class serves a three-year term. The classification of the Board of
Directors could have the effect of making it more difficult for a third party to
acquire control of the Company. Officers are elected at the first Board of
Directors meeting following the stockholders meeting at which directors are
elected, and officers serve at the discretion of the Board of Directors. Each
executive officer of the Company was chosen by the Board of Directors and serves
at the pleasure of the Board of Directors until his or her successor is
appointed or until his or her earlier resignation or removal in accordance with
applicable law. There are no family relationships between any of the directors
or executive officers of the Company.
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<PAGE> 37
BOARD COMMITTEES
The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee. The Compensation Committee provides
recommendations to the Board of Directors concerning salaries and incentive
compensation for officers and employees of the Company. The Audit Committee
recommends the Company's independent auditors and reviews the results and scope
of audit and other accounting-related services provided by such auditors. As a
result of the September 1997 resignation of Winn Schwartau from the Board of
Directors., Dr. Abowd serves as the sole current member of the Compensation and
Audit Committees. The Company intends to replace Mr. Schwartau with a
nonemployee member in the near future.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as
members of the Board of Directors but are reimbursed for their reasonable travel
expenses in attending Board of Directors and committee meetings. Directors who
are not employees of the Company are eligible to receive automatic grants of
stock options under the Company's Non-Employee Directors Stock Option Plan, and
may receive additional grants of options under such plan at the discretion of
the Compensation Committee of the Board of Directors. See "Stock Option
Plan -- Non-Employee Directors Stock Option Plan." The Company may in the future
establish a policy for compensating members of the Board of Directors for
attending Board of Directors or committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, compensation of executive officers of the Company was
determined by Harvey W. Sax, the Company's President and Chief Executive
Officer. In September 1996, the Company established a Compensation Committee to
review the performance of executive officers, establish overall employee
compensation policies and recommend salaries and incentive compensation for
officers and employees of the Company. No member of the Compensation Committee
is or will be an executive officer of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company in 1996 for its Chief Executive Officer and each executive officer
of the Company whose total annual salary and bonuses determined at December 31,
1996 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
---------------- --------------------
NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ------------------------------ -------- ----- -------------------- ------------
<S> <C> <C> <C> <C>
Harvey W. Sax.................................. $100,000 $0 -0- -0-
President, Chief Executive Officer
</TABLE>
- ---------------
(1) Other than its President and Chief Executive Officer, the Company had no
executive officer whose salary and bonuses exceeded $100,000 in 1996.
As of September 30, 1997, the annual salaries for the Company's executive
officers were as follows: Harvey W. Sax, President and Chief Executive Officer
($135,000); Nat Stricklen, Senior Vice President, Sales and Marketing,
($75,000); Norm Smith, Chief Financial Officer ($67,500); Krishan Puri,
Executive Vice President ($100,000); Gia Bokuchava, Ph.D., Chief Technical
Officer ($90,000); Roger Nebel, Vice President ($100,000); and Carl Peede, Chief
Operating Officer ($115,000). Pursuant to the employment agreements with Dr.
Bokuchava and Mr. Puri, each is eligible to receive cash bonuses to repay
certain promissory notes issued by them to the Company in connection with their
purchase of shares of Common Stock from the Company in August 1996. See "Certain
Transactions." Each of the Company's executive
36
<PAGE> 38
officers also is eligible to receive cash bonuses to be awarded at the
discretion of the Compensation Committee of the Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
the Named Executive Officer during the year ended December 31, 1996:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF GRANTED STOCK PRICE
SECURITIES TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE OPTION TERM(2)
OPTIONS FISCAL PRICE PER EXPIRATION --------------------
EXECUTIVE OFFICER GRANTED(1) YEAR SHARE DATE 5% 10%
- ----------------- ---------- ---------- --------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Harvey W. Sax................. -0- -- -- -- -- --
</TABLE>
OPTION EXERCISES IN LAST FISCAL AND YEAR-END OPTION VALUES
The following table sets forth the aggregate dollar value of all options
exercised, and the total number of unexercised options held, on December 31,
1996 by the Named Executive Officer:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31,1996 DECEMBER 31,1996(1)
ON VALUE --------------------------- ---------------------------
EXECUTIVE OFFICER EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey W. Sax............ -0- -- -- -- -- --
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Harvey W. Sax,
its President and Chief Executive Officer, which provides a five year term
commencing on January 1, 1996, subject to automatic extension for an additional
one year on each one-year anniversary of the agreement. This employment
agreement is subject to early termination as provided therein, including
termination by the Company "for cause" (as defined in the employment agreement).
The employment agreement provides for an annual base salary of $150,000 (which
is currently reduced to $135,000 by voluntary agreement of Mr. Sax), and for
bonus compensation to be awarded at the discretion of the Compensation Committee
of the Board of Directors.
STOCK OPTION PLANS
Employee Stock Option Plan. The Company's Stock Option Plan (the "Stock
Option Plan") was adopted by the Company's stockholders in September 1996. The
purpose of the Stock Option Plan is to provide incentives for officers and key
employees to promote the success of the Company, and to enhance the Company's
ability to attract and retain the services of such persons. The Company has
reserved 600,000 shares of Common Stock for issuance under the Stock Option
Plan. Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the Code
or (ii) non-qualified stock options. Stock options may be granted under the
Stock Option Plan for all employees of the Company, or of any present or future
subsidiary or parent of the Company. The Stock Option Plan is administered by
the Compensation Committee of the Board of Directors. The Compensation Committee
has the authority to determine exercise prices applicable to the options, the
eligible employees or consultants to whom options may be granted, the number of
shares of Common Stock subject to each option and the terms upon which options
are exercisable. The Compensation Committee has the authority to interpret the
Stock Option Plan and to prescribe, amend and rescind the rules and regulations
pertaining to the Stock Option Plan. No option is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee.
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<PAGE> 39
Any incentive stock option that is granted under the Stock Option Plan may
not be granted at a price less than the fair market value of the Common Stock on
the date of grant (or less than 110% of fair market value in the case of holders
of 10% or more of the total combined voting power of all classes of stock of the
Company or a subsidiary or parent of the Company). Non-qualified stock options
may be granted at the exercise price established by the Compensation Committee,
which will not be less than 85% of the fair market value of the Common Stock on
the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period
not to exceed ten years from the date of grant (or five years in the case of a
holder of 10% or more of the total combined voting power of all classes of stock
of the Company or a subsidiary or parent of the Company) and shall lapse upon
expiration of such period, or earlier upon termination of the recipient's
employment with the Company, or as determined by the Compensation Committee.
As of January 27, 1998, options to purchase 537,160 shares of Common Stock
were outstanding under the Stock Option Plan at exercise prices ranging from
$3.69 to $8.06 per share and at a weighted average exercise price of $4.75 per
share. All outstanding options vest 25% per year from their date of grant.
Non-Employee Directors Stock Option Plan. The Company's Non-Employee
Directors Stock Option Plan (the "Non-Employee Directors Plan") was adopted by
the Company's stockholders in September 1996 and amended in October 1996. The
Company has reserved 300,000 shares of Common Stock for issuance under the
Non-Employee Directors Plan.
The Non-Employee Directors Plan provides for the automatic granting of
non-qualified stock options to directors who are not officers or employees of
the Company ("Non-Employee Directors"). Each Non-Employee Director who is first
appointed or elected to the Board of Directors is granted an option to purchase
10,000 shares of Common Stock. Also, each Non-Employee Director automatically
receives an option to purchase 5,000 shares of Common Stock on the date of each
annual meeting of the Company's stockholders. The Non-Employee Directors Plan
also allows the Compensation Committee to make extraordinary grants of options
to Non-Employee Directors. All options granted under the Non-Employee Directors
Plan vest 50% per year of service by the Non-Employee Director on the Board of
Directors. No option is transferable by the optionee other than by will or laws
of descent and distribution, and each option is exercisable, during the lifetime
of the optionee, only by such optionee. The exercise price of all options will
be the fair market value of the shares of Common Stock on the date of grant, and
the term of each option may not exceed seven years. The Non-Employee Directors
Plan will continue in effect for a period of ten years unless sooner terminated
by the Board of Directors.
During September 1996, Dr. Abowd was granted an option under the
Non-Employee Directors Plan to purchase 10,000 shares of Common Stock at an
exercise price of $6.50 per share.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Stock Purchase Plan") became effective on March 1, 1997. A total of
150,000 shares of Common Stock have been reserved for issuance under the Stock
Purchase Plan. The Stock Purchase Plan is intended to qualify under Section 423
of the Code. The purpose of the Stock Purchase Plan is to encourage and enable
employees of the Company to acquire a proprietary interest in the Company
through ownership of shares of Common Stock. Eligible employees of the Company
will purchase shares of Common Stock at 85% of fair market value and the Company
will partially subsidize purchases under the Stock Purchase Plan and will pay
the expenses of its administration.
An employee electing to participate in the Stock Purchase Plan must
authorize a stated dollar amount or percentage of the employee's regular pay to
be deducted by the Company from the employee's pay during each of four quarterly
payroll deduction periods (each a "Purchase Period"). Purchase Periods begin on
January 1, April 1, July 1 and October 1 of each calendar year during which the
Stock Purchase Plan is in effect. The Company is deemed on the last day of each
Purchase Period to have granted a purchase right to each participant as of the
first day of the Purchase Period to purchase as many full and fractional shares
of Common Stock as can be purchased with the participant's payroll deductions.
On the last day of the Purchase Period, the participant will be deemed to have
exercised this option, at the option price, to the extent of such
38
<PAGE> 40
participant's accumulated payroll deductions. In no event, however, may the
participant purchase Common Stock having a fair market value (measured on the
first business day of the Purchase Period) of greater than $25,000 during a
calendar year. The option price under the Stock Purchase Plan is equal to 85% of
the fair market value of the Common Stock on either the first business day or
the last business day of the applicable Purchase Period, whichever is lower.
The initial Purchase Period under the Stock Purchase Plan will begin at a
date to be determined by the Board of Directors (the "Initial Purchase Period").
With respect to the Initial Purchase Period, an employee electing to participate
in the Stock Purchase Plan may authorize a stated dollar amount of the
employee's regular pay to be deducted by the Company from the employee's pay
during the Initial Purchase Period, or the employee may make a direct cash
contribution to his or her account under the Stock Purchase Plan. On the last
day of the Initial Purchase Period, the Company will be deemed to have granted a
purchase right to each participant to purchase as many full and fractional
shares of Common Stock as can be purchased with the participant's payroll
deductions and cash contributions, as of the first business day after the date
of this Prospectus.
Employees of the Company who have completed six full months of service with
the Company and whose customary employment is more than 20 hours per week and
five or more months per calendar year are eligible to participate in the Stock
Purchase Plan. An employee may not be granted an option under the Stock Purchase
Plan if after the granting of the option such employee would be deemed to own 5%
or more of the combined voting power of value of all classes of stock of the
Company. As of September 30, 1997, approximately 40 employees would have been
eligible to participate in the Stock Purchase Plan. An employee's rights under
the Stock Purchase Plan may not be assigned, transferred, pledged or otherwise
disposed of, except by will or the laws of descent and distribution. An
employee's rights under the Stock Purchase Plan terminate upon termination of
his or her employment for any reason, including retirement. Upon such
termination, the Company will refund the employee's payroll deductions or
contributions made during the Purchase Period.
An employee may not sell shares of Common Stock purchased under the Stock
Purchase Plan until the later of: (i) 180 days after the date of this
Prospectus; or (ii) the first day of the second Purchase Period following the
Purchase Period in which the option for such shares was granted.
The Stock Purchase Plan is administered by the Compensation Committee. No
member of the Board of Directors will be eligible to participate in the Stock
Purchase Plan during the period he or she serves as a member of the Compensation
Committee. The Compensation Committee may terminate or amend the Stock Purchase
Plan at any time. However, any termination or amendment may not affect or change
purchase rights previously granted under the Stock Purchase Plan without the
consent of the affected participants. Also, any amendment that materially
increases the benefits or number of shares under the Stock Purchase Plan (except
for adjustments due to changes in the Company's capital structure) or that
materially modifies the eligibility requirements of the Stock Purchase Plan will
be subject to stockholder approval. If not sooner terminated by the Compensation
Committee, the Stock Purchase Plan will terminate at the time that all
authorized shares of Common Stock reserved for grant under the Stock Purchase
Plan have been purchased.
401(k) Profit Sharing Plan. The Company's Board of Directors has approved
the adoption of a 401(k) Profit Sharing Plan (the "401(k) Plan") which is
intended to be a tax-qualified defined contribution plan under Section 401(k) of
the Code. This plan has not yet been implemented. In general, all employees of
the Company will be eligible to participate. The 401(k) Plan will include a
salary deferral arrangement pursuant to which participants may contribute
amounts not to exceed limitations imposed by the Code. Subject to certain Code
limitations, the Company may make a matching contribution of up to $1,000 of the
salary deferral contributions of participants at a rate of 50% of the
participant's contributions, up to 4% of the participant's salary. The Company
may also make an additional contribution to the 401(k) Plan each year at the
discretion of the Board of Directors. A separate account will be maintained for
each participant in the 401(k) Plan. The portion of a participant's account
attributable to his or her own contributions will be 100% vested. The portion of
the account attributable to Company contributions (including matching
contributions)
39
<PAGE> 41
will vest after 5 years of service with the Company. Distributions from the
401(k) Plan may be made in the form of a lump-sum cash payment or in installment
payments.
AGREEMENTS WITH EMPLOYEES
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company (i) restricting the ability of
the employee to compete with the Company during his or her employment and for a
period of eighteen months thereafter, (ii) restricting solicitation of customers
and employees following employment with the Company, and (iii) providing for
ownership and assignment of intellectual property rights to the Company.
CERTAIN TRANSACTIONS
During the period December 1994 through December 1995, Harvey W. Sax, the
Company's President and Chief Executive Officer, loaned a total of approximately
$63,497 to the Company pursuant to a promissory note payable by the Company on
September 12, 2000, which accrues interest at the prime rate plus 1% per annum.
The Company used approximately $56,000 of the net proceeds of its initial public
offering to repay the remaining outstanding amounts owed under this promissory
note.
In February 1996, in connection with a recapitalization of the Common
Stock, the Company issued 787,844 shares of Common Stock to Harvey W. Sax, its
President and Chief Executive Officer and then its sole stockholder, for $.001
per share. In December 1994, the Company granted Nat Stricklen, a co-founder and
director of the Company, an option to acquire, for an aggregate exercise price
of $10.00, shares of Common Stock which, when issued, would represent
approximately 10% of the issued and outstanding Common Stock. Mr. Stricklen
exercised this option in February 1996 and received 93,070 shares of Common
Stock.
In February 1996, the Company (i) sold for $.0001 per share 335,052 shares
to Margery Germain; and (ii) issued to Mark Germain for $200,000 an unsecured
promissory note due September 1997 in the principal amount of $200,000 and
bearing interest at the rate of 8% per annum. Pursuant to the terms of the
promissory note with Mr. Germain, in May, 1997 the Company issued Mr. Germain
33,333 shares of Common Stock in repayment of the $200,000 outstanding principal
balance of this note.
Mr. David A. Blech, Mrs. Esther Blech and the Edward A. Blech Trust
(collectively the "Blech Interests") have agreed in writing with the Nasdaq
Stock Market, Inc. that, for a period of three years from the date of their
original purchases of securities from the Company, none of them will sell,
transfer, assign, pledge or hypothecate any shares of Common Stock. Gifts of
shares of the Common Stock are permitted provided that the recipient of such
gift agrees in writing to be bound by the terms of the agreement. The Blech
Interests further agreed that while the Common Stock is listed on any Nasdaq
market, there will be no financial relationship between David Blech or any of
the foregoing Blech Interests, on the one hand, and the Company, on the other
hand; that the direct or indirect ownership of shares of Common Stock held by
Mr. David A. Blech and/or the Blech Interests may not exceed 5% of the Common
Stock; and that there may be no advisory relationship between Mr. David A. Blech
and the Company. To the best of the Company's knowledge and belief, the Blech
Interests beneficially own less than 5% of the Common Stock.
In August 1996, Harvey W. Sax, the Company's President and Chief Executive
Officer, contributed 3,956 shares of Common Stock to the Company.
