<PAGE> 1
FILED PURSUANT TO
RULE 424(b)(3)
REGISTRATION NO. 333-45383
PROSPECTUS
HOMECOM COMMUNICATIONS, INC.
(THE "COMPANY")
UP TO 1,142,858 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
1,767,858 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) 1,142,858 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 a registration statement covering the shares of Common Stock issuable
upon conversion of the Series A Preferred Stock (the "Series A Preferred
Registration Statement"). The Series A Preferred Holders have agreed that they
may not convert on a non-cumulative basis (i) more than 25% of the Series A
Preferred Stock during any thirty (30) day period following the effective date
(the "Registration Effective Date") of the registration statement (the
"Registration Statement") filed with the
---------------
continued on following page
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 8.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 14, 1998
<PAGE> 2
continued from previous page
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Securities and Exchange Commission (the "Commission") with respect to the offer
and sale of shares (the "Conversion Shares") of the Company's Common Stock
issuable upon conversion of the Series A Preferred Stock. The Series A Preferred
Stock is convertible into a number of shares of Common Stock equal to the
quotient of (a) the product of the number of shares of Series A Preferred Stock
being converted multiplied by $100.00 divided by (b) the then-applicable
conversion price. The conversion price for the Series A Preferred Stock (the
"Series A Preferred Conversion Price") is the lesser of (i) 75% of the average
closing bid price of the Company's Common Stock for the five trading days ending
on the day the Company actually receives a conversion notice; or (ii) $3.50 (the
"Fixed Conversion Price"). However, if the Registration Statement is not
declared effective by May 16, 1998, the Fixed Conversion Price shall be $3.00
per share. The Series A Preferred Conversion Price is subject to adjustment
under certain circumstances. On May 8, 1998, the closing bid price of the Common
Stock on the Nasdaq SmallCap(TM) Market was $4.5625 per share and the average of
the closing bid price of the Common Stock for the five trading days ending May
8, 1998 was $5.05 per share. See "Description of Securities -- Series A
Convertible Preferred Stock."
In connection with the issuance and sale of the Series A Preferred Stock,
the Company granted the Series A Preferred Stock Warrants to the Series A
Preferred Holders to acquire an aggregate of 75,000 shares of Common Stock, with
warrants to purchase 62,500 shares of Common Stock having an exercise price per
share equal to $14.50625 and warrants to purchase 12,500 shares of Common Stock
having an exercise price per share equal to $15.825. The Company also granted
50,000 warrants to a placement agent at an exercise price of $15.825 per share.
The Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. See "Description
of Securities -- Warrants."
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.
<PAGE> 3
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 1,767,858
shares of Common Stock. The Offered Shares include
(i) 1,142,858 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 weighted average exercise price of the Offered
Warrants is higher than the current trading price
of
3
<PAGE> 4
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 the Series A Preferred Registration
Statement. The Series A Preferred Holders have
agreed that they may not convert on a cumulative
basis (i) more than 25% of the Series A Preferred
Stock during any thirty (30) day period following
the effective date (the "Registration Effective
Date") of the registration statement (the
"Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") with
respect to the offer and sale of shares (the
"Conversion Shares") of the Company's Common Stock
issuable upon conversion of the Series A Preferred
Stock. The Series A Preferred Conversion Price is
subject to adjustment under certain circumstances.
See "Description of Securities -- Series A
Convertible Preferred Stock." On May 8, 1998, the
closing bid price of the Common Stock on the Nasdaq
SmallCap(TM) Market was $4.5625 per share and the
average of the closing bid price of the Common
Stock for the five trading days ending May 8, 1998
was $5.05 per share.
The Company has received no firm commitment for the
conversion of any of the Shares of Series A
Preferred Stock. Consequently, there can be no
assurance that the Shares of Series A Preferred
Stock will be converted. Pursuant to the Series A
Preferred Registration Rights Agreement, the
Company has agreed to register 1,142,858 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
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.
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<PAGE> 5
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. These warrants were subsequently assigned by
First Granite Securities, Inc. to Adar Equities,
LLC. Of the Debenture Warrants, warrants to acquire
an aggregate 200,000 shares are exercisable at a
price of $4.00 per share and warrants to acquire an
aggregate 200,000 shares are exercisable at a price
of $6.00 per share. The exercise price of the
Debenture Warrants is subject to adjustment. If not
earlier exercised, the Debenture Warrants expire on
October 27, 2000. Pursuant to an agreement dated
April 8, 1998, in the event that the Company agrees
to adjust the exercise price of the Series A
Preferred Stock Warrants to an exercise price below
$5.00 (the "Reduced Exercise Price"), the Company
has agreed to amend the exercise price of any
unexercised First Granite Debenture Warrants to the
Reduced Exercise Price.
RISK FACTORS............... An investment in the securities offered hereby
involves a high degree of risk. See "Risk Factors
NASDAQ SMALLCAP(TM)
MARKET SYMBOL............ HCOM
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. At May 8, 1998 $300,000 of the Debentures
remain to be converted. The Debentures are
convertible at the option of the holders. Pursuant
to certain amendments to the Debentures, dated as
of April 8, 1998, the Purchasers agree not to
convert any portion of the remaining Debentures
held by each of them for a period beginning April
8, 1998 and ending May 8, 1998 and thereafter not
to convert more than 25% of the Remaining
Debentures held by each of them in any thirty (30)
day period thereafter (the "Gating Restrictions").
The Debenture Conversion Price is equal to the
lessor of (a) a 25% discount from the closing bid
price of the Common Stock as reported by Nasdaq or
other securities exchanges or markets on which the
Common Stock is listed for the previous three
trading days ending on the day preceding notice of
conversion, or (b) $2.625 per share. However, in
the event that the closing bid price of the Common
Stock as reported by NASDAQ or on other securities
exchanges or markets on which the Common Stock is
listed for the previous five (5) trading days is
$3.50 or greater, following May 8, 1998 the
foregoing Gating Restrictions shall not apply as
long as the closing bid price for the previous five
(5) trading days is $3.50 or greater. In addition,
if the Common Stock is not traded on the NASDAQ
SmallCap Market or the electronic bulletin board,
the foregoing Gating Restrictions shall no longer
apply. The number of shares issuable upon
conversion of the Debentures is equal to the
aggregate principal balance of the Debentures
divided by the Debenture Conversion Price. The
offer and sale of the Debenture Conversion Shares
has been registered pursuant to the Debenture
Registration Statement which was declared effective
by the Commission on February 12, 1998.
5
<PAGE> 6
COMMON STOCK OUTSTANDING
BEFORE
OFFERING(1)(2)(3)........ 4,154,965
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF THE
REMAINING UNCONVERTED
DEBENTURE CONVERSION
SHARES(1)(3)(4).......... 4,269,251
COMMON STOCK OUTSTANDING
AFTER ISSUANCE OF
THE SERIES A PREFERRED
CONVERSION SHARES AND
COMMON STOCK ISSUABLE
UPON EXERCISE OF THE
OFFERED
WARRANTS(2)(5)(6)........ 5,351,394
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)....... 5,465,680
- ---------------
(1) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 557,160 shares of Common Stock are
issuable upon the exercise of outstanding options granted at exercise prices
ranging from $2.18 to $8.06 per share and weighted average exercise price of
$4.58 per share; (ii) 300,000 shares reserved for issuance under the
Company's Non-Employee Directors Plan, of which options to acquire 20,000
shares of Common Stock are issuable upon the exercise of outstanding options
granted at exercise prices ranging from $2.18 to $6.50 per share and a
weighted average exercise price of $4.34; (iii) 150,000 shares reserved for
issuance under the Company's Stock Purchase Plan, no shares having been
issued thereunder; (iv) 100,000 shares of Common Stock reserved for issuance
upon the exercise of 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 remaining
$300,000 of outstanding Debentures.
(3) Excludes shares of Common Stock issuable upon conversion of the Series A
Preferred Stock.
(4) Assumes that all holders of Debentures elect to convert the Debentures into
an aggregate 114,286 shares of Common Stock at a Conversion Price of $2.625
per share, which represents the Conversion Price that would be in effect if
the Company received notice of conversion after the close of business on May
8, 1998, 1998. See "Description of Securities -- Convertible Debentures."
(5) Assumes that all holders of the Series A Preferred Stock elect to convert
the Series A Preferred Stock into an aggregate 571,429 shares of Common
Stock at a conversion price of $3.50 per share, which represents the Series
A Preferred Conversion Price that would be in effect if the Company received
notice of conversion after the close of business on May 8, 1998. See
"Description of Securities -- Series A Convertible Preferred Stock."
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<PAGE> 7
(6) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock
Option Plan, of which options to acquire 557,160 shares of Common Stock are
issuable upon the exercise of outstanding options granted at exercise prices
ranging from $2.18 to $8.06 per share and weighted average exercise price of
$4.58 per share; (ii) 300,000 shares reserved for issuance under the
Company's Non-Employee Directors Plan, of which options to acquire 20,000
shares of Common Stock are issuable upon the exercise of outstanding options
granted at exercise prices ranging from $2.18 to $6.50 per share and a
weighted average exercise price of $4.34; (iii) 150,000 shares reserved for
issuance under the Company's Stock Purchase Plan, no shares having been
issued thereunder; and (iv) 25,000 shares of Common Stock that are issuable
upon exercise of the InsureRate Warrants. See "Management -- Incentive
Plans," "Description of Securities -- Convertible Debentures," "Description
of Securities -- Series A Preferred Stock," and "Description of
Securities -- Warrants." Also excludes shares that may be issued in
connection with the Company's August 1996 acquisition of HomeCom Internet
Security Services, Inc. See "Certain Transactions."
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
DECEMBER 2,
(INCORPORATION)
TO DECEMBER 31, YEAR ENDED DECEMBER 31,
--------------- --------------------------------------
1994 1995 1996 1997
--------------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................. -- $ 327,574 $ 2,298,855 $ 2,878,628
Operating loss............................. $ (17,452) (1,824) (580,865) (4,431,059)
Net loss................................... (17,452) (5,440) (625,583) (4,881,181)
Basic and diluted loss per share........... $ (.01) $ (.00) $ (.34) $ (1.88)
Weighted average common shares
outstanding.............................. 1,850,447 1,850,447 1,862,223 2,602,515
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).................... $ 8,455 $133,792 $(1,304,682) $ 2,721,930
Total assets................................. 10,254 247,382 1,726,522 4,664,779
Long-term obligations........................ -- 160,792 147,833 1,652,009
Total liabilities............................ -- 242,568 2,347,191 2,708,007
Stockholders' equity (deficit)............... 10,254 4,814 (620,669) 1,956,772
</TABLE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Exchange
Act, including without limitation, certain statements contained under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" concerning the Company's expectations, beliefs, or strategies
regarding increased future revenues and operations and certain statements
contained under "Business" concerning the development and marketing of
customized Internet applications and security consulting services and the effect
of market conditions and competition. When used in this Prospectus, the words
"believes," "intends," "anticipates" and similar expressions are intended to
identify forward-looking statements. All forward-looking statements included in
this Prospectus are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected or implied
by such forward-looking statements. Such risks and uncertainties include the
timing and acceptance of new product introductions, the actions of the Company's
competitors and business partners, and those discussed under the caption "Risk
Factors."
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<PAGE> 8
RISK FACTORS
An investment in the securities offered hereby is speculative in nature and
involves a high degree of risk. In addition to other information contained in
this Prospectus, prospective investors should carefully consider the following
risk factors before purchasing the securities offered hereby.
LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; CONTINUING LOSSES. The
Company was incorporated in December 1994 and commenced sales in January 1995.
Consequently, the Company has only a limited operating history upon which to
base an evaluation of the Company and its prospects. The Company's prospects
must be considered in light of the risks, expenses and difficulties frequently
encountered by companies in their early stages of development, particularly
companies in new and rapidly evolving industries. To address these risks, the
Company must, among other things, respond to competitive developments, continue
to attract, retain and motivate qualified persons, and continue to upgrade and
commercialize products and services. There can be no assurance that the Company
will be successful in addressing such risks. The Company has incurred net losses
since its incorporation and as of December 31, 1997 had an accumulated deficit
of approximately $5.5 million. For the years ended December 31, 1996 and 1997,
the Company had negative cash flows from operations of approximately $216,000
and $4.0 million, respectively. The Company continues to incur operating losses
and there can be no assurance that the Company will ever achieve or sustain
profitability.
RECENT REDUCTION OF STAFF AND OTHER EXPENSES; CONTINUING LOSSES. The
Company has experienced substantial change and expansion in its business and
operations since its incorporation in 1994 and expects to continue to experience
periods of rapid change. The Company's recent expansion of operating expenses
has placed significant demands on the Company's administrative, operational,
financial and other resources. Following completion of its initial public
offering, the Company expended considerable resources to expand its marketing
and sales programs, its product development staff, its accounting and internal
management systems and its other administrative and public relations
capabilities. These increases in expenditures were not followed by commensurate
increases in revenues, and during the quarter ended September 30, 1997, the
Company was forced to engage in substantial reductions in its personnel in order
to conserve operating capital. This reduction in staff has affected employee
morale and limited the Company's ability to increase sales to desired levels.