In August 1996, the Company issued and sold to six of its employees an
aggregate of 102,855 shares of Common Stock for a total of $468,004, payable
through the issuance of promissory notes payable in four equal annual
installments, bearing interest at 8% per annum and secured by the shares of
Common Stock purchased therewith. Also in August 1996, the Company entered into
employment agreements with such persons which provide that for each of the first
four years of employment, the Company will issue a bonus to the employee in the
amount necessary to repay the annual amount due under such promissory note (plus
the taxes due by the employee as a consequence of receiving such bonus).
Pursuant to the terms of the employment agreements, the Company will continue to
make these annual payments if the employee is terminated other than "for
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<PAGE> 42
cause," as defined in the employment agreements. Pursuant to the terms of the
subscription agreements for such shares, if the employee's employment is
terminated within such four-year period, the Company has the right to repurchase
that percentage of the shares purchased by the employee which shall equal the
percentage of the promissory note which is not yet due, payment for such
repurchase to be made by canceling the applicable outstanding amount of the
promissory note. Gia Bokuchava, Ph.D., Chief Technical Officer and a director,
and Krishan Puri, Executive Vice President and a director, purchased 39,559 and
29,669 shares of Common Stock, respectively, in this transaction. Mr. Vinod
Keni, a former director, purchased 3,955 shares in this transaction. The Company
has agreed with Mr. Keni that all 11,865 options to acquire Common Stock held by
Mr. Keni (at a weighted average exercise price of $5.16 per share) shall
continue to vest as if Mr. Keni were still employed by the Company. The Company
also agreed to cancel and forgive indebtedness of approximately $18,000
represented by the promissory note given by Mr. Keni to purchase such 3,955
shares and to give Mr. Keni a cash payment to cover Mr. Keni's estimated tax
liability from such cancellation of indebtedness.
In August 1996, Krishan Puri, Executive Vice President and a director,
exercised a warrant to purchase 9,307 shares of Common Stock for a total
exercise price of $1.00. Mr. Puri was granted the warrant in June 1995 in
connection with his agreeing to serve on the Company's former Board of Advisors.
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a Delaware corporation formed
in July 1996 to provide Internet and Intranet security system consulting
services. In the transaction, the former holders of HISS's capital stock
received the right to receive their pro rata share of four annual earnout
payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each,
an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal
to 30% of HISS's gross revenues for the 12 month period ending December 31,
1997; provided, however, that (i) the amount of each Annual Earnout will be
limited to the amount of HISS's net profits for the 12-month period ended
December 31 immediately preceding the payment date (the "Profit Cap"), (ii)
amounts not paid in a year as a result of the Profit Cap will be carried forward
to the subsequent year, and (iii) amounts not paid in the fourth year as a
result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in
whole or in part in cash or, at HomeCom's option, in shares of Common Stock
based upon the average trading price of the Common Stock for the ten trading
days immediately preceding payment of the Annual Earnout. An Annual Earnout will
not be paid if the recipient is then in violation of the non-solicitation and
non-competition provisions contained in the Stock Purchase Agreement to which
the former holders of HISS's capital stock are subject. Roger Nebel, Vice
President and a director of the Company, owned 48% of HISS's outstanding capital
stock and will be entitled to receive 48% of the Annual Earnouts. HISS was
merged with and into the Company on September 11, 1996.
RECENT TRANSACTIONS
INSURERATE
In January 1998, the Company formed InsureRate, Inc. ("InsureRate") for the
purpose of providing Internet web development and web hosting services to
entities engaged in the sale, marketing or underwriting of insurance and other
financial products and services. The Company has committed to loan InsureRate up
to $100,000 for the operation of InsureRate's business, including the purchase
of machinery, equipment, fixtures and furnishings, leasehold improvements and
other necessary business expenses and working capital needs. The unpaid
principal balance of this loan will bear interest at the Applicable Federal
Rate. The outstanding principal balance advanced to InsureRate plus accrued
interest is payable in January 2008. InsureRate has the option to repay this
loan to HomeCom in either cash or in shares of common stock of InsureRate having
a value on the repayment date equal to the aggregate principal amount advanced
by HomeCom to InsureRate, together with interest thereon.
The Company, InsureRate, Jerome R. Corsi ("Corsi") and Hamilton Dorsey
Alston Company ("HDA") (a licensed insurance agency) are parties to an agreement
(the "Purchase Agreement") pursuant to which HDA purchased InsureRate common
stock for a total purchase price of $100,000. As a result of the
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<PAGE> 43
transaction consummated by the Purchase Agreement, all of the outstanding
InsureRate Stock is, subject to the contingency described below, currently held
in the following amounts: the Company owns 56.67% of InsureRate's Common Stock,
HDA owns 33.33% and Corsi owns 10%.
InsureRate has agreed to deposit the $100,000 received from HDA into an
escrow account. Pursuant to an escrow agreement with a third party escrow agent,
HDA has the sole and absolute discretion until 9:00 a.m. Atlanta, Georgia time
on February 22, 1998, for any or no reason, to cause the escrow agent to deliver
to HDA the escrowed funds, without interest, upon receipt by the escrow agent
from HDA of the share certificate representing HDA's shares of InsureRate stock.
These shares would be delivered to the Company resulting in the ownership by
HomeCom of 90% of InsureRate's Common Stock.
The Company and HDA concurrently entered into a shareholders agreement
which, among other things, provides that: (i) the Company has a right of first
refusal to purchase HDA's InsureRate stock prior to a proposed sale of such
stock by HDA to a third party unaffiliated with HDA; (ii) HDA has the right to
cause the Company to purchase from HDA all of HDA's InsureRate stock at a
purchase price equal to $100,000 at any time, payable by HomeCom at its sole
discretion either in the form of cash or shares of Common Stock of HomeCom
having a value equal to $100,000; provided, however, that if HDA exercises such
right within 30 days after the date on which InsureRate's Internet web site is
first open for public access through the World Wide Web on the Internet, then
the Company must pay the $100,000 in cash; and (iii) the Company has the right
to purchase from HDA 50% of HDA's InsureRate stock at a purchase price equal to
$50,000 at any time; provided that HDA may, in its sole discretion, elect to
receive the purchase price either in the form of cash or shares of the Company's
Common Stock.
HDA and InsureRate also signed a Web Development and Hosting Services
Agreement whereby InsureRate agreed to perform for HDA Internet web site
development services for the creation of an Internet web site located on
InsureRate's web servers for the marketing of group and individual insurance
products according to the specifications submitted by HDA to InsureRate. Under
the terms of this agreement, InsureRate will offer to HDA the right to market
and advertise any other insurance products to be offered on InsureRate's web
servers prior to offering that right to any other insurance agency. If HDA
declines to offer any product or service on InsureRate's web site, then
InsureRate may offer the right to market the product or service to any other
insurance agency on its web site or any web server of InsureRate. HDA will pay a
quarterly hosting fee to InsureRate not to exceed two-thirds of the revenue
earned by HDA during the preceding calendar quarter from all agency and
brokerage agreements between HDA and each insurer for which HDA markets and
sells insurance products or services on InsureRate's web site.
As an inducement for HDA to enter into the Web Development and Hosting
Services Agreement, HomeCom granted to HDA a warrant to purchase 25,000 shares
of the Company's Common Stock for an exercise price of $3.70 per share. HDA may
exercise this warrant according to the following vesting schedule: (i) 8,333.33
shares are purchasable as of January 23, 1999; (ii) 8,333.33 shares are
purchasable as of January 23, 2000; and (iii) 8,333.33 shares are purchasable as
of January 23, 2001. This warrant expires on March 31, 2001 if not earlier
exercised.
SALE OF DEBENTURES
In September 1997, the Company completed the sale of the Debentures. The
Debentures were issued pursuant to the terms of a 5% Convertible Debenture
Purchase Agreement dated effective as of September 19, 1997 (the "Debenture
Agreement"). Principal and interest on the Debentures is payable on September
22, 2000. The Debentures are convertible at the option of the holders. The
holders of the Debentures have agreed, however, that they may convert (i) not
more than one-third of the aggregate value of the Debentures at any time on or
after the sooner of the Debenture Registration Effective Date or December 26,
1997; (ii) not more than an additional one-third of the aggregate value of the
Debentures at any time on or after the sooner of the 30th day following the
Debenture Registration Effective Date or January 25, 1998; and (iii) the final
one-third of the aggregate value of the Debentures at any time on or after the
sooner of the 60th day following the Debenture Registration Effective Date or
February 24, 1998. As a result of these agreements, two-thirds of the aggregate
value of the Debentures are convertible at the option of the holders immediately
as of the date of
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<PAGE> 44
this Prospectus and the balance of the Debentures will become convertible on
February 24, 1998. The Debentures are convertible at a conversion price (the
"Debenture Conversion Price") which is the lesser of (a) 75% of the average
closing bid price of the Common Stock as represented by Nasdaq or on other
securities exchanges or markets on which the Common Stock is listed for the
three trading days ending on the day preceding notice of conversion, or (b)
$4.00. The number of shares issuable upon conversion of the Debentures is equal
to the aggregate principle balance of the Debentures divided by the Debenture
Conversion Price. The offer and sale of the Debenture Conversion Shares has been
registered pursuant to the Debenture Registration Statement which was declared
effective by the Commission on or about February , 1998.
In connection with the completion of the Debenture Sale of the Debentures,
the Company issued the Debenture Warrants to acquire an aggregate 400,000 shares
of Common Stock. Of the Debenture Warrants, warrants to acquire an aggregate
200,000 shares are exercisable at a price of $4.00 per share, and warrants to
acquire an aggregate 200,000 shares are exercisable at a price of $6.00 per
share. The exercise price of the Debenture Warrants is subject to adjustment. If
not earlier exercised, the Debenture Warrants expire on October 27, 2000. See
"Description of Securities -- Warrants."
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, with respect to (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of the Common Stock;
(ii) each director; (iii) all executive officers and directors as a group; and
(iv) the Selling Securityholders, certain information with respect to the
beneficial ownership of the Common Stock as of January 27, 1998.
<TABLE>
<CAPTION>
COMMON PERCENTAGE NUMBER OF COMMON PERCENTAGE
STOCK OF COMMON SHARES OF STOCK OF COMMON
BENEFICIALLY STOCK COMMON BENEFICIALLY STOCK
OWNED BENEFICIALLY STOCK OWNED BENEFICIALLY
BEFORE OWNED BEFORE OFFERED AFTER OWNED AFTER
NAME OF BENEFICIAL OWNER(1) OFFERING(2) OFFERING HEREBY OFFERING(2) OFFERING(3)
- --------------------------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Harvey W. Sax(4)........................ 844,744 28.6% -- 844,744 25.0%
Nat Stricklen(5)........................ 68,170 2.3 -- 68,170 1.9
Krishan H. Puri(6)...................... 43,976 1.5 -- 43,976 1.3
Gia Bokuchava, Ph.D.(7)................. 40,059 1.4 -- 40,059 1.2
Roger J. Nebel(8)....................... 2,100 * -- 2,100 *
Gregory Abowd, Ph.D.(9)................. 5,000 * -- 5,000 *
Carl W. Peede(10)....................... -- * -- -- *
Norman H. Smith(11)..................... -- * -- -- *
First Granite Securities, Inc.(12)...... 400,000 11.9 400,000 0 *
Mark Germain(13)........................ 350,885 11.9 -- 350,885 9.9
Margery Germain(14)..................... 350,885 11.9 -- 350,885 9.9
FTS Worldwide Corporation(15)........... 283,657 8.8 -- 283,657 5.5
Euro Factors International, Inc.(16).... 124,100 4.0 -- 124,100 2.48
Beauchamp Finance(17)................... 106,371 3.5 -- 106,371 2.14
COLBO(18)............................... 88,643 2.9 -- 88,643 1.79
Dominion Capital Fund, LTD.(19)......... 573,491 14.9 573,491 0 *
Sovereign Partners, L.P.(20)............ 191,164 5.5 191,164 0 *
Ladenburg Thalmann & Co. Inc.(21)....... 100,000 3.27 100,000 0 *
The Malachi Group, Inc.(22)............. 50,000 1.66 50,000 0 *
All executive officers and directors as
a group (8 persons)................... 1,004,049 33.9% -- 1,004,049 20.60%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted, the street address of the named beneficial owner
is Building 14, Suite 100, 3535 Piedmont Road, Atlanta, Georgia 30305.
(2) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock beneficially owned, subject to community
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<PAGE> 45
property laws where applicable. Shares of Common Stock subject to options
that are currently exercisable or exercisable within sixty days of December
13, 1997 are deemed to be outstanding and to be beneficially owned by the
person holding such options for the purpose of computing the percentage
ownership of such person but are not treated as outstanding for the purpose
of computing the percentage ownership of any other person.
(3) The number and percentage of Common Stock beneficially owned after the
offering assumes that the Debentures are converted into an aggregate
602,770 shares at a Debenture Conversion Price of $2.8203125 per share,
which is the Debenture Conversion Price that would be effective if the
Company received notice of conversion of the Debentures after the close of
trading on January 27, 1998. The post offering ownership also assumes that
the Series A Preferred Stock is converted into an aggregate of 689,655
shares of Common Stock at a Series A Preferred Conversion Price of $2.90,
which is the Series A Preferred Conversion Price that would be effective if
the Company received notice of conversion of the Series A Preferred Stock
after the close of trading on January 27, 1998 and further assumes the
issuance of 625,00 shares of Common Stock upon exercise of the Offered
Warrants. The Debenture Conversion Price and the Series A Preferred
Conversion Price are variable, and the number of shares issuable upon
conversion of the Debentures and the Series A Preferred Stock will increase
if the average closing bid price of the Company's Common Stock is less than
$3.76 per share for the three or five trading days immediately prior to
issuance. See "Description of Securities -- Convertible Debentures."
(4) Excludes 10,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of January 27, 1998 at an exercise price of $4.06 per
share which is not currently exercisable and which becomes exercisable more
than 60 days following the date of the date of this Prospectus.
(5) Excludes 14,000 shares of Common Stock issuable upon the exercise of
options outstanding as of January 27, 1998 at a weighted average exercise
price of $4.61 per share which are not currently exercisable and which
become exercisable more than 60 days following the date of the date of this
Prospectus.
(6) Excludes 25,000 shares of Common Stock issuable upon the exercise of
options outstanding as of November 20, 1997 at a weighted average exercise
price of $4.45 per share which are not currently exercisable and which
become exercisable more than 60 days following the date of the date of this
Prospectus.
(7) Excludes 25,000 shares of Common Stock issuable upon the exercise of a
options outstanding as of January 27, 1998 at a weighted average exercise
price of $4.45 per share which are not currently exercisable and which
become exercisable more than 60 days following the date of the date of this
Prospectus.
(8) Includes 1,250 shares of Common Stock issuable upon the exercise of an
option outstanding as of January 27, 1998 at an exercise price of $6.00 per
share. Excludes 18,750 shares of Common Stock issuable upon the exercise of
options outstanding as of January 27, 1998 at a weighted average exercise
price of $5.07 per share which are not currently exercisable and which
become exercisable more than 60 days following the date of the date of this
Prospectus. Also excludes an indeterminate number of shares of Common Stock
which may be issued in connection with the Company's acquisition of HISS.
See "Certain Transactions."
(9) Includes 5,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of January 27, 1998 at an exercise price of $6.50 per
share which is currently exercisable. Excludes 5,000 shares of Common Stock
issuable upon the exercise of an option outstanding as of November 20, 1997
at an exercise price of $6.50 per share which is not currently exercisable
and which becomes exercisable more than 60 days following the date of the
date of this Prospectus.
(10) Excludes 60,000 shares of Common Stock issuable upon the exercise of
options outstanding as of January 27, 1998 at a weighted average exercise
price of $5.10 per share which are not currently exercisable and which
become exercisable more than 60 days following the date of the date of this
Prospectus.
(11) Excludes 25,000 shares of Common Stock issuable upon the exercise of
options outstanding as of January 27, 1998 at a weighted average exercise
price of $4.84 per share, which are not currently exercisable and which
become exercisable more than 60 days following the date of this Prospectus.
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<PAGE> 46
(12) The address of this security holder is 1276 50th Street, Brooklyn, NY
11219. Includes 400,000 shares of Common Stock issuable upon the exercise
of currently exercisable warrants at an exercise price of $4.00 per share
for 200,00 of the shares of Common Stock issuable thereunder and $6.00 per
share for the remaining 200,000 shares of Common Stock issuable thereunder.