Notwithstanding the Company's efforts to limit its expenditures, its operating
costs continue to exceed revenues. If the Company cannot generate sufficient
revenues to offset its operating expenses or the Company's management otherwise
fails to manage the Company's growth effectively, the Company's business,
financial condition and operating results will be materially and adversely
affected. There can be no assurance that current management can operate the
Company's business adequately to achieve profitable operations. See
"Business -- Employees" and "Management."
NEED FOR ADDITIONAL FINANCING. The Company has substantially limited
sources of capital and continues to incur substantial operating losses. As of
December 31, 1997, the Company had net working capital of approximately $2.7
million. On December 23, 1997, the Company issued and sold 20,000 shares of
Series A Preferred Stock to the Series A Preferred Holders for aggregate net
proceeds of approximately $1.8 million. The proceeds will be used for general
working capital purposes. Because the Company expects to continue to incur
substantial operating losses, the Company will continue to use substantial sums
of cash in its operations for an indefinite period. Accordingly, the Company
will be required to obtain additional capital. No assurance can be given that
the Company will be successful in its efforts to obtain additional capital, or
that capital will be available on terms acceptable to the Company. If the
Company exhausts its current sources of capital and is not able to obtain
additional capital, the Company will be required to undertake certain steps to
continue its operations. Such steps may include immediate reduction of the
Company's operating costs and other expenditures, including potential reductions
of personnel and suspension of salary increases and capital expenditures. If
such measures are not sufficient, the Company may elect to implement other cost
reduction actions as the Company may determine are necessary and in the
Company's best interests. Any such actions undertaken may limit the Company's
opportunities to realize continued increases in sales and the Company may not be
able to reduce its costs in amounts sufficient to achieve break-even or
profitable operations. If the Company exhausts its sources of capital, and
subsequent cost reduction measures are not sufficient to allow
8
<PAGE> 9
the Company to achieve break-even or profitable operations, the Company will be
forced to seek protection from its creditors.
POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP(TM) MARKET;
DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is listed
on The Nasdaq SmallCap(TM) Market. In order to continue to be included in the
Nasdaq SmallCap(TM) Market, companies must maintain certain listing
requirements. At December 31, 1997, the Company's net tangible assets of
approximately $1,957,000 did not meet the Nasdaq's requirements for at least
$2,000,000 of net tangible assets. The Company is developing a plan to achieve
compliance with all of Nasdaq's listing requirements, although no assurances can
be given that the Company will be able to achieve or maintain such compliance.
Failure of the Company to meet Nasdaq's maintenance criteria may cause the
common stock to be delisted from The Nasdaq SmallCap(TM) Market, and trading, if
any, in the common stock would thereafter be conducted in the over-the-counter
market. As a result, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the common stock. In
addition, if the common stock were delisted from trading on The Nasdaq
SmallCap(TM) Market and the trading price of the common stock was less than
$5.00 per share, trading in the common stock would also be subject to certain
rules promulgated under the Securities Exchange Act of 1934, which require
additional disclosure by broker-dealers in connection with any trades involving
a stock defined as a "penny stock" (generally, any non-Nasdaq equity security
that has a market price of less than $5.00 per share, subject to certain
exceptions). Such rules require the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith, and impose various sales practice requirements on
broker-dealers who sell penny stock to persons other than established customers
and accredited investors. For these types of transactions, the broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser's written consent to the transactions prior to sale. The
additional burdens imposed upon broker-dealers by such requirements may
discourage broker-dealers from effecting transactions in the common stock, which
could severely limit the market liquidity of the common stock and the ability of
stockholders to sell the Common Stock in the secondary market. In addition, if
the Company's common stock is delisted from the Nasdaq SmallCap(TM) Market,
unless for the purpose of listing on a national exchange, the unpaid balance of
the Company's 5% debentures may accelerate, unless waived by the holders.
PRICE EROSION; CONTINUING DECLINE IN MARGINS. The market for Internet and
Intranet products and services is highly competitive and is characterized by
pressures to reduce prices, incorporate new capabilities and accelerate
completion schedules. Increased competition has resulted in significant price
competition, which in turn has resulted in significant reductions in the average
selling price of many of the Company's products and services, including its Web
site development and hosting services. The Company has not been able to offset
the effects of price reductions through an increase in the number of its
customers, higher revenue from enhanced services or cost reductions, and the
Company expects its margins to continue to decline.
INTENSE COMPETITION. The Company's current and prospective competitors
include many companies that have longer operating histories, longer customer
relationships and substantially greater financial, management, technical,
development, sales, marketing and other resources than the Company. Many
nationally known companies and regional and local companies across the country
are involved in Intranet and Intranet applications, including the development
and support of Web sites and Internet applications, and the number of these
companies is increasing. Companies competing directly or indirectly with the
Company include Web site service boutique firms, communications, telephone and
telecommunications companies, computer hardware and software companies,
established on-line services companies, advertising agencies, direct access
Internet and Internet-services and access providers as well as specialized and
integrated marketing communication firms. The Company also competes with the
internal information technology departments of prospective customers who are
choosing whether to outsource design and support. The Company competes on the
basis of creative talent, price, reliability of services and responsiveness. The
Company's ability to compete in its markets is substantially limited by its
available working capital and its continuing operating losses. See
"Business -- Competition."
NEW AND UNCERTAIN MARKET. The market for Internet and Intranet products
and services has only recently developed. Because this market is relatively new
and because current and future competitors are likely to introduce competing
Internet and Intranet products and services, it is difficult to predict the rate
at
9
<PAGE> 10
which the market will grow or at which new or increased competition will result
in market saturation. If the Internet and Intranet markets fail to grow, grow
more slowly than anticipated or become saturated with competitors, the Company's
business, financial condition and operating results will be materially and
adversely affected.
DEPENDENCE ON THE INTERNET. Although a portion of the sales of the
Company's products and services will depend upon growth of private Intranet
networks, sales of the Company's Internet related products and services will
depend in large part upon an adequate infrastructure for providing Internet
access and carrying Internet traffic. The Internet may not prove to be a viable
commercial marketplace because of inadequate development of the necessary
infrastructure or timely development of complementary products such as high
speed modems. Because global commerce and on-line exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether the Internet will prove to be a
viable commercial marketplace. There can be no assurance that the infrastructure
or complementary products necessary to make the Internet a viable commercial
marketplace will be developed, or, if developed, that the Internet will become a
viable commercial marketplace. If the necessary infrastructure or complementary
products are not developed, or if the Internet does not become a viable
commercial marketplace, the Company's business, financial condition and
operating results will be materially and adversely affected.