(13) The address of this stockholder is 81 Main Street White Plains, NY 10601.
Includes 335,052 shares of Common Stock owned by Margery Germain, the wife
of Mr. Germain, as to which shares Mr. Germain disclaims beneficial
ownership.
(14) The address of this stockholder is 6 Olmstead Road Scarsdale, NY 10583.
Includes 15,833 shares of Common Stock owned by Mark Germain.
(15) The address of this Selling Securityholder is 24 Route de Malagnov, Geneva,
Switzerland, CH 1208. Represents shares of Common Stock issuable upon
conversion of an aggregate $800,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.8203125.
(16) The address of this Selling Securityholder is 140 Birmensdorferstrasse,
Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable
upon conversion of an aggregate $350,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.8203125.
(17) The address of this Selling Securityholder is 140 Birmensdorferstrasse,
Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable
upon conversion of an aggregate $300,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.8203125.
(18) The address of this Selling Securityholder is Szigetszentmiklos, Gyari Ut.
Hungary H-2310. Represents shares of Common Stock issuable upon conversion
of an aggregate $250,000 of Debentures held by this Selling Securityholder.
The number of shares of Common Stock represented as beneficially owned by
this Selling Securityholder is estimated based upon an assumed Debenture
Conversion Price of $2.8203125.
(19) The address of this shareholder is Bahamas Financial Centre, Third Floor,
Charlotte & Shirley Street, Nassau, Bahamas CB-13136. Represents shares of
Common Stock issuable upon conversion of an aggregate 15,000 shares of
Series A Preferred Stock. The number of shares of Common Stock represented
as beneficially owned by this shareholder is estimated based upon an
assumed Series A Preferred Conversion Price of $2.90. Also includes 56,250
shares of Common Stock issuable upon the exercise of warrants at a weighted
average exercise price of $14.72604 per share.
(20) The address of this shareholder is Bahamas Financial Centre, Third Floor,
Charlotte & Shirley Street, Nassau, Bahamas CB-13136. Represents shares of
Common Stock issuable upon conversion of 5,000 shares of Series A Preferred
Stock held by the shareholder. The number of shares of Common Stock
represented as beneficially owned by this shareholder is estimated based
upon an assumed Series A Preferred Conversion Price of $2.90. Also includes
18,750 shares of Common Stock issuable upon the exercise of warrants at a
weighted average exercise price of $14.72604 per share.
(21) The address of this shareholder is 35th Floor, 590 Madison Avenue, New
York, NY 10022. Includes 100,000 shares of Common Stock issuable upon the
exercise of warrants at an exercise price of $7.20 per share.
(22) The address of this shareholder is Suite 1132, 3390 Peachtree Road NE,
Atlanta, GA 30326. Includes 50,000 shares of Common Stock issuable upon the
exercise of warrants at an exercise price $15.825 per share.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, $.0001 par value, and 1,000,000 shares of preferred stock, $.01
par value. As of January 27, 1998, the Company had issued an outstanding
2,956,396 shares of Common Stock and 20,000 shares of Series A Preferred Stock.
As
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<PAGE> 47
of such date, there were 30 holders of record of shares of Common Stock and two
holders of record of the Series A Preferred Stock. As of January 27, 1998, the
Company had outstanding an aggregate $1,700,000 of its Debentures.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and all matters to be submitted to a vote of the
Company's stockholders. Subject to the rights of any holders of preferred stock
which may be issued in the future, the holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of dissolution,
liquidation or winding up of the Company, holders of shares of Common Stock are
entitled to share ratably in all assets remaining after payment of all
liabilities and the aggregate liquidation preference of outstanding shares of
preferred stock. Holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares of Common Stock to be issued by the Company in this
offering will be, duly authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of preferred stock with designations, rights and preferences determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividends, liquidation, conversion, voting and other rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In the
event of issuance, the preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
SERIES A CONVERTIBLE PREFERRED STOCK
The Company has designated 20,000 shares of its preferred stock as Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). In transactions
completed in December 1997, the Company issued 20,000 shares of the Series A
Preferred Stock for aggregate consideration of $2,000,000. See "Recent Sale of
Series A Preferred Stock." The shares of Series A Preferred Stock have the
designations, rights and preferences described below.
DIVIDENDS
The holders of the Series A Preferred Stock are entitled to receive
dividends pari passu, on an as-converted basis, with any dividend which shall be
declared and paid upon or set aside for the Common Stock in any year, when, as,
and if declared by the Board of Directors of the Company out of funds legally
available for that purpose, with each share of Series A Preferred Stock being
entitled to receive dividends based on the number of shares of Common Stock into
which a share of Series A Preferred Stock could be converted on the record date
for the dividend. Dividends shall be payable in cash, stock or otherwise in an
amount not less than the per share amount, if any, of any cash, stock, or other
dividend declared on the Common Stock during such fiscal year.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or not, the holders of Series A Preferred Stock shall be
entitled to receive, before any amount shall be paid to holders of Common Stock,
an amount per share equal to $100.00 for each outstanding share of Series A
Preferred Stock (as equitably adjusted for stock splits, combinations or similar
events and hereafter individually referred to as the "Original Issue Price")
plus, in each case, all declared and unpaid dividends, if any (such amount being
herein referred to as the "Series A Preference"). If, upon the occurrence of a
liquidation, dissolution or winding up, the assets and surplus funds distributed
among the holders of Series A Preferred Stock shall be insufficient to permit
the payment to such holders of the full amount of the Series A Preference, then
the
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<PAGE> 48
entire assets and surplus funds of the Company legally available for
distribution shall be distributed ratably among the holders of Series A
Preferred Stock based upon the aggregate Original Issue Price of Series A
Preferred Stock held by each holder. If, upon the occurrence of a liquidation,
dissolution or winding up, after the payment to the holders of all series of
Preferred Stock of the full amount of the Series A Preference, assets or surplus
funds remain in the Company, all such remaining assets and surplus funds shall
be distributed ratably among the holders of the Common Stock. A liquidation,
dissolution or winding up of the Company shall be deemed to be occasioned by,
and to include, the Company's sale of all or substantially all of its assets or
the acquisition of the Company by another entity by means of merger,
consolidation or reorganization (other than a merger which solely effects a
change of domicile) or consolidation, where, after such merger or consolidation,
less than 50% of the surviving entity is held by persons who were stockholders
of the Company immediately before the merger, consolidation or reorganization.
VOTING RIGHTS
Each holder of shares of Series A Preferred Stock shall be entitled to the
number of votes equal to the number of full shares of Common Stock into which
such holder's shares of Series A Preferred Stock could be converted on the
record date for the vote or written consent of shareholders and, except as
otherwise required by law, shall have voting rights and powers equal to the
voting rights and powers of the Common Stock. Each holder of Series A Preferred
Stock shall be entitled to notice of any stockholders' meeting in accordance
with the bylaws of the Company and shall vote together with (and not as a
separate class from) holders of the Common Stock upon all other matters
submitted to a vote of shareholders. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares of Common Stock into which shares of Series A
Preferred Stock held by each holder could be converted) shall be rounded to the
nearest whole number (with one-half rounded upward to one).
CONVERSION
Each share of Series A Preferred Stock shall be convertible, at the option
of the holder thereof, into a number of shares of Common Stock equal to the
quotient of (a) the product of the number of shares of Series A Preferred Stock
being converted multiplied by $100 divided by (b) the then-applicable Conversion
Price. The Conversion Price shall equal the lesser of: (i) 80% of the average
closing bid price of the Common Stock for the five trading days ending on the
day the Company actually receives a conversion notice, or (ii) 110% of the
closing bid price of the Common Stock on the closing date of the sale of the
Series A Preferred Stock. Upon conversion, all declared and unpaid dividends on
the Series A Preferred Stock shall be paid, to the extent funds are legally
available therefor, either in cash or in shares of Common Stock of the Company,
at the election of the Company, wherein the shares of Common Stock shall be
valued at the Closing Price on the day the Company actually receives a
conversion notice. The Series A Preferred Stock shall be convertible into shares
of Common Stock not earlier than the following: (i) the first one-half at any
time on or after the 30th day following the Debenture Registration Effective
Date, and (ii) the second one-half at any time on or after the 60th day
following the Debenture Registration Effective Date. Notwithstanding the
foregoing, the Series A Preferred Stock shall not be convertible into shares of
Common Stock under any circumstances until the later of (x) 150 days after the
closing date of the sale of the Debentures or (y) 30 days after the Debenture
Registration Effective Date.
ANTIDILUTION ADJUSTMENTS
The number of shares of Common Stock issuable upon conversion of the Series
A Preferred Stock is subject to adjustment for stock splits, stock dividends,
any distribution payable in securities of the Company other than shares of
Common Stock and provision is not made for payment of such distribution to
holders of the Series A Preferred Stock on an as-converted basis or any change
of the Common Stock into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision, combination or consolidation of shares
provided for above).
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<PAGE> 49
REDEMPTION
The Company shall have the right to call for redemption all or any part of
the outstanding Series A Preferred Stock, at any time or from time to time,
including after receipt of a conversion notice, prior to the issuance shares of
Common Stock upon conversion of the Series A Preferred Stock. The redemption
price (the "Redemption Price") for each share of Series A Preferred Stock
redeemed shall be equal to (a) the sum of $100 per share, plus all accrued but
unpaid dividends thereon up to and including the Redemption Date (as defined
below), multiplied by (b) one hundred twenty-five (125%) percent. The Redemption
Price shall be payable in cash within ten business days following the date the
Company initiates the delivery of a redemption notice to the holders of Series A
Preferred Stock.
CONVERTIBLE DEBENTURES
GENERAL
The Debentures were issued under the Debenture Agreement between the
Company and the Selling Securityholders. The following summaries of certain
provisions of the Debentures and the Debenture Agreement do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Debentures and the Debenture Agreement, including
the definitions therein of certain terms which are not otherwise defined in this
Prospectus and those terms made a part of the Debenture Agreement.
The Debentures represent general unsecured debt obligations of the Company
and are convertible into Common Stock as described below under "-- Conversion of
Debentures." The Debentures will mature on September 22, 2000, unless earlier
converted into shares of Common Stock at the option of the holders upon written
notice to the Company. Upon maturity, the Company will pay the principal amount
of, and all accrued but unpaid interest on, the Debentures in cash or Conversion
Shares, at its option. The Debentures bear interest from the date of original
issue at the annual rate of 5%, payable on September 22, 2000.
CONVERSION OF DEBENTURES
The Debentures are convertible at the option of the holders. The holders
have agreed, however, that they may convert (i) not more than one-third of the
aggregate value of the Debentures at any time on or after the Registration
Effective Date; (ii) not more than an additional one-third of the aggregate
value of the Debentures at any time on or after the 30th day following the
Debenture Registration Effective Date; and (iii) the final one-third of the
aggregate value of the Debentures at any time on or after the 60th day following
the Debenture Registration Effective Date. The Debenture Conversion Price is
equal to the lessor of (a) a 25% discount from the closing bid price of the
Common Stock as reported by Nasdaq or other securities exchanges or markets on
which the Common Stock is listed for the previous three trading days ending on
the day preceding notice of conversion, or (b) $4.00 per share. The Debenture
Conversion Price is subject to equitable adjustment by the Company upon the
occurrence of certain events, including, but not limited to: (i) forward and
reverses stock splits; (ii) dividend payments on shares of Common Stock; (iii)
subdivision of shares of Common Stock; (iv) combinations or reclassifications of
Common Stock; and (v) issuance of rights, warrants, options or the like. The
Company is not required to issue fractional shares of Common Stock upon
conversion of the Debentures; instead, the number of shares issuable shall be
rounded to the nearest whole share, with the fraction paid in cash at the
discretion of the Company.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Debentures as being the occurrence of
one or more of the following: (i) any of the representations or warranties made
by the Company under the Debentures or the Debenture Agreement shall have been
incorrect when made in any material respect; (ii) the Company shall fail to
perform or observe in any material respect to any other covenant, term,
provision, condition, agreement or obligation of the Company under the
Debentures, the Registration Agreements and the Debenture Agreement, and such
failure shall continued uncured for a period of seven days after written notice
from the holder of the Debentures specifically describing such failure; (iii) a
trustee, liquidator or receiver shall be appointed
48
<PAGE> 50
for the Company or for a substantial part of its property or business without
its consent and shall not be discharged within thirty days after such
appointment; (iv) any governmental agency or any court of competent jurisdiction
at the instance of any governmental agency shall assume custody or control of
the whole or any substantial portion of the properties or assets of the Company
and shall not be dismissed thirty calendar days thereafter; (v) bankruptcy
reorganization, insolvency or liquidation proceedings or other proceedings for
relief under any bankruptcy law or any law for the relief of debtors shall be
instituted by or against the Company, and if instituted against the Company, the
Company shall by any action or answer approve of, consent to or acquiesce in any
such proceedings or admit the material allegations of, or default in answering a
petition filed in any such proceeding; or (vi) the Company's Common Stock is
delisted from trading on The Nasdaq SmallCap(TM) Market unless it is there upon
admitted to trading on a national stock exchange.
The Debentures provide that if any Event of Default shall have occurred and
be continuing, and in each and every such case, unless such Event of Default
shall have been waived in writing by the Holder of the Debentures (which waiver
shall not be deemed to be a waiver of any subsequent Event of Default) at the
option of the Holder and in Holder's sole discretion, the Holder may consider
the Debentures immediately due and payable, without presentment, demand, protest
or notice of any kind, all of which are expressly waived by the Company, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's rights and remedies provided in the Debentures or
any other rights or remedies afforded by law.
SATISFACTION AND DISCHARGE
The Debentures will cease to be of further effect at the earlier to occur
of when: (i) the Company has paid or caused to be paid the principal of, and
interest on the Debentures when the same has become due and payable upon
maturity; or (ii) all outstanding Debentures have been fully converted into
Conversion Shares.
MODIFICATIONS OF THE DEBENTURES
The Debentures provide that the Debentures nor any terms thereof shall be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the holders of the Debentures.
GOVERNING LAW
The Debentures provide that they shall be governed by, and construed in
accordance with, the laws of the State of New York.
WARRANTS
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter, Ladenburg Thalmann & Co. Inc.,
the Underwriter Warrants to acquire 100,000 shares of the Company's Common Stock
at an exercise price of $7.20 per share. The exercise price is subject to
adjustment under certain circumstances. The Underwriter Warrants expire on May
12, 2002 if not earlier exercised.
In connection with the completion of the Debenture Sale, the Company issued
to First Granite Securities, Inc., an entity designated by the holder of the
Debentures, the Debenture Warrants to acquire an aggregate 400,000 shares of
Common Stock. Of the Debenture Warrants, warrants to acquire an aggregate
200,000 shares are exercisable at a price of $4.00 per share and warrants to
acquire an aggregate 200,000 shares are exercisable at a price of $6.00 per
share. The exercise price of the Debenture Warrants is subject to adjustment. If
not earlier exercised, the Debenture Warrants expire on October 27, 2000.
In connection with the completion of the sale of the Series A Preferred
Stock, the Company issued the Series A Preferred Stock Warrants. The Series A
Preferred Stock Warrants represent the right to acquire an aggregate 125,000
shares of Common Stock, with warrants to purchase 62,500 shares of Common Stock
having an exercise price per share equal to $14.50625 and warrants to purchase
the remaining 62,500 shares having an exercise price equal to $15.825. The
Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. The Company
intends to register
49
<PAGE> 51
the shares of Common Stock issuable upon exercise of the Series A Preferred
Stock Warrants together with the shares of Series A Preferred Stock. See
"-- Registration Rights."
In connection with the purchase of InsureRate common stock by HDA and as an
inducement for HDA to enter into the Web Development and Hosting Services
Agreement, HomeCom granted to HDA the InsureRate Warrants. The InsureRate
Warrants represent the right to purchase 25,000 shares of Common Stock of
HomeCom for an aggregate purchase price of $92,500. HDA may exercise its right
to purchase such shares subject to the following vesting schedule: (i) 8,333.33
shares are purchasable as of January 23, 1999; (ii) 8,333.33 shares are
purchasable as of January 23, 2000; and (iii) 8,333.33 shares are purchasable as
of January 23, 2001. The InsureRate Warrants expires on March 31, 2001 if not
earlier exercised.