RISK OF CHANGING TECHNOLOGY. The Internet software and services markets
are characterized by rapid technological change, evolving industry standards,
emerging industry competition and frequent new service, software and other
product introductions. The Company's future success will depend in significant
part on its ability to anticipate industry standards, continue to apply advances
in Internet and Intranet technologies, enhance its current services and
products, and develop and introduce new services and products on a timely basis.
The introduction of services and products embodying new technologies and the
emergence of new industry standards can render existing services and products
obsolete and unmarketable. There can be no assurance that the Company will be
successful in developing and marketing product enhancements or new services and
products that respond to technological change or evolving industry standards,
that the Company will not experience difficulties that could delay or prevent
the successful development, introduction and marketing of these services or
products, or that its new services and products will adequately meet the
requirements of the marketplace and achieve market acceptance. If the Company is
unable, for technological or other reasons, to develop and introduce new
services or products in a timely and cost-effective manner or to address
compatibility, inoperability or other issues raised by technological changes or
new industry standards, the Company's business, financial condition and
operating results will be materially and adversely affected. See
"Business -- Products and Services."
DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent
upon its senior management and the loss of any member of senior management could
have a material adverse effect upon the Company's business, financial condition
and operating results. No assurance can be given that the Company can retain its
senior management or other key personnel. Although the Company has entered into
employment agreements with each of its executive officers which contain
non-competition and non-disclosure provisions, the Company's ability to benefit
from them is uncertain because such provisions typically must be limited in
geographic scope to be enforceable. Restrictions limited in geographic scope may
not effectively prohibit competition with the Company because of the global
nature of the Internet. See "Management."
LENGTH OF SALES CYCLE. The development and implementation of interactive
Web sites and intranet software applications requires the Company to engage in a
lengthy sales cycle. The pursuit of sales leads typically involves an analysis
of the prospective customer's needs, preparation of a written proposal, one or
more presentations and contract negotiations. The Company often provides
significant education to prospective customers regarding the use and benefits of
Internet or Intranet technologies and products. Extensive Web site development
or licensing of the Company's products may also involve a substantial commitment
of capital by potential customers as well as the attendant delays frequently
associated with approving larger capital expenditures and reviewing new
technologies that affect key operations. If the Company's average sales cycle
continues to lengthen, the Company will face increased costs, potentially lower
profit margins and a potential inability to achieve targeted sales goals.
10
<PAGE> 11
RISK OF DEFECTS. Web site services and other services based on software
and computing systems often encounter development and completion delays and the
underlying software may contain undetected errors or failures when introduced
and, in the case of Web sites, when the volume of traffic on a site increases.
In addition, there can be no assurance that errors found in the software
underlying a Web site or other project will not result in delays in completion,
commercial release or market acceptance of such Web site or other project.
Likewise, there can be no assurance that the Company will not incur
unanticipated costs to cure any defect or be obligated to refund money paid to
the Company or to pay for damages caused by any delay or defect. Software
applications and products as complex as those being developed by the Company may
contain undetected errors or failures when first introduced. If software errors
are discovered after introduction, the Company could experience delays and lost
revenues during the period required to correct these errors. There can be no
assurance that, despite testing by the Company and by current and potential
customers, errors will not be found in new applications, products or releases
after commencement of installation or shipment, resulting in loss of or delay in
receiving revenues.
SECURITY RISKS. The Company's software and equipment are vulnerable to
computer viruses or similar disruptive problems caused by customers or other
Internet users. Computer viruses or problems caused by third parties could lead
to interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. Although the Company attempts to limit its liability
to customers for these types of risks through contractual provisions, there can
be no assurance that these provisions will be enforceable.
LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. The Company relies primarily
on a combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company has a registered service mark for
its logo, and has applied for federal registration of the names "HomeCom," "Post
On The Fly(TM)" and "Personal Internet Banker(TM)." Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop competing products and
services. In distributing its software products, the Company intends to rely
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as the laws of the United States. The
Company does not believe that any of its proposed products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
products. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
electronic commerce grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company. In addition, Web site developers such as the Company face
potential liability for the actions of customers and others using their
services, including liability for infringement of intellectual property rights,
rights of publicity, defamation, libel, fraud, misrepresentation, unauthorized
computer access, theft, tort liability and criminal activity under the laws of
the United States, various states and foreign jurisdictions. An imposition of
liability could have a material adverse effect on the Company. See
"Business -- Intellectual Property Rights."
11
<PAGE> 12
DILUTION. Purchasers of shares of Common Stock offered hereby will
experience immediate and substantial dilution in net tangible book value per
share. The number of shares of Common Stock that are issuable upon conversion of
the Debentures and the Series A Preferred Stock is variable based upon the
closing bid prices of the Company's Common Stock. Accordingly, the number of
shares issuable upon conversion of the Debentures or the Series A Preferred
Stock may increase significantly. See "Risk Factors -- Variability of Number of
Shares of Common Stock Issuable Upon Conversion of Debentures and Series A
Preferred Stock." In addition, the Company will be required to issue a
substantial number of additional shares of Common Stock in the future in order
to obtain additional financing. The issuance of any of the shares will have the
effect of increasing the dilution to new investors in this Offering.
FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's limited
operating history, the Company does not have historical financial data for a
significant number of periods on which to base planned operating expenses.
Accordingly, the Company's expense levels are based in part on its expectations
as to future revenues and to a large extent are fixed. However, the Company
typically operates with no significant backlog. As a result, quarterly sales and
operating results generally depend on the volume and timing of and ability to
perform services requested within the quarter, and are difficult to forecast.
The Company may be unable to adjust spending in a timely manner to compensate
for any unexpected revenues shortfall. Accordingly, any significant shortfall of
demand for the Company's products and services in relation to the Company's
expectations would result in fluctuations in future quarterly operating results.
The Company may also experience significant fluctuations in future quarterly
operating results as the result of many factors, including demand for the
Company's products and services, introduction or enhancement of products by the
Company and its competitors, market acceptance of new products and services, mix
of products and services sold and general economic conditions. As a result, the
Company believes that period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as any indication
of future performance.