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Restated Certificate of Incorporation contains provisions
which eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty, other than liability for a
breach of the duty of loyalty, acts or omissions not in good faith that
constitute a breach of the director's duty to the Company, acts that involve
intentional misconduct or a knowing violation of the law, transactions in which
the director receives an improper benefit and acts or omissions for which
liability is expressly provided by an applicable statute. While the Restated
Certificate of Incorporation provides directors with protection from awards for
monetary damages for breach of duties to the Company, it does not eliminate
those duties. Accordingly, the Restated Certificate of Incorporation should not
affect the availability of equitable remedies, such as injunction or rescission,
based on a director's breach of the duty of care. However, equitable remedies
may not provide stockholders adequate monetary compensation for damages caused
by breach of duties to the Company. The Company's Restated Bylaws contain
provisions requiring the indemnification of the Company's directors and
officers, and persons serving at the request of the Company as a director or
officer of another corporation, to the fullest extent permitted under the
Delaware General Corporation Law. These provisions do not apply to liabilities
under federal securities laws. The Company believes that these Restated
Certificate of Incorporation and Bylaws provisions are necessary to attract and
retain qualified persons as directors and officers of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person, or affiliate or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans) or (iii) on or after the date the person becomes
an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation that was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such charter or
bylaw amendment shall not become effective until twelve months after the date it
is adopted. Neither the Restated Certificate of Incorporation nor the Restated
Bylaws of the Company contains any such
50
<PAGE> 52
exclusion, although the Board of Directors has excluded the stockholders of the
Company prior to the offering from the coverage of Section 203.
PLAN OF DISTRIBUTION
The Company will not receive any of the proceeds of the sale of the Offered
Shares. The Offered Shares may be sold from time to time to purchasers directly
by the Selling Securityholders. Alternatively, the Selling Securityholders may
from time to time offer the Offered Shares through brokers, dealers or agents
who may receive compensation in the form of discounts, concessions or
commissions from the Selling Securityholders and/or the purchasers of the
Offered Shares for whom they may act as agent. The Selling Securityholders and
any such brokers, dealers or agents who participate in the distribution of the
Offered Shares may be deemed to be "underwriters," and any profits on the sale
of the Offered Shares by them and any discounts, commissions or concessions
received by any such brokers, dealers or agents might be deemed to be
underwriting discounts and commissions under the Securities Act. To the extent
the Selling Securityholders may be deemed to be underwriters, the Selling
Securityholders may be subject to certain statutory liabilities of, including,
but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5
under the Exchange Act.
The Selling Securityholders have advised the Company that the Offered
Shares offered hereby may be sold from time to time in one or more transactions
at fixed prices, at prevailing market prices at the time of sale, at varying
prices determined at the time of sale or at negotiated prices. The Offered
Shares may be sold by one or more of the following methods, without limitation:
(a) a block trade in which the broker or dealer so engaged will attempt to sell
the Offered Shares as agent but may position and resell a portion of the block
as principal to facilitate the transaction; (b) purchases by a broker or dealer
as principal and resale by such broker or dealer for its account pursuant to
this Prospectus; (c) ordinary brokerage transactions and transactions in which
the broker solicits purchasers; (d) an exchange distribution in accordance with
the rules of such exchange; (e) face-to-face transactions between sellers and
purchasers without a broker-dealer; (f) through the writing of options; and (g)
other. At any time a particular offer of the Offered Shares is made, a revised
Prospectus or Prospectus Supplement, if required, will be distributed which will
set forth the aggregate amount and type of Offered Shares being offered and the
terms of the offering, including the name or names of any underwriters, dealers
or agents, any discounts, commissions, concessions and other items constituting
compensation from the Selling Securityholders and any discounts, commissions or
concessions allowed or reallowed or paid to dealers. Such Prospectus Supplement
and, if necessary, a post-effective amendment to the Registration Statement of
which this Prospectus is a part, will be filed with the Commission to reflect
the disclosure of additional information with respect to the distribution of the
Securities. In addition, the Offered Shares covered by this Prospectus may be
sold in private transactions or under Rule 144 rather than pursuant to this
Prospectus.
To the best knowledge of the Company, there are currently no plans,
arrangement or understandings between any Selling Securityholders and any
broker, dealer, agent or underwriter regarding the sale of the Offered Shares by
the Selling Securityholders. There is no assurance that any Selling
Securityholders will sell any or all of the Offered Shares offered by it
hereunder or that any such Selling Securityholders will not transfer, devise or
gift such Offered Shares by other means not described herein.
The Selling Securityholders and any other person participating in such
distribution will be subject to applicable provisions of the Exchange Act and
the rules and regulations thereunder, including, without limitation, Regulation
M which may limit the timing of purchases and sales of any of the Offered Shares
by the Selling Securityholders and any other such person. Furthermore,
Regulation M of the Exchange Act may restrict the ability of any person engaged
in the distribution of the Offered Shares to engage in market-making activities
with respect to the particular Offered Shares being distributed for a period of
up to five business days prior to the commencement of such distribution. All of
the foregoing may affect the marketability of the Offered Shares and the ability
of any person or entity to engage in market-making activities with respect to
the Securities.
Pursuant to the Registration Agreement entered into in connection with the
offer and sale of the Debentures by the Company, each of the Company and the
Selling Securityholders will be indemnified by the
51
<PAGE> 53
other against certain liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
The Company has agreed to pay substantially all of the expenses incidental
to the registration, offering and sale of the Offered Shares to the public other
than commissions, fees and discounts of underwriters, brokers, dealers and
agents.
LEGAL MATTERS
The validity of the Common Stock being offered hereby will be passed upon
for the Company by Morris, Manning & Martin a Limited Liability Partnership,
Atlanta, Georgia.
EXPERTS
The balance sheets as of December 31, 1995 and 1996 and the statements of
operations, stockholders' equity (deficit) and cash flows for the period from
December 2, 1994 (date of incorporation) to December 31, 1994 and the years
ended December 31, 1995 and 1996, included in this Registration Statement, have
been included herein in reliance on the report, which includes an explanatory
paragraph relating to the uncertainty of the Company's ability to continue as a
going concern, of Coopers & Lybrand L.L.P., independent accountants, given on
the authority of that firm as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements, and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy
statements and other information can also be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements, and other information that
are filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval System. This Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission two Registration Statements on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statements") under the Securities Act with respect to the Offered Shares and
shares of Common Stock issuable upon conversion of the Debentures. This
Prospectus does not contain all of the information set forth in the Registration
Statements and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, the Debentures, the Series A
Preferred Stock and the shares of Common Stock offered by such Registration
Statements, reference is made to the Registration Statements and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statements, each such statement being
qualified in all respects by such reference. Copies of the Registration
Statements, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.
52
<PAGE> 54
HOMECOM COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS:
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1995 and 1996............. F-3
Statements of Operations for the period from December 2,
1994 (date of incorporation) to December 31, 1994 and the
years ended December 31, 1995 and 1996.................... F-4
Statements of Stockholders' Equity (Deficit) for the period
from December 2, 1994 (date of incorporation) to December
31, 1994 and the years ended December 31, 1995 and 1996... F-5
Statements of Cash Flows for the period from December 2,
1994 (date of incorporation) to December 31, 1994 and the
years ended December 31, 1995 and 1996.................... F-6
Notes to Financial Statements............................... F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS:
Balance Sheets as of December 31, 1996 and September 30,
1997...................................................... F-16
Statements of Operations for the Three and Nine Month
Periods Ended September 30, 1996 and 1997................. F-17
Statements of Cash Flows for the Nine Months Ended September
30, 1996 and 1997......................................... F-18
Notes to Financial Statements............................... F-19
</TABLE>
F-1
<PAGE> 55
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
HOMECOM COMMUNICATIONS, INC.
We have audited the accompanying balance sheets of HomeCom Communications,
Inc. as of December 31, 1995 and 1996, and the related statements of operations,
stockholders' equity (deficit) and cash flows for the period from December 2,
1994 (date of incorporation) to December 31, 1994 and for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HomeCom Communications, Inc.
as of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the period from December 2, 1994 (date of incorporation) to December
31, 1994 and for the years ended December 31, 1995 and 1996, in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred net losses from operations since
its incorporation and has an accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. Management's plans in regard
to these matters, as described in Note 1, include raising additional capital
through a public offering. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
February 21, 1997
F-2
<PAGE> 56
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1995 1996
------------ ------------
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................. $129,095 $ 332,377
Account receivable, net of allowance for uncollectible
accounts of $2,485 and $106,845 as of December 31, 1995
and 1996, respectively................................. 86,325 488,254
Other current assets...................................... 148 621
-------- ----------
Total current assets.............................. 215,568 821,252
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 30,015 359,260
SOFTWARE DEVELOPMENT COSTS, NET............................. -- 81,520
DEPOSITS.................................................... 1,799 57,527
DEFERRED OFFERING COSTS..................................... -- 406,963
-------- ----------
Total assets...................................... $247,382 $1,726,522
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 14,287 $ 649,794
Accrued salaries and payroll taxes payable................ 25,010 309,377
Accrued vacation.......................................... -- 14,935
Current portion of notes payable to stockholders.......... -- 989,904
Current portion of note payable to bank................... -- 13,614
Unearned revenue.......................................... 42,479 133,170
Current portion of obligations under capital leases....... -- 15,140
-------- ----------
Total current liabilities......................... 81,776 2,125,934
NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 160,792 55,677
NOTE PAYABLE TO BANK........................................ -- 47,032
OTHER LIABILITIES........................................... -- 73,424
OBLIGATIONS UNDER CAPITAL LEASES............................ -- 45,124
-------- ----------
Total liabilities................................. 242,568 2,347,191
-------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, no par value at December 31, 1995; $.0001
par value at December 31, 1996; 1,500 shares authorized
and 1,000 shares issued and outstanding at December 31,
1995; 15,000,000 shares authorized, 1,923,063 shares
issued and outstanding at December 31, 1996............ 27,706 192
Additional paid-in capital................................ -- 472,726
Subscriptions receivable.................................. -- (468,004)
Accumulated deficit....................................... (22,892) (625,583)
-------- ----------
Total stockholders' equity (deficit).............. 4,814 (620,669)
-------- ----------
Total liabilities and stockholders' equity
(deficit)....................................... $247,382 $1,726,522
======== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-3
<PAGE> 57
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION) TO
DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 2 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
NET SALES:
Service sales.......................................... $ -- $ 327,574 $2,112,878
Equipment sales........................................ -- -- 185,977
---------- ---------- ----------
Total net sales................................ -- 327,574 2,298,855
---------- ---------- ----------
COST OF SALES:
Cost of services....................................... -- 59,871 546,409
Cost of equipment sold................................. -- -- 128,938
---------- ---------- ----------
Total cost of sales............................ -- 59,871 675,347
---------- ---------- ----------
GROSS PROFIT............................................. -- 267,703 1,623,508
---------- ---------- ----------
OPERATING EXPENSES:
Sales and marketing.................................... 1,045 124,253 845,690
Product development.................................... -- 20,239 78,887
General and administrative............................. 16,407 121,313 1,194,728
Depreciation and amortization.......................... -- 3,722 85,068
---------- ---------- ----------
Total operating expenses....................... 17,452 269,527 2,204,373
---------- ---------- ----------
OPERATING LOSS........................................... (17,452) (1,824) (580,865)
OTHER EXPENSES (INCOME)
Interest expense....................................... -- 3,469 51,272
Other expense (income), net............................ -- 147 (6,554)
---------- ---------- ----------
LOSS BEFORE INCOME TAXES................................. (17,452) (5,440) (625,583)
INCOME TAXES............................................. -- -- --
---------- ---------- ----------
NET LOSS................................................. $ (17,452) $ (5,440) $ (625,583)
========== ========== ==========
NET LOSS PER SHARE....................................... $ (.01) $ (.00) $ (.33)
========== ========== ==========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES
OUTSTANDING............................................ 1,850,447 1,850,447 1,879,696
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-4
<PAGE> 58
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY (DEFICIT)
--------- --------- ---------- ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
ISSUANCE OF STOCK,
December 2, 1994........ 1,000 $ 27,706 $ 27,706
Net Loss.................. -- -- $ (17,452) (17,452)
--------- --------- --------- ---------
BALANCE, December 31,
1994.................... 1,000 27,706 (17,452) 10,254
Net Loss.................. -- -- (5,440) (5,440)
--------- --------- --------- ---------
BALANCE, December 31,
1995.................... 1,000 27,706 (22,892) 4,814
Termination of S
Corporation............. $(22,892) 22,892 --
Issuance of stock......... 19,663 468,104 $(468,004) 100
Net Loss.................. (625,583) (625,583)
93.07-for-one stock split
and recapitalization.... 1,902,400 (495,618) 495,618
--------- --------- -------- --------- --------- ---------
BALANCE, December 31,
1996.................... 1,923,063 $ 192 $472,726 $(468,004) $(625,583) $(620,669)
========= ========= ======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-5
<PAGE> 59
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION)
TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
DECEMBER 2 TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(17,452) $ (5,440) $(625,583)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation........................................... -- 3,722 79,064
Amortization........................................... -- -- 8,666
Provision for bad debts................................ -- 2,485 104,360
Deferred rent expense.................................. -- -- 73,424
Change in operating assets and liabilities:
Accounts receivable................................. -- (88,810) (506,289)
Other current assets................................ -- (148) (473)
Deposits............................................ (1,799) -- (55,728)
Accounts payable and accrued expenses............... -- 14,287 316,641
Accrued salaries and payroll taxes payable.......... -- 25,010 284,367
Accrued vacation.................................... -- -- 14,935
Unearned revenue.................................... -- 42,479 90,691
-------- -------- ---------
Net cash used in operating activities.......... (19,251) (6,415) (215,925
-------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment.......... -- (33,737) (349,646)
Software development costs............................. -- -- (84,182)
-------- -------- ---------
Net cash used in investing activities.......... -- (33,737) (433,828)
-------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock............................... 27,706 -- 100
Payment of deferred offering costs..................... -- -- (88,096)
Proceeds from note payable............................. -- -- 70,000
Repayment of note payable.............................. -- -- (9,354)
Proceeds from notes payable to stockholders............ -- 163,497 889,904
Repayment of notes payable to stockholders............. -- (2,705) (5,115)
Repayment of capital lease obligations................. -- -- (4,404)
-------- -------- ---------
Net cash provided by financing activities...... 27,706 160,792 853,035
-------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 8,455 120,640 203,282
CASH AND CASH EQUIVALENTS at beginning of period......... 0 8,455 129,095
-------- -------- ---------
CASH AND CASH EQUIVALENTS at end of period............... $ 8,455 $129,095 $ 332,377
======== ======== =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON
CASH INVESTING ANDFINANCING ACTIVITIES:
Cash paid during the period for interest............... $ 0 $ 3,469 $ 6,277
======== ======== =========
</TABLE>
During the year ended December 31, 1996, capital lease obligations of
$64,667 were incurred when the Company entered into leases on computer
equipment.
The accompanying notes are an integral part of these Financial Statements.
F-6
<PAGE> 60
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
HomeCom Communications, Inc. (the "Company") develops and markets
specialized software applications and products and provides services that enable
businesses to use the Internet and Intranets to obtain and communicate important
business information, conduct commercial transactions and improve business
productivity. HomeCom provides Internet/Intranet services in one business
segment in five integrated areas: customized software applications design,
development and integration; World Wide Web site development; Internet
outsourcing services; specialized Internet-enabled software products; and
security consulting and integration services.
BASIS OF PRESENTATION -- GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplate the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has incurred net losses from operations since its
incorporation, and has an accumulated deficit at December 31, 1996. Management
believes that a public offering of its common stock and the conversion of
certain debt to equity and successful commercialization of its products and
services will generate the required capital necessary to continue as a going
concern.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, management considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are shown net of the allowance for doubtful accounts.
The allowance was $2,485 and $106,845 at December 31, 1995 and 1996,
respectively.
FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation, which is computed using the straight-line method over the
estimated useful lives of the related assets (three to five years). Assets
recorded under capital leases are amortized over the shorter of their useful
lives or the term of the related leases using the straight line method.
Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income.
INCOME TAXES
Prior to February 9, 1996, the Company qualified as an S Corporation for
federal and state income tax purposes. Accordingly, no provision was made for
income taxes for its operations prior to February 9, 1996.
Individual stockholders report their share of the Company's taxable income
or loss on their respective individual income tax returns. The Company's taxable
income or loss allocated to the stockholders differs from book income primarily
due to the use of accelerated methods for depreciating furniture, fixtures and
equipment for income tax purposes.
Effective February 9, 1996, the Company converted from an S corporation to
a C corporation for income tax purposes and is, therefore, subject to corporate
income taxes. Deferred income tax assets and liabilities reflect differences
between the bases of the Company's assets and liabilities for financial
reporting and income tax purposes. The net deferred income tax asset of
approximately $236,000 at December 31, 1996 is primarily
F-7
<PAGE> 61
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
due to operating loss carryforwards generated since February 9, 1996 and is
fully offset by a valuation allowance. The effect of a change in the valuation
allowance that results from a change in circumstances that causes a change in
judgment about the realizability of the related deferred tax asset in future
years would be included in income in that period. The statements of operations
include a presentation of the unaudited pro forma effects of income taxes on the
Company's operations as if the Company had been subject to corporate income
taxes for all periods presented.
As a result of termination of the S Corporation in February 1996, the
accumulated deficit as of that date was transferred to additional paid-in
capital.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
SOFTWARE DEVELOPMENT COSTS, NET
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting For Costs
of Computer Software To Be Sold, Leased, or Otherwise Marketed". The
capitalization of these costs begins when a product's technological feasibility
has been established and ends when the product is available for general release
to customers. Amortization is computed on an individual product basis and is the
greater of (a) the ratio of current gross revenues for a product to the total
current and anticipated future gross revenues for the product or (b) the
straight-line method over the estimated economic life of the product. As of
December 31, 1996, software development costs were $81,520, net of $2,662 of
accumulated amortization.
DEFERRED OFFERING COSTS
Costs in connection with the Company's public offering of securities have
been deferred and will be netted against the gross proceeds of the offering. As
of December 31, 1996, costs deferred totaled $406,963.
REVENUE RECOGNITION
The Company recognizes revenues on web page development and specialized
software application contracts using the percentage-of-completion method. The
percentage of completion is determined by relating the actual hours of work
performed to date to the current estimated hours at completion of the respective
contracts. Earned revenue is based on the percentage that incurred hours to date
bear to total estimated hours after giving effect to the most recent estimates
of total hours. Earned revenue reflects the original contract price adjusted for
agreed upon claim and change order revenue, if any. If estimated total costs on
any of these contracts indicate a loss, the entire amount of the estimated loss
is recognized immediately. Revenues related to other services are recognized as
the services are performed. Revenues from equipment sales and related costs are
recognized when products are shipped to the customer. Unearned revenue, as
reflected on the accompanying balance sheet, represents the amount of billings
recorded on contracts in advance of work being performed.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for the Company's notes
payable and capital lease obligations approximate fair value due to the
short-term nature of these instruments.
F-8
<PAGE> 62
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ADVERTISING EXPENSES
All advertising costs are expensed when incurred. Advertising expenses were
approximately $9,000 and $211,000 for the years ended December 31, 1995 and
1996, respectively.
LOSS PER COMMON SHARE
Loss per common share is based on the Company's common stock and is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options and warrants (calculated using the treasury
stock method at the initial public offering price of $6.00 per share). Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the assumed initial public offering price
per share and stock options issued with exercise prices below such price during
the twelve-month period preceding the proposed date of the initial filing of the
registration statement have been included in the calculation of common shares,
using the treasury stock method, as if they were outstanding for all periods
presented. All per share data has been retroactively adjusted to reflect the
93.07-for-one stock split approved by the Board of Directors on September 11,
1996 and effective September 11, 1996.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), was issued. SFAS 128 is designed to improve
the earnings per share information provided in financial statements by
simplifying the existing computational guidelines, revising the disclosure
requirements, and increasing the comparability of earnings per share data on an
international basis. SFAS 128 is effective for financial statements issued for
periods ending after December 15, 1997, including interim periods. Earlier
application is not permitted. The Company will adopt SFAS 128 on its effective
date. Pro forma earnings per share of the Company computed using SFAS 128 is not
different from earnings per share computed using existing standards and
guidelines.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET:
Furniture, fixtures and equipment, net, are comprised of the following as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1996
------- --------
<S> <C> <C>
Furniture and fixtures...................................... $ 3,187 $145,066
Computer equipment.......................................... 30,550 238,317
Computer equipment under capital leases..................... -- 64,667
------- --------
33,737 448,050
Less: accumulated depreciation and amortization............. (3,722) (88,790)
------- --------
$30,015 $359,260
======= ========
</TABLE>
F-9
<PAGE> 63
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE:
Notes payable are comprised of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1996
-------- ----------
<S> <C> <C>
Promissory note payable to a spouse of a stockholder
(interest accrues at 8%), payable September 1997,
non-collateralized, payable in cash and/ or through
issuance of shares of common stock at the effectiveness of
an initial public offering at the initial public offering
price per share. The Company intends to issue shares in
payment of the principal amount payable under the note.... -- $ 200,000
Promissory notes payable to stockholders and affiliates
(interest accrues at 8%), payable August and September
1997, non-collateralized.................................. $100,000 789,904
Promissory note payable to a stockholder (interest accrues
at the prime rate plus 1%), payable September 12, 2000.... 60,792 55,677
Promissory note payable to a bank (interest accrues at the
prime rate plus 1.5%), payable in 60 equal monthly
installments through February, 2001, collateralized by
certain trade receivables and equipment................... -- 60,646
160,792 1,106,227
-------- ----------
Less current maturities of notes payable.................... -- 1,003,518
$160,792 $ 102,709
======== ==========
</TABLE>
Future principal payments on notes payable at December 31, 1996 are as
follows:
<TABLE>
<S> <C>
1997........................................................ $1,003,518
1998........................................................ 13,903
1999........................................................ 15,321
2000........................................................ 72,561
2001........................................................ 924
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2001. During 1996, the Company entered into
several capital leases to purchase computer equipment.
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1996:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ----------
<S> <C> <C>
1997........................................................ $19,414 $ 291,405
1998........................................................ 18,659 270,461
1999........................................................ 17,148 248,501
2000........................................................ 14,163 241,440
2001........................................................ 539 40,240
------- ----------
Total minimum lease payments................................ 69,923 $1,092,047
==========
Less amount representing interest........................... (9,659)
-------
Present value of minimum lease payments..................... $60,264
=======
</TABLE>
F-10
<PAGE> 64
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During January 1996, the Company executed a five-year lease for new office
space. Future minimum annual lease payments are approximately $241,000 per year
for the remainder of the lease term. The total amount of the base rent payments
is being charged to expense on a straight-line method over the term of the
lease. The Company has recorded a deferred credit to reflect the excess of rent
expense over cash payments since inception of the lease.
Rental expense under operating leases for the period from December 2, 1994
to December 31, 1994 and the years ended December 31, 1995 and 1996 was $1,299,
$22,188 and $226,700, respectively.
Subsequent to December 31, 1996, the Company entered into four additional
capital leases for computer equipment. The future minimum payments under these
leases are approximately $135,000 per year through 1999.
The Company's software and equipment are vulnerable to computer viruses or
similar disruptive problems caused by customers or other Internet users.
Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. Although the Company attempts to limit its liability
to customers for these types of risks through contractual provisions, there can
be no assurance that these provisions will be enforceable.
Various legal proceedings may arise in the normal course of business.
Management does not believe that there are currently any asserted or unasserted
claims that will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
5. CONCENTRATION OF CREDIT RISKS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
The Company places its cash and cash equivalents with quality financial
institutions.
Concentration of credit risk with respect to trade receivables is monitored
by the Company through ongoing credit evaluations of its customers' financial
condition. The Company's sales to its five largest customers represented
approximately 46% and 26% of total revenues for the years ended December 31,
1995 and 1996, respectively. The five most significant customer balances
represented approximately 73% and 39% of the accounts receivable balance at
December 31, 1995 and 1996, respectively. No company accounted for more than 10%
of the revenues of the Company during 1996.
6. EQUITY TRANSACTIONS:
All share and per share amounts presented below have been adjusted to
reflect the 93.07-for-one stock split effective September 11, 1996.
During 1995, the Company issued warrants to its former Board of Advisors to
purchase 37,228 shares of common stock for total consideration of $4.00. The
warrants were granted at the fair market value of the common stock at the time
of issuance. These warrants were exercised in August 1996.
F-11
<PAGE> 65
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During February 1996, the Company issued 707,332 additional shares to the
previous sole stockholder, 93,070 shares to an executive officer of the Company
pursuant to the exercise of options granted in connection with the founding of
the Company, and 893,472 shares to four private investors.
In August 1996, the Company sold to certain key employees an aggregate of
102,855 shares of common stock for an aggregate consideration of $468,004,
payable through the issuance of promissory notes payable in four equal
installments, bearing interest at 8% per annum and secured by the shares of
common stock purchased therewith. Also in August 1996, the Company entered into
employment agreements with such persons which provide that, assuming continued
employment with the Company, for each of the first four years of employment, the
Company will issue a bonus to the employee in the amount necessary to repay the
annual amount due under such promissory note (plus the taxes due by the employee
as a consequence of receiving such bonus). Pursuant to the terms of the
employment agreements, the Company will continue to make these annual payments
if the employee is terminated other than "for cause," as defined in the
employment agreements. Pursuant to the terms of the subscription agreements for
such shares, if the employee's employment is terminated within such four-year
period, the Company has the right to repurchase that percentage of the shares
purchased by the employee which shall equal the percentage of the promissory
note which is not yet due, payment for such repurchase to be made by canceling
the applicable outstanding amount of the promissory note. For financial
reporting purposes, these notes receivable have been presented as a separate
component of stockholders' equity.
In September 1996, the Company amended and restated its Certificate of
Incorporation (i) to reclassify its common stock from no par value stock to
stock with a par value of $0.0001 per share, (ii) to increase the authorized
shares of common stock to 15,000,000, and (iii) to authorize the issuance of
1,000,000 shares of $0.01 par value preferred stock. No preferred stock has been
issued.
In September 1996, the Board of Directors approved a 93.07-for-one stock
split effected in the form of a stock dividend, whereby each common stockholder
of record as of September 11, 1996 received 92.07 additional shares of common
stock for each share owned as of the record date. As a result of the stock split
and the above recapitalization, 1,902,400 shares were issued and $495,618 was
transferred from Common Stock to Paid-in Capital. Weighted average common shares
outstanding and per share amounts for all periods presented have been restated
to reflect the stock split.
7. LONG-TERM INCENTIVE PLANS:
EMPLOYEE STOCK OPTION PLAN
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996. Shares of common stock
may be sold or awarded to officers, key employees and consultants. The Company
has reserved 300,000 shares of common stock for issuance under the Stock Option
Plan. Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code or (ii) non-qualified stock options.
During 1996, the Company granted options to purchase shares under the Stock
Option Plan. The options vest 25% per year and expire ten years after the grant
date. The exercise price of the grants was made at or above the fair market
value of the stock on the grant date.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
The Company's Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") was adopted by the Company's stockholders in September 1996. Shares of
common stock may be sold or awarded to directors who are not officers or
employees of the Company ("Non-Employee Directors"). The Company has reserved
300,000 shares of common stock for issuance under the Directors' Plan.
F-12
<PAGE> 66
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Directors' Plan provides for the automatic granting of an option to
purchase 10,000 shares of common stock to each Non-Employee Director who is
first appointed or elected to the Board of Directors. Also, each Non-Employee
Director is automatically granted an option to purchase 5,000 shares of common
stock on the date of each annual meeting of the Company's stockholders.
Furthermore, the Directors' Plan allows the Board of Directors to make
extraordinary grants of options to Non-Employee Directors.
During 1996, the Company granted options to purchase shares under the
Directors' Plan. The options granted under the Directors' Plan vest 50% per year
of service and expire seven years after date of grant. The exercise price of the
grants was above the fair market value of the stock on the grant date.
Options historically have been granted based on an amount greater than or
equal to the fair value of the shares at the date of grant. Since no quoted
market price was available prior to the Company's proposed initial public
offering, the best estimate of the fair value of the stock was determined by the
Board of Directors.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following assumptions used for
grants in 1996: dividend yield of 0%, expected volatility of 80%, risk-free
interest rate of 6.46%, and expected lives of four years for the Stock Option
Plan and two years for the Directors' Plan.
A summary of the Company's stock option plan activity and related
information for the year ended December 31, 1996, is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
------------------------
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------- --------------
<S> <C> <C>
Outstanding at beginning of year............................ 0 --
Granted..................................................... 229,167 $6.30
Exercised................................................... 0 --
Forfeited................................................... (8,624) 6.19
-------
Outstanding at end of year.................................. 220,543 6.30
=======
Options exercisable at year-end............................. 0 --
=======
Weighted average fair value of options granted during the
year at the share's fair value............................ $ 2.86
Weighted average fair value of options granted during the
year at above the share's fair value...................... $ 1.89
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WEIGHTED AVERAGE
EXERCISE OUTSTANDING AT REMAINING CONTRACTUAL WEIGHTED AVERAGE
PRICES DECEMBER 31, 1996 LIFE EXERCISE PRICE
- -------- ----------------- --------------------- ----------------
<C> <C> <C> <C>
$4.55 22,241 9.7 $4.55
6.50 198,302 7.5 6.50
</TABLE>
F-13
<PAGE> 67
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company applies APB Opinion 25 and related interpretations in
accounting for its plans. For the fiscal year ended December 31, 1996, no
compensation cost was recognized for its stock option plans. Had compensation
cost for the Company's stock-based compensation plans been determined under the
provisions consistent with FASB Statement 123, the Company's net loss and loss
per share for the year ended December 31, 1996, would have been the pro forma
amounts indicated below:
<TABLE>
<S> <C>
Net loss -- as reported..................................... $(625,583)
Net loss -- pro forma....................................... (676,776)
Loss per share -- as reported............................... (0.33)
Loss per share -- pro forma................................. (0.36)
</TABLE>
8. ACQUISITION:
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a Delaware corporation formed
in July 1996 to provide Internet and Intranet security system consulting
services. In the transaction, the former holders of HISS's capital stock
received the right to receive their pro rata share of four annual earnout
payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each,
an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal
to 30% of HISS's gross revenues for the 12 month period ending December 31,
1997; provided, however, that (i) the amount of each Annual Earnout will be
limited to the amount of HISS's net profits for the 12-month period ended
December 31 immediately preceding the payment date (the "Profit Cap"), (ii)
amounts not paid in a year as a result of the Profit Cap will be carried forward
to the subsequent year, and (iii) amounts not paid in the fourth year as a
result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in
whole or in part in cash or, at HomeCom's option, in shares of common stock
based upon the average trading price of the common stock for the ten trading
days immediately preceding payment of the Annual Earnout. An Annual Earnout will
not be paid if the recipient is then in violation of the non-solicitation and
non-competition provisions contained in the Stock Purchase Agreement to which
the former holders of HISS's capital stock are subject.
HISS was formed in July 1996 and was in its start-up phase at the date of
acquisition. The purchase consideration is contingent on achieving specified
earnings levels in future periods and is not currently estimable. When such
amounts are determinable, the consideration, if any, will be recognized and
amortized over the remaining life of the intangible assets acquired.
9. RELATED PARTY TRANSACTIONS:
The Company has borrowed $160,792 and $1,045,581 as of December 31, 1995
and 1996, respectively, from certain of its stockholders and affiliates of its
stockholders. Interest expense on these notes was $3,469 and $44,952 in 1995 and
1996, respectively.
The Company has entered into an employment agreement with its Chief
Executive Officer and principal stockholder which expires December 31, 2000.
F-14
<PAGE> 68
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Deferred income taxes at December 31, 1996 reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996, are as follows:
<TABLE>
<S> <C>
Temporary differences:
Allowance for uncollectibles.............................. $ 40,601
Vacation accrual.......................................... 5,675
Depreciation.............................................. 4,820
Deferred rent expense..................................... 27,901
Software development expenses............................. (29,515)
---------
49,482
Net operating loss carryforward............................. 190,156
---------
Deferred tax asset.......................................... 239,638
Valuation allowance......................................... (239,638)
---------
Net deferred tax asset...................................... $ 0
=========
</TABLE>
At December 31, 1996, the Company had net operating losses for income tax
purposes of $500,412 which expire in 2011. Realization of these assets is
contingent on having future taxable earnings. Based on the cumulative losses in
recent years, management believes that it is more likely than not that some
portion or all of the deferred tax asset and operating loss carryforward will
not be realized and has recorded a full valuation allowance.