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of this offering, the
Company will have outstanding 4,726,394 shares of Common Stock (assuming full
conversion of the Series A Preferred Stock at a Series A Preferred Conversion
Price of $3.50, but assuming no exercise of the Offered Warrants), will have
outstanding options to purchase of 557,160 shares of Common Stock pursuant to
the Company's stock option plans at a weighted average exercise price of
approximately $4.58 per share, and will have outstanding warrants to acquire an
aggregate 650,000 shares at a weighted average exercise price of approximately
$7.24 per share. Additionally, the Company has outstanding $300,000 of the
Debentures, which would be convertible into an aggregate 114,286 shares of
Common Stock if the Company had received notice of conversion after the close of
business on May 8, 1998, based on a Debenture Conversion Price of $2.625 per
share. The number of shares of Common Stock issuable upon conversion of the
Debentures or the Series A Preferred Stock can increase significantly if the
price of the Company's Common Stock is lower than 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 4,726,394 shares outstanding after this
offering (assuming conversion of the Series A Preferred Stock but no exercise of
the Offered Warrants), approximately 2,418,607 shares (including the 571,429
shares assumed to be sold in this offering) will be freely tradable without
restriction or further registration under the Securities Act unless they are
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act. The remaining 2,307,787 outstanding shares of Common
Stock may be sold in the public market only if registered or pursuant to an
exemption from registration such as Rule 144 or Rule 144(k) promulgated under
the Securities Act. In addition, the Company intends to file a registration
statement on Form S-8 under the Securities Act for the purpose of registering
the potential sale of the 600,000 shares reserved for issuance under the
Company's Stock Option Plan (of which options to purchase 557,160 shares are
outstanding), the 300,000 shares for issuance under the Company's Non-Employee
Directors Plan (of which options to purchase 10,000 shares are outstanding) and
the 150,000 shares reserved for issuance under the Company's Stock Purchase Plan
(of which no shares or purchase rights have yet been granted). After the
effective date of 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.
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<PAGE> 13
VARIABILITY OF NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
DEBENTURES AND SERIES A PREFERRED STOCK. The number of shares of Common Stock
issuable upon conversion of the Debentures and Series A Preferred Stock is
essentially unlimited. If the price of the Common Stock as reported by the
Nasdaq SmallCap(TM) Market, declines to a price less than $2.625 per share, the
Company will be required to issue substantially more than the 114,286 shares
assumed hereunder to be issuable upon conversion of the remaining unconverted
Debentures. If the price of the Common Stock, as reported by the Nasdaq
SmallCap(TM) Market, declines to a price less than $3.50, the Company will be
required to issue substantially more than the 571,429 shares assumed hereunder
to be issuable upon conversion of the Series A Preferred Stock. All shares
issuable by the Company upon conversion of the Debentures and the Series A
Preferred Stock are subject to effective registration statements filed with the
Commission. Consequently, all of such shares will be eligible for sale in the
market place without restriction, except to the extent that any of the selling
holders are deemed to be "affiliates" of the Company at the time of sale. No
assurance can be given that the trading price of the Company's Common Stock will
not fall significantly below the prices noted above, or that purchasers in this
offering will not suffer significant additional dilution as a result of any such
decline in the price of the Common Stock.
UNPAID BALANCE OF DEBENTURES ACCELERATES UPON DEFAULT. The unpaid balance
of the Debentures accelerates upon any default in the payment of the Debentures.
Consequently, if the Company defaults in the payment of any of the principle or
interest due or payable on the Debentures the value of the Common Stock may
decline.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO CONVERT
DEBENTURES. Holders of the Debentures will only be able to convert the
Debentures if (i) a current prospectus under the Securities Act relating to the
shares of Common Stock underlying the Debentures is then in effect, and (ii)
such shares of Common Stock are qualified for sale or exempt from qualification
under the applicable securities laws of the states in which they are offered.
There can be no assurance that the Company will be able to maintain the
effectiveness of a current prospectus covering the shares of Common Stock
issuable upon conversion of the Debentures. See "Description of Securities."
SENIORITY OF SERIES A PREFERRED STOCK; STAGGERED BOARD; POSSIBLE
ANTI-TAKEOVER EFFECTS. The Board of Directors has authority to issue up to
1,000,000 shares of preferred stock and to fix the rights, preferences,
privileges and restrictions, including voting rights, of the preferred stock
without further vote or action by the Company's stockholders. The rights of the
holders of Common Stock will be subject to, and may be adversely affected by,
the rights of the holders of any preferred stock that may be issued in the
future. While the Company has no present intention to issue shares of preferred
stock, such issuance, while providing desired flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company. See "Description of Capital
Stock-Series A Preferred Stock." In addition, the Company's Restated Certificate
of Incorporation provides that the Board of Directors be divided into three
classes of directors, with each class serving a staggered three-year term. The
division of the Board of Directors into three classes may tend to discourage a
third party from making a tender offer or otherwise attempting to obtain control
of the Company and may maintain the incumbency of the Board of Directors,
because such a division generally makes it more difficult for stockholders to
replace a majority of directors. See "Description of Securities -- Limitations
on Liability of Directors."
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY. The Company's Restated
Certificate of Incorporation provides, as permitted by Delaware law, that its
directors shall have no personal liability for certain breaches of their
fiduciary duties to the Company. In addition, the Company's Restated Bylaws
provide for mandatory indemnification of directors and officers to the fullest
extent permitted by Delaware law. These limitations on personal liability do not
apply to liabilities under federal securities laws. However, these provisions
may reduce the likelihood of derivative litigation against directors and may
discourage stockholders from bringing a lawsuit against directors for a breach
of their fiduciary duties. See "Description of Securities -- Limitations on
Liability of Directors."
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<PAGE> 14
GOVERNMENT REGULATION. The Telecommunications Act of 1996 (the "1996
Telecommunications Act"), which became effective on February 8, 1996, imposes
criminal liability on persons sending or displaying in a manner available to
minors indecent material on an interactive computer service such as the
Internet. The 1996 Telecommunications Act also imposes criminal liability on an
entity knowingly permitting facilities under its control to be used for those
activities. The constitutionality of these provisions was successfully
challenged in federal district court and ultimately found to be unconstitutional
by the United States Supreme Court in Reno v. American Civil Liberties Union.
Therefore, at the time of this Prospectus, the Company does not believe that it
is currently subject to direct regulation by any government agency, other than
regulations applicable to businesses generally, and believes that there are
currently few laws or regulations directly applicable to Web site service
companies. The Federal Communications Commission is studying the possible
regulation of the Internet. Any such regulations adopted by the Federal
Communications Commission may adversely impact the manner in which the Company
conducts its business. It is possible that a number of additional laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy, pricing and characteristics and quality of products and services.
The adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services, increase the Company's cost of doing business, cause the Company to
modify its operations, or otherwise have an adverse effect on the Company's
business, financial condition or operating results. Moreover, the applicability
to the Internet of existing laws governing issues such as property ownership,
libel and personal privacy is uncertain. The Company cannot predict the impact,
if any, that future regulation or regulatory changes may have on its business.
In addition, Web site developers such as the Company face potential liability
for the actions of customers and others using their services, including
liability for infringement of intellectual property rights, rights of publicity,
defamation, libel, fraud, misrepresentation, unauthorized computer access,
theft, tort liability and criminal activity under the laws of the United States,
various states and foreign jurisdictions. Any imposition of liability could have
a material adverse effect on the Company. The Company's network services are
transmitted to its customers over dedicated and public telephone lines. These
transmissions are governed by regulatory policies establishing charges and terms
for communications. Changes in the regulatory environment relating to the
telecommunications and media industry, including regulatory changes which
directly or indirectly affect use of or access to the Internet or increase the
likelihood or scope of competition from regional telephone companies, could have
a material adverse effect on the Company.