PRO FORMA (UNAUDITED)
As described in Note 1, the Company previously elected S Corporation status
under the provisions of the Internal Revenue Code. In February 1996, the Company
elected C Corporation status. The following unaudited pro forma information has
been determined based upon the provisions of Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes". This information reflects
income tax expense that the Company would have incurred had it been subject to
Federal and state income taxes. The Company would not have a Federal and state
income tax provision because of net operating loss carryforwards for all periods
presented.
The pro forma income tax benefit differs from the amounts computed by
applying the Federal statutory rate of 34% to loss before taxes as follows:
<TABLE>
<CAPTION>
DECEMBER 2
TO YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1995 1996
------------ --------------- ------------
<S> <C> <C> <C>
Tax benefit at the statutory rate............... $ 5,934 $ 1,850 $ 212,698
State income tax, net of federal benefit........ 698 218 25,023
Permanent differences........................... 1,917
Valuation allowance............................. (6,632) (2,068) (239,638)
------- ------- ---------
$ 0 $ 0 $ 0
======= ======= =========
</TABLE>
F-15
<PAGE> 69
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS:
CURRENT ASSETS:
Cash and cash equivalents................................. $ 332,377 $ 2,177,677
Account receivable, net of allowance for uncollectible
accounts of $106,845 and $219,055 as of December 31,
1996 and September 30, 1997, respectively.............. 488,254 657,163
Other current assets...................................... 621 636
---------- -----------
Total current assets.............................. 821,252 2,835,476
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 359,260 606,839
SOFTWARE DEVELOPMENT COSTS, NET............................. 81,520 96,128
DEPOSITS.................................................... 57,527 57,530
DEFERRED DEBT ISSUE COSTS................................... -- 127,500
DEFERRED OFFERING COSTS..................................... 406,963 --
---------- -----------
Total assets...................................... $1,726,522 $ 3,723,473
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT):
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 649,794 $ 545,373
Accrued salaries and payroll taxes payable................ 309,377 143,813
Accrued vacation.......................................... 14,935 14,935
Current portion of notes payable to stockholders.......... 989,904 --
Current portion of note payable to bank................... 13,614 12,126
Unearned revenue.......................................... 133,170 157,359
Current portion of obligations under capital leases....... 15,140 --
---------- -----------
Total current liabilities......................... 2,125,934 873,606
CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $566,667......... -- 1,133,333
NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 55,677 --
NOTE PAYABLE TO BANK........................................ 47,032 --
OTHER LIABILITIES........................................... 73,424 62,420
OBLIGATIONS UNDER CAPITAL LEASES............................ 45,124 49,022
---------- -----------
Total liabilities................................. 2,347,191 2,118,381
---------- -----------
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
September 30, 1997, respectively.......................... 192 296
Additional paid-in capital................................ 472,726 5,936,879
Subscriptions receivable.................................. (468,004) (318,753)
Accumulated deficit....................................... (625,583) (4,013,330)
---------- -----------
Total stockholders' equity (deficit).............. (620,669) 1,605,092
---------- -----------
Total liabilities and stockholders' equity
(deficit)....................................... $1,726,522 $ 3,723,473
========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-16
<PAGE> 70
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
1996 1997 1996 1997
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET SALES:
Service sales............................... $ 623,068 $ 667,806 $1,318,675 $ 2,268,377
Equipment sales............................. 30,950 45,595 152,649 62,598
---------- ----------- ---------- -----------
Total net sales..................... 654,018 713,401 1,471,324 2,330,975
---------- ----------- ---------- -----------
COST OF SALES:
Cost of services............................ 152,866 557,799 271,887 1,252,507
Cost of equipment sold...................... 37,076 42,730 114,552 52,294
---------- ----------- ---------- -----------
Total cost of sales................. 189,942 600,529 386,439 1,304,801
---------- ----------- ---------- -----------
GROSS PROFIT.................................. 464,076 112,872 1,084,885 1,026,174
---------- ----------- ---------- -----------
OPERATING EXPENSES:
Sales and marketing......................... 190,596 627,962 408,131 1,163,072
Product development......................... 37,242 177,961 63,823 375,977
General and administrative.................. 276,963 1,381,769 664,244 2,739,374
Depreciation and amortization............... 24,887 58,225 52,835 138,832
---------- ----------- ---------- -----------
Total operating expenses............ 529,688 2,245,917 1,189,033 4,417,255
---------- ----------- ---------- -----------
OPERATING LOSS................................ (65,612) (2,133,045) (104,148) (3,391,081)
OTHER EXPENSES (INCOME)
Interest expense............................ 11,257 -- 26,833 53,665
Other expense (income), net................. -- (37,096) -- (56,999)
---------- ----------- ---------- -----------
LOSS BEFORE INCOME TAXES...................... (76,869) (2,095,949) (130,981) (3,387,747)
INCOME TAXES.................................. -- -- -- --
NET LOSS............................ $ (76,869) $(2,095,949) $ (130,981) $(3,387,747)
========== =========== ========== ===========
NET LOSS PER SHARE.................. $ (.04) $ (.71) $ (.07) $ (1.36)
========== =========== ========== ===========
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING.......................... 1,870,156 2,956,396 1,870,156 2,483,258
========== =========== ========== ===========
</TABLE>
The accompanying Notes are an integral part of these Financial Statements
F-17
<PAGE> 71
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------
1996 1997
--------- -----------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................. $(130,981) $(3,387,747)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation........................................... 52,835 138,486
Amortization........................................... -- 14,547
Forgiveness of subscriptions receivable................ -- 149,251
Provision for bad debts................................ 33,515 194,894
Deferred rent expense.................................. 51,486 (11,004)
Change in operating assets and liabilities:
Accounts receivable.................................. (383,630) (363,803)
Other current assets................................. (4,663) (15)
Deposits............................................. (55,800) (3)
Accounts payable and accrued expenses................ 87,810 (81,001)
Accrued salaries and payroll taxes payable........... 147,009 (165,564)
Accrued vacation..................................... 29,533 --
Unearned revenue..................................... 84,314 24,189
--------- -----------
Net cash used in operating activities................ (88,572) (3,487,770)
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment............... (329,569) (364,265)
Software development costs.................................. (53,245) (29,155)
--------- -----------
Net cash used in investing activities................ (382,814) (393,420)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs.......................... (63,618) (438,867)
Payment of deferred debt issue costs........................ -- (127,500)
Proceeds of issuance of convertible debentures.............. -- 1,700,000
Proceeds from note payable.................................. 70,000 --
Repayment of note payable................................... (7,487) (48,520)
Proceeds from notes payable to stockholders................. 444,904 490,000
Repayment of notes payable to stockholders.................. (4,187) (1,335,581)
Repayment of capital lease obligations...................... -- (33,042)
Proceeds from sale of stock, net of underwriting discounts
and commissions........................................... 100 5,520,000
--------- -----------
Net cash provided by financing activities............ 439,712 5,726,490
--------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (31,674) 1,845,300
CASH AND CASH EQUIVALENTS at beginning of period............ 129,095 332,377
--------- -----------
CASH AND CASH EQUIVALENTS at end of period.................. $ 97,421 $ 2,177,677
========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON
CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest.................... $ 5,190 $ 53,664
========= ===========
</TABLE>
During the nine month period ended September 30, 1997, capital lease
obligations of $21,800 were incurred when the Company entered into leases on
computer equipment.
During the nine month period ended September 30, 1997, the Company issued
33,333 shares of common stock in satisfaction of a $200,000 note payable to
stockholder.
The accompanying notes are an integral part of these Financial Statements.
F-18
<PAGE> 72
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Article 10 of Regulation S-X of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the financial position and results of operations of
HomeCom Communications, Inc. (the "Company") for the interim periods presented.
All such adjustments are of a normal and recurring nature. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in this Registration Statement beginning at page F-2.
2. STOCK OFFERING
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.
3. ISSUANCE OF CONVERTIBLE DEBENTURES
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. The holders have
agreed, however, that they may convert (i) not more than one-third of the
aggregate value of the Debentures at any time on or after the date on which this
registration statement is declared effective (the "Registration Effective
Date"); (ii) not more than an additional one-third of the aggregate value of the
Debentures at any time on or after the 30th day following the Registration
Effective Date; and (iii) the final one-third of the aggregate value of the
Debentures at any time on or after the 60th day following the Registration
Effective Date. 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. 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.
4. ISSUANCE OF SERIES A CONVERTIBLE PREFERRED STOCK
In December 1997, the Company issued 20,000 shares of its Series A
Convertible Preferred Stock (the "Series A Preferred Stock") to private
investors (the "Series A Preferred Holders") for an aggregate purchase price of
$2,000,000. Net proceeds to the Company were approximately $1.8 million.
Pursuant to
F-19
<PAGE> 73
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Registration Rights Agreements with the Series A Preferred Holders, the Company
agreed to file on or before January 31, 1998 a registration statement covering
the shares of Common Stock issuable upon conversion of the Series A Preferred
Stock (the "Series A Preferred Stock Registration Statement"). The Series A
Preferred Holders have agreed that they may convert (i) not more than one-half
of the Series A Preferred Stock at any time on or after the 30th day following
the effective date of the Series A Preferred Stock Registration Statement; and
(ii) the second one-half of the Series A Preferred Stock at any time on or after
the 60th day following the effective date of the Series A Preferred Stock
Registration Statement. However, the Series A Preferred Holders also have agreed
that they may not convert any of the Series A Preferred Stock until on or after
the later of 30 days after the Registration Effective Date or February 27, 1998.
The Series A Preferred Stock is convertible into a number of shares of Common
Stock equal to the quotient of (a) the product of the number of shares of Series
A Preferred Stock being converted multiplied by $100.00 divided by (b) the
then-applicable conversion price. The conversion price for the Series A
Preferred Stock is the lesser of (i) 80% of the average closing bid price of the
Company's Common Stock for the five trading days ending on the day the Company
actually receives a conversion notice; or (ii) $14.50625.
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.
In connection with the issuance and sale of the Series A Preferred Stock,
the Company granted warrants to the Series A Preferred Holders to acquire an
aggregate of 75,000 shares of Common Stock, with warrants to purchase 62,500
shares of Common Stock having an exercise price per share equal to $14.50625 and
warrants to purchase 12,500 shares of Common Stock having an exercise price per
share equal to $15.825. The Company also granted 50,000 warrants to a placement
agent at an exercise price of $15.825 per share. These warrants will expire on
December 31, 2000 and are eligible to be exercised at any time on or after June
23, 1998.
5. NET LOSS PER SHARE
Net loss per common share is based on the Company's common stock and is
computed using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. Dilutive common equivalent
shares consist of stock options and warrants (calculated using the treasury
stock method at the initial public offering price of $6.00 per share). Pursuant
to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock issued for consideration below the initial public offering price per share
and stock options issued with exercise prices below such price during the
twelve-month period preceding the date of the initial filing of the registration
statement have been included in the calculation of common shares, using the
treasury stock method, as if they were outstanding for all periods presented.
All per share data has been retroactively adjusted to reflect the 93.07-for-one
stock split approved by the Board of Directors on September 11, 1996 and
effective September 11, 1996.
6. INCOME TAXES
There was no provision for or cash payment of income taxes for the nine
months ended September 30, 1997 and 1996, respectively, as the Company
anticipates a net taxable loss for the year ended December 31, 1997, and, prior
to February 9, 1996, the Company qualified as a S Corporation for federal and
state income tax purposes.
F-20
<PAGE> 74
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Forwarding Looking Statements.......... 7
Risk Factors........................... 9
Use of Proceeds........................ 16
Price Range of Common Stock............ 16
Dividend Policy........................ 16
Selected Financial Data................ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 18
Business............................... 24
Management............................. 34
Certain Transactions................... 40
Recent Transactions.................... 41
Principal and Selling Stockholders..... 43
Description of Securities.............. 45
Plan of Distribution................... 50
Legal Matters.......................... 51
Experts................................ 51
Available Information.................. 52
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
HOMECOM
COMMUNICATIONS,
INC.
UP TO
1,379,310
SHARES OF
COMMON STOCK
ISSUABLE UPON CONVERSION
OF 20,000 SHARES OF THE
COMPANY'S SERIES A
CONVERTIBLE PREFERRED
STOCK AND
UP TO
625,000
SHARES OF
COMMON STOCK
ISSUABLE UPON THE
EXERCISE OF WARRANTS
--------------------
PROSPECTUS
--------------------
, 1998
======================================================
<PAGE> 75
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $ 2,069.45
Nasdaq SmallCap Market additional listing fee............... 7,500.00
Accountants' fees and expenses.............................. 5,000.00
Legal fees and expenses..................................... 45,000.00
Blue Sky fees and expenses.................................. 5,000.00
Transfer Agent's fees and expenses.......................... 500.00
Printing and engraving expenses............................. 2,500.00
Miscellaneous............................................... 2,430.55
----------
Total expenses.............................................. $70,000.00
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Delaware General Corporation Law (the "DGCL") permits a corporation to
eliminate or limit the personal liability of a director to the corporation or
its stockholders for monetary damages for breach of duty of care or other duty
as a director, provided that no provision shall eliminate or limit the liability
of a director: (A) for an appropriation, in violation of his duties, of any
business opportunity of the corporation; (B) for acts or omissions which involve
intentional misconduct or a knowing violation of law; (C) for unlawful corporate
distributions; or (D) for any transaction from which the director received an
improper personal benefit. This provision pertains only to breaches of duty by
directors in their capacity as directors (and not in any other corporate
capacity, such as officers) and limits liability only for breaches of fiduciary
duties under Delaware corporate law (and not for violation of other laws, such
as the federal securities laws). The Company's Restated Certificate of
Incorporation (the "Restated Certificate") exonerates the Company's directors
from monetary liability to the extent permitted by this statutory provision.
The Company's Restated Certificate of Incorporation and Restated Bylaws
(the "Restated Bylaws") also provide that the Company shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (including any action by or in the right of the
Company), by reason of the fact that such person is or was a director or officer
of the Company, or is or was serving at the request of the Company as a director
or officer of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including reasonable attorneys' fees), judgments,
fines, and amounts paid in settlement actually and reasonably incurred by such
person in connection with such action, suit or proceeding, if such person acted
in good faith and in a manner such person reasonably believed to be in or not
opposed to the best interests of the Company (and with respect to any criminal
action or proceeding, if such person had no reasonable cause to believe such
person's conduct was unlawful), to the maximum extent permitted by, and in the
manner provided by, the DGCL.
Notwithstanding any provisions of the Company's Restated Certificate of
Incorporation and Restated Bylaws to the contrary, the DGCL provides that the
Company shall not indemnify a director or officer for any liability incurred in
a proceeding in which the director is adjudged liable to the Company or is
subjected to injunctive relief in favor of the Company: (1) for any
appropriation, in violation of his duties, of any business opportunity of the
Company; (2) for acts or omissions which involve intentional misconduct or a
knowing violation of law; (3) for unlawful corporate distributions; or (4) for
any transaction from which the director or officer received an improper personal
benefit.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following list describes sales by the Registrant of securities in the
past three years which were not registered under the Securities Act.
II-1
<PAGE> 76
During the period from its formation in December 1994 through August 1996,
the Registrant has issued the securities set forth below which were not
registered under the Securities Act of 1933, as amended (the "Securities Act").
All share amounts have been adjusted to reflect the Registrant's September 1996
recapitalization and 93.07 for 1 stock split.
1. In December 1994, in connection with the incorporation of the
Registrant, the Registrant issued and sold to its sole stockholder 93,070
shares of Common Stock for $27,706.
2. In February 1996, in connection with the recapitalization of the
Registrant, the Registrant issued and sold 707,332 shares of Common Stock
to its President, Chief Executive Officer and sole stockholder for a total
purchase price of $760.
3. In February 1996, the Registrant issued and sold 93,070 shares of
Common Stock to its Senior Vice President for a total purchase price of $10
upon the exercise of stock options granted in connection with the founding
of the Registrant.