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<PAGE> 15
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 weighted
average exercise price of the Offered Warrants is 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............................................... 16.00 2.00
Second quarter (through May 8).............................. 18.25 1.13
</TABLE>
On May 8, 1998, the last reported sale price of the Common Stock as
reported by the Nasdaq SmallCap(TM) Market was $4.625 per share. As of May 8,
1998, there were 44 holders of record of the Company's Common Stock.
DIVIDEND POLICY
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
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<PAGE> 16
SELECTED FINANCIAL DATA
The following selected historical financial data of HomeCom Communications,
Inc. have been derived from the audited financial statements of the Company. The
data should be read in conjunction with the financial statements, related notes
and other financial information included herein.
<TABLE>
<CAPTION>
DECEMBER 2,
(INCORPORATION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -------------------------------------
1994 1995 1996 1997
--------------- -------- ---------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales:
Service sales....................................... $ -- $327,574 $2,112,878 $ 2,792,306
Equipment sales..................................... -- -- 185,977 86,322
-------- -------- ---------- -----------
Total net sales.............................. -- 327,574 2,298,855 2,878,628
-------- -------- ---------- -----------
Cost of Sales:
Cost of services.................................... -- 59,871 546,409 1,645,646
Cost of equipment sold.............................. -- -- 128,938 68,974
-------- -------- ---------- -----------
Total cost of sales.......................... -- 59,871 675,347 1,714,620
-------- -------- ---------- -----------
Gross profit.......................................... -- 267,703 1,623,508 1,164,008
-------- -------- ---------- -----------
Operating expenses:
Sales and marketing................................. 1,045 124,253 845,690 1,367,247
Product development................................. -- 20,239 78,887 435,810
General and administrative.......................... 16,407 121,313 1,194,728 3,553,473
Depreciation and amortization....................... -- 3,722 85,068 238,537
-------- -------- ---------- -----------
Total operating expenses..................... 17,452 269,527 2,204,373 5,595,067
-------- -------- ---------- -----------
Operating Loss........................................ (17,452) (1,824) (580,865) (4,431,059)
Other expenses (income):
Interest expense, net............................... -- 3,469 51,272 543,420
Other expense (income), net......................... -- 147 (6,554) (93,298)
-------- -------- ---------- -----------
Loss before income taxes.............................. (17,452) (5,440) (625,583) (4,881,181)
Income taxes.......................................... -- -- -- --
-------- -------- ---------- -----------
Net loss.............................................. $(17,452) $ (5,440) $ (625,583) $(4,881,181)
======== ======== ========== ===========
Basic and diluted loss per share...................... $ (.01) $ (.00) $ (.34) $ (1.88)
======== ======== ========== ===========
Weighted average common shares outstanding............ 1,850,447 1,850,447 1,862,223 2,602,515
======== ======== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997
--------------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............................ $ 8,455 $133,792 $(1,304,682) $2,721,930
Total assets......................................... 10,254 247,382 1,726,522 4,664,779
Long-term obligations................................ -- 160,792 147,833 1,652,009
Total liabilities.................................... -- 242,568 2,347,191 2,708,007
Stockholders' equity (deficit)....................... 10,254 4,814 (620,669) 1,956,772
</TABLE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company was incorporated in December 1994 and commenced sales in
January 1995 when it began marketing its Web site development and hosting
services. The Company markets its services through a direct sales force,
advertisement, referrals, and active business partner relationships with
organizations such as AT&T, Microsoft, Netscape and Unisys.
The Company generates revenues through Internet and Intranet customized
software applications, Web site development, Web site hosting services, computer
hardware resales, consulting services (including consulting on internet and
intranet security) and fees charged for the maintenance of Web sites. Most
customized software application projects are generally completed within six to
eight weeks, although certain past, current and future projects have taken and
are expected to take longer to complete. Revenues on customized application and
Web site projects are recognized using the percentage of completion method. Web
site maintenance and hosting revenues represent recurring revenues and are
deferred and recognized ratably over the period.
During 1997, custom Internet and Intranet applications and integration
services accounted for approximately 56% of the Company's revenues, Internet
outsourcing services generated approximately 29% of the Company's revenues and
Internet security services generated approximately 14% of the Company's
revenues.
During 1996 and 1997, expenses substantially exceeded net sales as the
Company expanded its products and services, increased its marketing and sales
staff and enhanced its operational and administrative support structure to
support anticipated increases in revenues. The anticipated increases in revenues
have not materialized and the Company has been forced to substantially reduce
its operating expenses. In the third quarter of 1997, the Company reduced the
number of its employees from approximately 100 persons in July 1997 to
approximately 42 persons by December 31, 1997. As a result of this substantial
reduction in its work force, the Company faces issues involving employee morale
and hiring. Notwithstanding these reductions in operating expenses, the Company
expects to continue to incur operating losses for an indefinite period. See
"Risk Factors -- Recent Reduction of Staff and Other Expenses; Continuing
Losses."
The Company's revenues and operating results have varied substantially from
period to period, and should not be relied upon as an indication of future
results. See "Risk Factors -- Potential Fluctuations in Quarterly Results." The
Company historically has operated with no significant backlog because its
services are provided as requested by customers. As a result, revenues in any
quarter are substantially affected by the amount of services requested by its
customers. Because the Company is incurring expenses in anticipation of future
revenue growth and a high percentage of the Company's expenses are relatively
fixed, a small variation in the timing of recognition of specific revenues could
cause significant variations in operating results from quarter to quarter.
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RESULTS OF OPERATIONS
The following table sets forth certain operating data as a percentage of
net revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1995 1996 1997
----- ----- ------
<S> <C> <C> <C>
Net sales:
Service sales............................................. 100.0% 91.9% 97.0%
Equipment sales........................................... -- 8.1 3.0
----- ----- ------
Total net sales................................... 100.0 100.0 100.0
----- ----- ------
Cost of sales:
Cost of services.......................................... 18.3 23.8 57.2
Cost of equipment sold.................................... -- 5.6 2.4
----- ----- ------
Total cost of sales............................... 18.3 29.4 59.6
----- ----- ------
Gross profit................................................ 81.7 70.6 40.4
----- ----- ------
Operating expenses:
Sales and marketing....................................... 37.9 36.8 47.5
Product development....................................... 6.2 3.4 15.1
General and administrative................................ 37.1 52.0 123.4
Depreciation and amortization............................. 1.1 3.7 8.3
----- ----- ------
Total operating expenses.......................... 82.3 95.9 194.4
----- ----- ------
Operating loss.............................................. (0.6) (25.3) (153.9)
----- ----- ------
Other expenses (income)
Interest expense.......................................... 1.1 2.2 18.9
Other expense (income), net............................... 0.0 (0.3) (3.2)
----- ----- ------
Loss before income taxes.................................... (1.7) (27.2) (169.6)
----- ----- ------
Income taxes................................................ 0.0 0.0 0.0
----- ----- ------
Net loss.................................................... (1.7)% (27.2)% (169.6)%
===== ===== ======
</TABLE>
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1997
Net Sales. Net sales increased 25.2% from $2,298,855 in 1996 to $2,878,628
in 1997. Revenues from service sales increased 32.2% from $2,112,878 in 1996 to
$2,792,306 in 1997. This increase of $679,428 is primarily attributable to
increases in hosting revenues of approximately $472,000 and security consulting
revenue of approximately $308,000. Revenues from equipment sales were $86,322
during 1997 as compared to $185,977 during 1996.
Cost of Sales. Cost of sales for services increased from $546,409, or
23.8% of revenues in 1996 to $1,645,646, or 57.2% of revenues in 1997. This
increase reflects higher overall payroll costs associated with increasing the
Company's technical staff to a high of approximately 60 persons in July 1997 to
create available capacity for anticipated revenue growth, which did not occur.
As part of ongoing efforts to control cash expenditures, the Company has reduced
this staff to approximately 30 persons at December 31, 1997.
Gross Profit. Gross profit decreased by $459,500 from $1,623,508 in 1996
to $1,164,008 in 1997. Gross profit margins decreased from 70.6% during 1996 to
40.4% during 1997. This decrease as a percentage of net sales primarily reflects
increased costs incurred by the Company for technical personnel hired in advance
of anticipated revenue growth, which did not occur.
Sales and Marketing. Sales and marketing expenses increased 61.7% from
$845,690 in 1996 to $1,367,247 in 1997. This increase was primarily attributable
to an increase in advertising and marketing expenses. As a percentage of net
sales, these expenses increased from 36.8% in 1996 to 47.5% in 1997. During
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<PAGE> 19
the third quarter of 1997, the Company implemented procedures intended to
substantially reduce advertising and marketing expenses.
Product Development. Total expenditures for product development were
$604,643, or 21.0% of net sales in 1997, of which $168,833 were capitalized.
This compares to total product development expenditures of $163,069, or 7.1% of
sales, in 1996, of which $84,182 were capitalized. The product development staff
was 8 persons in July 1997. Subsequently, the Company reduced its product
development staff to two persons at December 31, 1997.
General and Administrative. General and administrative expenses increased
from $1,194,728 in 1996 to $3,553,473 in 1997. As a percentage of net sales,
these expenses increased from 52.0% in 1996 to 123.4% in 1997. This increase as
a percentage of net sales reflects primarily increases for operational and
administrative support personnel incurred to support anticipated growth in
revenues, which did not occur. During the third quarter of 1997, the Company
implemented steps to significantly reduce its general and administrative costs.
These steps included: (i) reductions in general and administrative staff; and
(ii) reductions in public relations and other professional services.
Depreciation and Amortization. Depreciation and amortization increased
from $85,068, or 3.7% of net sales in 1996 to $238,537, or 8.3% in 1997,
reflecting increased expenditures on capital equipment.
Interest Expense. Interest expense increased from $51,272 in 1996 to
$543,420 during 1997, principally reflecting $443,889 of amortization of the
discount associated with the convertible debentures issued in September 1997.
YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales increased 601.8% from $327,574 in 1995 to $2,298,855
in 1996. Revenues from service sales increased 545.0% from $327,574 in 1995 to
$2,112,878 in 1996. This increase of $1,785,304 is primarily attributable to
increases in hosting revenues of $321,278, Web site development and customized
applications revenues of $1,159,205, and consulting and maintenance revenues of
$112,779. Revenues from equipment sales were $185,977 during 1996.
Cost of Sales. Cost of sales for services includes salaries for
programmers, technical staff and customer support. Cost of sales for services
increased from $59,871, or 18.3% of net sales in 1995 to $546,409, or 23.8% of
net sales in 1996. This increase reflects the Company's significant increase in
payroll costs associated with the hiring of additional technical personnel in
1996. Increases in the Company's personnel costs as a percentage of sales also
reflects higher costs incurred to attract and retain Internet software
development professionals, and a change in the mix of products and services
sold.
Gross Profit. Gross profit increased by $1,355,805 from $267,703 in 1995
to $1,623,508 in 1996. Gross profit margins decreased from 81.7% during 1995 to
70.6% during 1996. This decrease as a percentage of net sales primarily reflects
increased costs incurred by the Company for technical personnel and a change in
the mix of products and services sold.
Sales and Marketing. Sales and marketing expenses increased 580.6% from
$124,253 in 1995 to $845,690 in 1996. This increase was primarily attributable
to an increase in the size of the Company's sales force. As a percentage of net
sales, these expenses decreased from 37.9% of net sales in 1995 to 36.8% of
revenues in 1996.
Product Development. Total expenditures for product development were
$163,069, or 7.1% of net sales in 1996, of which $84,182, or 51.6%, were
capitalized. This compares to total product development expenditures of $20,239,
or 6.2% of net sales, in 1995, none of which were capitalized.
General and Administrative. General and administrative expenses increased
from $121,313 in 1995 to $1,194,728 in 1996. As a percentage of net sales, these
expenses increased from 37.1% in 1995 to 52.0% in 1996. This increase as a
percentage of net sales reflects primarily increases for operational and
administrative support personnel incurred to support anticipated growth.
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Depreciation and Amortization. Depreciation and amortization increased
from $3,722 in 1995 to $85,068 in 1996, or 1.1% of revenues during 1995 to 3.7%
of revenues in 1996, reflecting increased expenditures on capital equipment.
Interest Expense. Interest expense increased from $3,469 in 1995 to
$51,272 during 1996, principally reflecting increased debt levels associated
with notes payable to investors entered into in 1996.
Income Taxes. The company has not paid income taxes to date because it has
not had taxable income. Net operating loss carryforwards are recorded as a
deferred tax asset with a full valuation allowance.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its components,
and is effective for fiscal years beginning after December 15, 1997. The
adoption of FAS 130 is not expected to have a material effect on the Company's
disclosures.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") was issued. FAS 131 is designed to improve the information provided in
financial statements about the different types of business activities in which
the enterprise engages and economic environments in which the enterprise
operates, and is effective for fiscal years beginning after December 15, 1997.