4. Pursuant to a privately negotiated transaction with five investors,
the Registrant issued and sold to four of the investors in February 1996 an
aggregate of 893,472 shares of Common Stock for a total purchase price of
$96, and issued and sold to three of the investors in February, March and
May 1996 promissory notes in the aggregate principal amount of $499,904. In
May 1997, pursuant to the terms of such promissory notes, the Registrant
issued a total of 33,333 shares of Common Stock to the holders of such
notes in partial repayment of the principal amounts owed thereunder.
5. In August 1996, the Registrant issued an aggregate of 37,228 shares
of Common Stock to four members of its former Board of Advisors upon
exercise of warrants, for a total purchase price of $4.00.
6. In August 1996, the Registrant issued and sold an aggregate of
102,855 shares of Common Stock to six of its employees for a total purchase
price of $468,004.22, paid through delivery of 8% promissory notes, payable
25% per year, secured by the shares purchased thereby.
7. In August 1996, in connection with the Registrant's acquisition of
all of the stock of HomeCom Internet Security Services, Inc., a Delaware
corporation ("HISS"), the Registrant and the stockholders of HISS entered
into a Stock Purchase Agreement which provides that the Registrant may, at
its option, issue shares of its Common Stock as all or part of the earnout
payments to be paid to such former stockholders pursuant to the Stock
Purchase Agreement.
8. In September 1996, the Registrant granted stock options (i) to
three directors under its Non-Employee Directors Stock Option Plan to
purchase an aggregate of up to 30,000 shares of Common Stock and (ii) to 24
employees under its Stock Option Plan to purchase an aggregate of up to
79,167 shares of Common Stock.
9. In September 1997, the Registrant issued and sold 5% convertible
debentures (the "Debentures") to four private investors for an aggregate
purchase price of $1,700,000. The Debentures were issued pursuant to the
terms of a 5% Convertible Debenture Purchase Agreement dated effective as
of September 19, 1997 (the "Debenture Agreement"). Outstanding principal
and interest on the Debentures is payable on September 22, 2000. The
Debentures are convertible at the option of the holders. The holders of the
Debentures have agreed, however, that they may convert (i) not more than
one-third of the aggregate value of the Debentures at any time on or after
the sooner of the date on which this registration statement is declared
effective (the "Registration Effective Date") or December 26, 1997; (ii)
not more than an additional one-third of the aggregate value of the
Debentures at any time on or after the sooner of the 30th day following the
Registration Effective Date or January 25, 1998; and (iii) the final
one-third of the aggregate value of the Debentures at any time on or after
the sooner of the 60th day following the Registration Effective Date or
February 24, 1998. As a result of these agreements, two-thirds of the
aggregate value of the Debentures are convertible at the option of the
holders immediately as of the date of this Prospectus and the balance of
the Debentures will become convertible on February 24, 1998 The Debentures
are convertible at a conversion price (the "Conversion Price") which is the
lesser of (a) 75% of the average closing bid price of the Common Stock as
represented by Nasdaq or on other securities
II-2
<PAGE> 77
exchanges or markets on which the Common Stock is listed for the three
trading days ending on the day preceding notice of conversion, or (b)
$4.00. The number of shares issuable upon conversion of the Debentures is
equal to the aggregate principle balance of the Debentures divided by the
Conversion Price. The Conversion Price is subject to adjustment under
certain circumstances. See "Description of Securities -- Convertible
Debentures". On December 13, 1997, the closing price of the Common Stock,
which is quoted on the Nasdaq SmallCap(TM) Market under the symbol "HCOM,"
was $8.0625 per share. In connection with the issuance of the Debentures,
the Registrant granted to an entity designated by the investors aggregate
warrants to acquire 400,000 shares of Common Stock, with warrants to
acquire 200,000 of such shares exercisable at a price of $4.00 per share
and warrants to acquire the remaining 200,000 of such shares exercisable at
a price of $6.00 per share. If not earlier exercised, these warrants expire
on October 27, 2000.
10. In December 1997, the Registrant issued 20,000 shares of its
Series A Convertible Preferred Stock (the "Series A Preferred Stock") to
private investors (the "Series A Preferred Holders") for an aggregate
purchase price of $2,000,000. Net proceeds to the Registrant were
approximately $1.8 million. Pursuant to Registration Rights Agreements with
the Series A Preferred Holders (the "Preferred Registration Agreements"),
the Registrant agreed to file on or before January 31, 1998 a registration
statement covering the shares of Common Stock issuable upon conversion of
the Series A Preferred Stock (the "Series A Preferred Stock Registration
Statement"). The Series A Preferred Holders have agreed that they may
convert (i) not more than one-half of the Series A Preferred Stock at any
time on or after the 30th day following the effective date of this
registration statement (the "Registration Effective Date"); and (ii) the
second one-half of the Series A Preferred Stock at any time on or after the
60th day following the Registration Effective Date. However, the Series A
Preferred Holders also have agreed that they may not convert any of the
Series A Preferred Stock until on or after the later of 30 days after the
Registration Effective Date or February 27, 1998. The Series A Preferred
Stock is convertible into a number of shares of Common Stock equal to the
quotient of (a) the product of the number of shares of Series A Preferred
Stock being converted multiplied by $100.00 divided by (b) the then-
applicable conversion price. The conversion price for the Series A
Preferred Stock (the "Series A Preferred Conversion Price") is the lesser
of (i) 80% of the average closing bid price of the Registrant's Common
Stock for the five trading days ending on the day the Registrant actually
receives a conversion notice; or (ii) $14.50625. The Series A Preferred
Conversion Price is subject to adjustment under certain circumstances. On
January 27, 1998, the closing bid price of the Common Stock on the Nasdaq
SmallCap(TM) Market was $3.59375 per share and the average of the Closing
bid price of the Common Stock for the five trading days ending January 27,
1998 was $3.625 per share.
In connection with the issuance and sale of the Series A Preferred
Stock, the Registrant granted warrants to the Series A Preferred Holders to
acquire an aggregate of 75,000 shares of Common Stock, with warrants to
purchase 62,500 shares of Common Stock having an exercise price per share
equal to $14.50625 and warrants to purchase 12,500 shares of Common Stock
having an exercise price per share equal to $15.825. The Registrant also
granted 50,000 warrants to a placement agent at an exercise price of
$15.825 per share. These warrants to purchase an aggregate 125,000 shares
of Common Stock (the "Series A Preferred Stock Warrants") will expire on
December 31, 2000 and are eligible to be exercised at any time on or after
June 23, 1998. The Series A Preferred Stock Registration Statement will
cover (i) the shares of Common Stock issuable upon conversion of the Series
A Preferred Stock (which would be 689,655 shares assuming that the holders
of the Series A Preferred Stock had exercised their conversion privileges
after the close of business on January 27, 1998 which would have resulted
in a conversion price of $2.90 per share); (ii) 125,000 shares of Common
Stock issuable upon the exercise of the Series A Preferred Stock Warrants;
(iii) 100,000 shares of Common Stock issuable upon the exercise of warrants
granted to the Registrant's underwriter in connection with its initial
public offering; and (iv) 400,000 shares of Common Stock issuable upon the
exercise of warrants granted in connection with the Registrant's sale of
the Debentures.
The sales and issuance of shares listed above were exempt from registration
under the Securities Act by virtue of Sections 4(2) and 3(b) thereof and in
reliance on Rule 701 and Regulation D promulgated
II-3
<PAGE> 78
thereunder. The recipients of the above-described securities represented their
intention to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate restrictive legends were affixed to stock
certificates and warrants issued in such transactions.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement.*
3.1 -- Restated Certificate of Incorporation of the Registrant.*
3.2 -- Restated Bylaws of the Registrant.*
3.3 -- Certificate of Designation of Series A Convertible Preferred
Stock.***
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Bylaws of the Registrant
defining rights of the holders of Common Stock of the
Registrant.*
4.2 -- Specimen Stock Certificate.*
4.3 -- Form of Warrant.*
5.1 -- Opinion of Morris, Manning & Martin, L.L.P., Counsel to the
Registrant, as to the legality of the shares being
registered.
10.1 -- HomeCom Communications, Inc. Stock Option Plan and form of
Stock Option Certificate.*
10.2 -- HomeCom Communications, Inc. Non-Employee Directors Stock
Option Plan and form of Stock Option Certificate.*
10.3 -- Employment Agreement between the Registrant and Harvey W.
Sax, dated January 1, 1996.*
10.4 -- Form of Employment Agreement entered into between the
Registrant and each of its executive officers except Harvey
W. Sax.*
10.5 -- Lease Agreement between Property Georgia OBJLW One
Corporation and the Registrant dated January 22, 1996.*
10.6 -- Lease and Services Agreement between Alliance Greensboro,
L.P. and the Registrant, dated June 25, 1996.*
10.7 -- Business Alliance Program Agreement between Oracle
Corporation and the Registrant, dated May 30, 1996, together
with the Sublicense Addendum, Application Specific
Sublicense Addendum, Full Use and Deployment Sublicense
Addendum and License Transfer Policy, each dated May 30,
1996.*
10.8 -- Network Enrollment Agreement between Apple Computer, Inc.
and the Registrant, effective May 1996.*
10.9 -- Member Level Agreement between Microsoft Corporation and the
Registrant, effective May 1996.*
10.10 -- Master Agreement for Internet Services and Products between
BBN Planet Corporation and the Registrant, dated February 1,
1996.*
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.*
</TABLE>
II-4
<PAGE> 79
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <C> <S>
10.16 -- Marketing Associate Agreement dated February 6, 1997 between
the Registrant and Unisys Corporation.**
10.17 -- Letter agreement dated January 16, 1997 between the
Registrant, David A. Blech, Esther Blech and the Edward A.
Blech Trust.*
10.18 -- HomeCom Communications, Inc. Employee Stock Purchase Plan.*
10.19 -- 5% Convertible Debenture Purchase Agreement dated effective
September 19, 1997 between the Registrant, Euro Factors
International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.20 -- Form of 5% Convertible Debenture issued by the Registrant
and held by Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.21 -- Registration Rights Agreement dated effective September 19,
1997 between the Registrant, Euro Factors International,
Inc., Beauchamp Finance, FTS Worldwide Corporation and
COLBO.***
10.22 -- Letter agreement dated September 23, 1997 between the
Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.23 -- Letter agreement dated September 27, 1997 between the
Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.24 -- Form of Warrant to purchase 200,000 shares of Common Stock
at an exercise price of $4.00 per share issued by the
Registrant to First Granite Securities, Inc.***
10.25 -- Form of Warrant to purchase 200,000 shares of Common Stock
at an exercise price of $6.00 per share issued by the
Registrant to First Granite Securities, Inc.***
10.26 -- Form of Securities Purchase Agreement between the
Registrant, Sovereign Partners, L.P. and Dominion Capital
Fund, LTD. dated as of December 23, 1997.***
10.27 -- Form of Registration Rights Agreement between the
Registrant, Sovereign Partners, L.P. and Dominion Capital
Fund, LTD. dated as of December 23, 1997.***
10.28 -- Form of Warrant to purchase 18,750 shares of Common Stock
issued by the Registrant to Sovereign Partners, L.P.***
10.29 -- Form of Warrant to purchase 56,250 shares of Common Stock
issued by the Registrant to Dominion Capital Fund, LTD.***
10.30 -- Common Stock Purchase Agreement dated January 23, 1998 by
and among InsureRate, Inc., the Registrant, Jerome R. Corsi
and Hamilton Dorsey Alston Company.***
10.31 -- Escrow Agreement dated as of January 23, 1998 by and among
InsureRate, Inc., Hamilton Dorsey Alston Company, the
Registrant, Jerome R. Corsi and SunTrust Bank, Atlanta.***
10.32 -- Shareholders Agreement dated January 23, 1998 by and among
Hamilton Dorsey Alston Company, the Registrant and
InsureRate, Inc.***
10.33 -- Web Development and Hosting Services Agreement dated January
23, 1998, by and among InsureRate, Inc. and Hamilton Dorsey
Alston Company.***
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.***
</TABLE>
II-5
<PAGE> 80
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<C> <C> <S>
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.***
23.1 -- Consent of Coopers & Lybrand L.L.P.
23.2 -- Consent of Morris, Manning & Martin, L.L.P. (included in Exhibit 5.1).
24.1 -- Powers of Attorney (included on signature page).
27.1 -- Financial Data Schedule (for SEC use only).**
</TABLE>
- ---------------
* Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant (Registration No. 333-12219).
** Incorporated herein by reference to exhibit of the same number in the Form
10-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).
ITEM 17. UNDERTAKINGS
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high and of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement
or any material change to such information in this Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "1993 Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that, in the opinion of the
Securities and
II-6
<PAGE> 81
Exchange Commission, such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
(c) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the 1933 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the 1933 Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-7
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia
on the 30th day of January, 1998.
HomeCom Communications, Inc.
By: /s/ HARVEY W. SAX
------------------------------------
Harvey W. Sax
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Harvey W. Sax and Norman H. Smith, and each of
them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution for him and in his name, place and stead, in any
and all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that each of said attorney-in-fact
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ NORMAN H. SMITH President and Chief Executive January 30, 1998
As Attorney-In-Fact Officer (Principal Executive
- ----------------------------------------------------- Officer)
Harvey W. Sax
/s/ NORMAN H. SMITH Executive Vice President and January 30, 1998
As Attorney-In-Fact Director
- -----------------------------------------------------
Nat Stricklen
/s/ NORMAN H. SMITH Executive Vice President and January 30, 1998
As Attorney-In-Fact Director
- -----------------------------------------------------
Krishan Puri
/s/ NORMAN H. SMITH Chief Technical Officer and January 30, 1998
As Attorney-In-Fact Director
- -----------------------------------------------------
Gia Bokuchava, Ph.D.
/s/ NORMAN H. SMITH Vice President and Director January 30, 1998
As Attorney-In-Fact
- -----------------------------------------------------
Roger Nebel
/s/ NORMAN H. SMITH Chief Financial Officer January 30, 1998
- -----------------------------------------------------
Norman H. Smith
/s/ NORMAN H. SMITH Director January 30, 1998
As Attorney-In-Fact
- -----------------------------------------------------
Gregory Abowd
</TABLE>
II-8
<PAGE> 1
EXHIBIT 5.1
[MORRIS, MANNING & MARTIN LETTERHEAD]
A LIMITED LIABILITY PARTNERSHIP
ATTORNEYS AT LAW
1600 ATLANTA FINANCIAL CENTER
3343 PEACHTREE ROAD, N.E.
ATLANTA, GEORGIA 30326-1044
TELEPHONE 404 233-7000
FACSIMILE 404 365-9532
MEMBER,
COMMERCIAL LAW AFFILIATES
WITH INDEPENDENT FIRMS
IN PRINCIPAL CITIES WORLDWIDE
January 30, 1998
HomeCom Communications, Inc.
Suite 100, Building 14
Piedmont Center
3535 Piedmont Road
Atlanta, Georgia 30305
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have served as counsel for HomeCom communications, Inc. a Delaware
corporation (the "Company"), in connection with the registration under the
Securities Act of 1933, as amended, pursuant to the Company's Registration
Statement on Form S-1 (the "Registration Statement"), of a proposed public
offering of 2,004,310 shares (the "Shares") of the Company's authorized common
stock, $.0001 par value (the "Common Stock"), of which all 2,004,310 Shares are
to be sold by certain shareholders of the Company (the "Selling Shareholders")
designated in the Registration Statement.
We have examined and are familiar with originals or copies (certified
or otherwise identified to our satisfaction) of such documents, corporate
records and other instruments relating to the incorporation of the Company and
to the authorization and issuance of the outstanding shares of common Stock and
the Shares to be sold by the Selling Shareholders, as appropriate, as we have
deemed necessary and advisable.
Based upon the foregoing and having regard for such legal
considerations that we have deemed relevant, it is our opinion that the
2,004,310 Shares to be sold by the Selling Shareholders will be, upon sale and
delivery as contemplated in the Registration Statement, legally and validly
issued, fully paid and nonassessable.
<PAGE> 2
MORRIS, MANNING & MARTIN
a limited liability partnership
January 30, 1998
Page 2
We hereby consent to the reference to our firm under the heading
"Legal Matters" in the Prospectus contained in the Registration Statement and
to the filing of this Opinion as Exhibit 5.1 thereto.
Very truly yours,
MORRIS, MANNING & MARTIN, L.L.P.
BY: /s/ Oby T. Brewer III
----------------------------
Oby T. Brewer III
<PAGE> 1
EXHIBIT 10.37
STOCK PURCHASE WARRANT
HOMECOM COMMUNICATIONS, INC.
COMMON STOCK
($.0001 Par Value)
DATED DECEMBER 23, 1997
50,000 SHARES VOID AFTER DECEMBER 23, 2000
This certifies that, for value received, THE MALACHI GROUP, INC. (the
"Holder"), its permitted successors and assigns, is entitled, upon the due
exercise hereof at any time during the period commencing on DECEMBER 23, 1997,
and terminating at 5:00 p.m. E.S.T. on DECEMBER 23, 2000, to purchase Fifty
Thousand (50,000) shares of common stock, $.0001 par value per share ("Common
Stock"), of HOMECOM COMMUNICATIONS, INC., a Delaware corporation (hereinafter
called "HomeCom"), such number of shares being subject to adjustment upon the
occurrence of the contingencies set forth in this Warrant. The purchase price
payable upon the exercise of this Warrant shall be $15.825 per share multiplied
by the number of shares of Common Stock being purchased (hereinafter referred to
as the "Exercise Price"), subject to adjustment upon the occurrence of the of
the contingencies set forth in this Warrant. Shares issuable upon exercise of
this Warrant are hereinafter referred to as the "Warrant Shares."
SECTION I. DURATION AND EXERCISE OF WARRANT. This Warrant shall expire on 5:00
p.m. E.S.T. on DECEMBER 23, 2000 (the "Expiration Date"). After the Expiration
Date, any unexercised portion of this Warrant will be wholly void and of no
value. This Warrant may be exercised by the Holder on any business day beginning
on the date hereof and on or prior to the Expiration Date. For purposes of this
Warrant, the term "business day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in New York, New
York are authorized or obligated by law or executive order to close.
Subject to the provisions of this Warrant, the Holder shall have the
right to purchase from HomeCom (and HomeCom shall as soon as practicable,
subject to Section V, issue and sell to such Holder) Fifty Thousand (50,000)
fully paid and nonassessable shares of Common Stock, including any shares of any
class or series of stock into which such shares may hereafter be changed and
subject to the adjustments contemplated by Section IV hereof, at the Exercise
Price, upon surrender to HomeCom of this Warrant, together with a Warrant
Exercise Agreement in the form attached hereto as EXHIBIT 1 duly filled in and
executed by the Holder or his duly authorized agent, and upon payment of the
Exercise Price in lawful money of the United States of America in cash, by
cashier's check payable to the order of HomeCom or by wire transfer to HomeCom's
account of immediately available funds. The number of Warrant Shares, and the
amount and type of securities or other property purchasable upon exercise of
this Warrant shall be subject to adjustment as provided in Section IV.
<PAGE> 2
Subject to Section IV, (i) upon such surrender of this Warrant and
payment of the Exercise Price on or prior to the Expiration Date, HomeCom shall
deliver or cause to be delivered to the Holder certificates or other appropriate
instruments for the Warrant Shares and any other securities, and such other
property issuable upon the exercise of this Warrant, in such name or names as
the Holder shall designate on the Form of Exercise attached thereto; and (ii)
such Warrant Shares, securities and other property shall be deemed to have been
issued, and any person so designated therein shall be deemed to have become, the
holder of record of such Warrant Shares, securities or property as of the date
of the surrender of this Warrant and payment of the Exercise Price.
This Warrant shall be exercisable, at the election of the Holder,
either in its entirety or from time to time in part only. Upon the exercise of
only a portion of this Warrant, the Holder shall be required to pay HomeCom upon
exercise of such portion of this Warrant a fraction of the Exercise Price equal
to the fraction of this Warrant so exercised. In the event that less than all of
this Warrant is exercised, HomeCom shall cause a new Warrant to be issued to the
Holder or such person or entity as shall be designated in the Form of Exercise
for the remaining portion of the Warrant.
SECTION II. REGISTRATION; TRANSFERS AND EXCHANGES. HomeCom shall maintain at its
executive offices a register reflecting the ownership of the Warrant Shares and
any permitted transfers thereof from time to time (the "Warrant Register").
HomeCom may deem and treat the Holder of this Warrant as indicated in
the Warrant Register as the absolute owner thereof (notwithstanding any notation
of ownership or other writing thereon made by anyone) for the purpose of any
exercise thereof, any distribution to the Holder thereof and for all other
purposes, and HomeCom shall not be affected in any way by any notice to the
contrary. Upon written notice to HomeCom by the Holder and its permitted
transferee of a transfer of this Warrant in accordance with the terms hereof,
HomeCom shall reflect such transfer in the Warrant Register.
Holder acknowledges and understands that neither this Warrant nor the
Warrant Shares are registered under the Securities Act of 1933, as amended
("Federal Act") or under any state securities law. If at any time during which
this Warrant is exercisable according to its terms there is no effective
Registration Statement on file with the Securities and Exchange Commission (the
"Commission") covering the Warrant Shares then acquirable hereunder, the offer
and sale of the Warrant Shares to the holder of this Warrant must be exempt from
the registration requirements of the Federal Act, and such state securities laws
as shall be applicable; and in the case of an exemption, only if HomeCom has
received an opinion of counsel that such transaction does not require
registration of the Warrant Shares, which opinion and which counsel shall be
satisfactory to HomeCom in its sole discretion. HomeCom may condition such
exercise upon its receipt of such representations, factual assurances and legal
opinions as it shall deem necessary to determine and document the availability
of any such exemption and may further condition such exercise upon such
undertakings by the Holder or such restriction upon the transferability of the
Warrant Shares to be acquired hereunder as it shall determine to be necessary to
effectuate and protect the claim to any such exemption.
-2-
<PAGE> 3
If this Warrant at any time becomes mutilated, lost, stolen or
destroyed, HomeCom will issue in exchange and substitution for and upon
cancellation of the mutilated Warrant, or in lieu of and in substitution for the
Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing
an equivalent Warrant, but only upon receipt of evidence satisfactory to HomeCom
of such loss, theft or destruction of such Warrant and indemnity reasonably
satisfactory to HomeCom.
SECTION III. PAYMENT OF TAXES. HomeCom shall not be required to pay any
transfer, documentary, stamp or other taxes imposed under any federal, state or
local laws on Warrants issued pursuant to transfers or exchanges or under other
circumstances covered in Sections II and V hereof.
HomeCom shall not be required to pay any tax or taxes or government
charges of any kind that may be payable in respect of any issuance of any stock
certificates for Warrant Shares, any certificates or other instruments for any
other securities, or any other property purchased upon exercise of this Warrant.
HomeCom shall not be required to issue or deliver such stock certificates,
certificates or other instruments for other securities, or other property unless
or until the person requesting the issuance thereof shall have paid to HomeCom
the amount of any such tax or government charge or shall have established to the
satisfaction of HomeCom that such tax or government charge has been paid.
SECTION IV. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES PURCHASABLE
HEREUNDER. The Exercise Price and the number of Warrant Shares purchasable upon
the exercise of the Warrant are subject to adjustment from time to time upon the
occurrence of the events enumerated in this Section IV.
A. In case HomeCom shall at any time after the date of this
Warrant (i) declare a dividend on the Common Stock payable in
shares of its capital stock (whether shares of Common Stock or
of capital stock of any other class), (ii) subdivide the
outstanding Common Stock, (iii) combine the outstanding Common
Stock into a smaller number of shares or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock
(including any such reclassification in connection with a
consolidation or merger in which HomeCom is the continuing
corporation), the Exercise Price in effect at the time of the
record date for such dividend or of the effective date of such
subdivision, combination or reclassification, shall be
proportionately adjusted so that the Holder of the Warrant
exercised after such time shall be entitled to receive the
aggregate number and kind of shares of capital stock which, if
such Warrant had been exercised immediately prior to such
date, he would have owned upon such exercise and been entitled
to receive by virtue of such dividend, subdivision,
combination or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur.
-3-
<PAGE> 4
1. No adjustment in the Exercise Price shall be required
unless such adjustment would require an increase or
decrease of at least five cents ($.05) in such price;
provided, however, that any adjustments which by
reason of this Section IV are not required to be made
shall be carried forward and taken into account in
any subsequent adjustment.
2. In the event that at any time, as a result of an
adjustment made pursuant to Section IV the holder of
the Warrant thereafter exercised shall become
entitled to receive any shares of capital stock of
HomeCom other than shares of Common Stock, thereafter
the number of such other shares so receivable upon
exercise of the Warrant shall be subject to
adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions
with respect to the Common Stock purchasable pursuant
to this Warrant.
3. Upon each adjustment of the Exercise Price as a
result of the calculations made in Section IV, the
Warrant outstanding immediately prior to the making
of such adjustment shall thereafter evidence the
right to purchase, at the adjusted Exercise Price,
that number of Warrant Shares (calculated to the
nearest hundredth) obtained by (A) multiplying the
number of Warrant Shares purchasable upon exercise of
the Warrant immediately prior to such adjustment of
the number of Warrant Shares by the Exercise Price in
effect immediately prior to such adjustment of the
Exercise Price and (B) dividing the product so
obtained by the Exercise Price in effect immediately
after such adjustment of the Exercise Price.
B. In case of any capital reorganization of HomeCom, or of any
reclassification of the Common Stock (other than a change in
par value, or from no par value to par value, or as a result
of subdivision or combination), or in case of the
consolidation of HomeCom with or the merger of HomeCom with
any other corporation or association (other than a
consolidation or merger in which (i) HomeCom is the continuing
corporation and (ii) the holders of HomeCom's Common Stock
immediately prior to such merger or consolidation continue as
holders of Common Stock after such merger or consolidation) or
of the sale of the properties and assets of HomeCom as, or
substantially as, an entirety to any other corporation or
association, the Warrant shall after such reorganization,
reclassification, consolidation, merger or sale be
exercisable, upon the terms and conditions specified herein,
for the number of shares of stock or other securities
or property to which a holder of the number of Warrant Shares
purchasable (at the time of such reorganization,
reclassification, consolidation, merger or sale) upon exercise
of such Warrant would have been entitled upon such
reorganization, reclassification, consolidation, merger or
sale; and in any such case, if necessary, the provisions set
forth in this Section IV with respect to the rights and
interests thereafter of the holder of the Warrant shall be
appropriately adjusted so as to be applicable, as nearly as
may reasonably be, to any shares of stock or other
-4-
<PAGE> 5
securities or property thereafter deliverable on the exercise
of the Warrant. The subdivision or combination of shares of
Common Stock at any time outstanding into a greater or lesser
number of shares shall not be deemed to be a reclassification
of the Common Stock for the purposes of this Section IV.
HomeCom shall not effect any such consolidation, merger or
sale, unless prior to or simultaneously with the consummation
thereof the successor corporation or association (if other
than HomeCom) resulting from such consolidation or merger or
the entity purchasing such assets or other appropriate entity
shall assume, by written instrument executed and delivered to
HomeCom, the obligation to deliver to the holder of the
Warrant such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be
entitled to purchase and the other obligations under this
Warrant.
SECTION V. FACTIONAL WARRANTS AND FRACTIONAL WARRANT SHARES. HomeCom expressly
agrees that the Holder of this Warrant shall be entitled to exchange such
Warrant for fractions of Warrants upon surrender of this Warrant to HomeCom in
exchange for Warrants reflecting such fractions of Warrants; provided, however,
that HomeCom will not be required to issue any fractional Warrants representing
fractional shares of Common Stock upon exercise of this Warrant or distribute
stock certificates or other instruments that evidence fractional shares of
Common Stock and HomeCom will pay a cash adjustment in respect of any fractional
shares of Common Stock or fractional shares of securities otherwise issuable
upon the exercise of this Warrant.
SECTION VI. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall
be construed as conferring upon the Holder the right to vote, receive dividends
or to be deemed for any purpose the holder of Warrant Shares or of any other
securities of HomeCom that may at any time be issuable on the exercise of this
Warrant, nor shall anything contained herein be construed to confer upon the
Holder, as such, any of the rights of a stockholder of HomeCom or any right to
vote on matters submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value, consolidation,
merger, conveyance, or, without limitation, otherwise), or to receive notice of
meetings, or to receive subscription rights or otherwise, until this Warrant
shall have been exercised as provided herein.
SECTION VII. ISSUANCE OF NEW WARRANTS. Notwithstanding any of the provisions of
this Warrant to the contrary, HomeCom may, at its option, issue a new Warrant in
such form as may be approved by its Board of Directors which reflect any
adjustment or change in the number or kind or class of shares of stock or other
securities or property purchasable under this Warrant made in accordance with
the provisions hereof. HomeCom may, at its option, require the Holder of this
Warrant to surrender its then current Warrant for any such new Warrant.
SECTION VIII. NOTICES. All instructions, notices and other communications to be
given to any party hereto shall be in writing and shall be personally delivered
or sent by first class or certified mail, postage prepaid and return receipt
requested, and shall be deemed to be given for purposes
-5-
<PAGE> 6
of this Warrant on the day when delivered to the intended party (if by personal
delivery) or three (3) days after mailing (if by mail) at its address specified
below:
(a) If to HomeCom:
Building 14, Suite 100
3535 Piedmont Road
Atlanta, Georgia 30305
Attn: Harvey Sax, President/CEO
(P)(404) 237-4646
(F)(404) 237-3060
or such other address as HomeCom may designate from time to time by written
notice to the Holder.
(b) If to the Holder:
The Malachi Group, Inc.
Suite 1132
3390 Peachtree Road NE
Atlanta, Georgia 30326
Attention: Porter Bingham
(P) (404) 237-3031
(F) (404) 467-6777
or such other address as the Holder may designate from time to time by written
notice to HomeCom.
SECTION IX. SUPPLEMENTS AND AMENDMENTS. This Warrant may be amended and
supplemented in writing signed by HomeCom and the Holder.
SECTION X. SUCCESSORS. This Warrant shall be binding upon and inure to the
benefit of the respective successors and permitted assigns hereunder of HomeCom
or the Holder.
SECTION XI. TERMINATION. This Warrant shall terminate at the close of business
on the Expiration Date. Notwithstanding the foregoing, this Warrant will
terminate on any earlier date when this Warrant has been exercised in full or
has been redeemed or acquired by HomeCom.
SECTION XII. GOVERNING LAW. This Warrant shall be governed by and construed in
accordance with the laws of the State of Georgia.
SECTION XIII. JURISDICTION AND VENUE. Any judicial proceedings brought by or
against any party on any dispute arising out of this Warrant or any matter
related thereto shall be brought in the state or federal courts of Fulton
County, Georgia and, by execution and delivery of this Warrant, each of the
parties accepts for itself the exclusive jurisdiction and venue of the aforesaid
courts as trial courts, and irrevocably agrees to be bound by any judgment
rendered thereby in connection
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with this Warrant after exhaustion of all appeals taken (or by the appropriate
appellate court if such appellate court renders judgment).
SECTION XIV. BENEFITS OF THIS AGREEMENT. Nothing in this Warrant shall be
construed to give to any person or corporation other than HomeCom and the Holder
of this Warrant any legal or equitable right, remedy or claim under this
Warrant, and this Warrant shall be for the sole and exclusive benefit of HomeCom
and the Holder hereof.
SECTION XV. SEVERABILITY. If any provision of this Warrant is held to be
illegal, invalid or unenforceable under present or future laws effective during
the term hereof, such provision shall be fully severable; this Warrant shall be
construed and enforced as if such illegal, invalid or unenforceable provision
had never comprised a part hereof; and the remaining provisions of this Warrant
shall remain in full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or its severance from this Warrant.
Furthermore, in lieu of such illegal, invalid or unenforceable provision there
shall be added automatically as a part of this Warrant a provision as similar in
terms to such illegal, invalid or unenforceable provision as may be possible and
be legal, valid and enforceable.
SECTION XVI. HEADINGS. The section and subsection headings herein are for
convenience only and shall not affect the construction hereof.
IN WITNESS WHEREOF, HomeCom has caused this Warrant to be duly executed
as of the day and year first above written.
HOMECOM INC.
By:
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Name:
--------------------------
Title:
--------------------------
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
HomeCom Communications, Inc. of our report, which includes an explanatory
paragraph relating to the uncertainty of the Company's ability to continue as a
going concern, dated February 21, 1997, on our audits of the financial
statements of HomeCom Communications, Inc. We also consent to the reference to
our firm under the caption "Experts."
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
January 30, 1998