The adoption of FAS 131 is not expected to have a material effect on the
Company's disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions, and is effective for
transactions entered into in fiscal years beginning after December 31, 1997. The
adoption of SOP 97-2 is not expected to have a material effect on the Company's
financial statements.
In early 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 31,
1998. The adoption of SOP 98-1 is not expected to have a material effect on the
Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Following completion of its initial public offering, the Company increased
its expenses in anticipation of potential increased sales which did not occur.
During the quarter ended June 30, 1997, the Company realized that sales had not
increased at the rate anticipated. In response, the Company took efforts during
the quarter ended September 30, 1997 to reduce its general and administrative
costs. These efforts included (i) a reduction in staff from a high of
approximately 100 persons in July 1997 to approximately 42 persons by December
31, 1997; and (ii) reductions in advertising, public relations and other
professional services.
Subsequent to these actions, management has undertaken additional steps to
address the Company's ongoing cash requirements including narrowing the
Company's market focus, identifying additional operational and administrative
efficiencies, and actively managing working capital. The Company also may
consider raising additional capital through exercise of outstanding warrants,
sales of non-strategic business lines, and additional debt and equity offerings.
The Company has substantially limited unused sources of capital. As of
December 31, 1997, the Company had net working capital of approximately $2.7
million. Because the Company expects to continue to incur substantial operating
losses, the Company will continue to use substantial sums of cash in its
operations for an indefinite period. Accordingly, the Company will be required
to obtain additional capital. No assurance can be given that the Company will be
successful in its efforts to obtain additional capital, or that capital will
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<PAGE> 21
be available on terms acceptable to the Company or on terms that will not
significantly dilute the interests of existing stockholders. If the Company
exhausts its current sources of capital and is not able to obtain additional
capital, the Company will be required to undertake certain steps to continue its
operations. Such steps may include immediate reduction of the Company's
operating costs and other expenditures, including potential reductions of
personnel and suspension of salary increases and capital expenditures. If such
measures are not sufficient, the Company may elect to implement other cost
reduction actions as the Company may determine are necessary and in the
Company's best interests, including the possible sale of certain of the
Company's service lines. Any such actions undertaken may limit the Company's
opportunities to realize continued increases in sales and the Company may not be
able to reduce its costs in amounts sufficient to achieve break-even or
profitable operations. If the Company exhausts its sources of capital, and
subsequent cost reduction measures are not sufficient to allow the Company to
achieve break-even or profitable operations, the Company will be forced to seek
protection from its creditors.
Net cash used in operating activities was $4,024,016 for year ended
December 31, 1997. The Company has primarily financed its operations to date
through public and private sales of debt and equity securities and loans from
its principal stockholders and affiliates. Net cash provided by financing
activities was $7,435,630 and $853,035 during 1997 and 1996, respectively.
During May 1997, the Company completed an initial public offering of its common
stock, issuing 1,000,000 shares at a price of $6.00 per share. The net proceeds
to the Company from the initial public offering were approximately $4,700,000.
The Company has repaid all outstanding principal amounts loaned to the Company
by stockholders and affiliates. During September 1997, the Company completed the
issuance of an aggregate $1,700,000 principal amount of the Company's 5%
convertible debentures due September 22, 2000 (the "Debentures"). Net proceeds
from the sale of the Debentures was approximately $1.5 million. In December
1997, the Company issued 20,000 shares of Series A preferred stock for aggregate
net proceeds of approximately $1,800,000
The Company spent $387,209 and $349,646 during 1997 and 1996, respectively,
for the purchase of capital equipment. These amounts were expended primarily for
computer equipment, communications equipment and software necessary for the
Company to increase its presence in the Internet and Intranet applications
marketplace. The Company's commitments as of December 31, 1997 consist primarily
of leases on its Atlanta, Vienna, Virginia and New York City facilities.
Accounts receivable, net of allowance for doubtful accounts, totaled
$470,839 as of December 31, 1997. Trade receivables are monitored by the Company
through ongoing credit evaluations of its customers' financial conditions. The
allowance for doubtful accounts is considered by management to be an adequate
reserve for known and estimated bad debts of the Company. A revision in this
reserve due to actual results differing from this estimate could have a material
impact on the results of operations, financial position and liquidity of the
Company.
At December 31, 1997, the Company had net operating loss carry-forwards for
income tax purposes of $5,008,001, of which $411,227 expire in 2011 and
$4,596,774 expire in 2012. Realization of these assets is contingent on having
future taxable earnings. In addition, certain stock transaction during the year
resulted in the Company incurring an ownership change as defined in Internal
Revenue Code Section 382. The result of this ownership change is to
substantially limit the utilization of the Company's net operating loss carry-
forwards in the future. Based on the cumulative losses in recent years and the
limitation on the use of the Company's net operating losses, management believes
that a full valuation allowance should be recorded against the deferred tax
asset.
YEAR 2000 READINESS
Many existing computer programs were originally designed to use only two
digits to identify a year in date fields. If not corrected, these applications,
could fail or produce erroneous results when working with dates in the year 2000
and beyond. This "Year 2000" issue could potentially affect the Company in three
areas: its product and service offerings to its customers, third-party products
used internally, and its suppliers. The Company plans to undertake a review of
software applications used in order to determine potential exposure to this
issue and develop an appropriate response.
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If the Company's review and remediation efforts with respect to this issue
are not completed on a timely basis, Year 2000 issues could have a material
impact on the Company's operations and financial results. However, at this time,
it is not anticipated that the Company's Year 2000 response will have an adverse
material effect upon the Company's financial position or results of operations.
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BUSINESS
GENERAL
HomeCom develops and markets specialized software applications and products
and provides services that enable businesses to use the Internet and Intranets
to obtain and communicate important business information, conduct commercial
transactions and improve business productivity. HomeCom provides
Internet/Intranet solutions in three areas: (i) customized software applications
design, development and integration including, World Wide Web site development;
(ii) Internet outsourcing services; and (iii) security consulting and
integration services. HomeCom's objective is to be a leading provider of
business communications solutions using Internet standard protocol technologies.
HomeCom employs a team of highly trained Internet/Intranet software
developers and multimedia and graphics professionals who design and develop
specialized Internet/Intranet software applications. These applications enable
companies to obtain and communicate vital business information, such as sales
reports, order status systems, employee directories and client account
information. The Company works closely with its customers to analyze and design
Internet-based software solutions that facilitate the interactive exchange of
business information. Through its experience in designing custom Internet
solutions for businesses, HomeCom believes that it has developed and continues
to develop in-depth knowledge concerning industry-specific Internet applications
and requirements. The Company plans to leverage this knowledge to develop
additional Internet-enabled applications targeted for vertical industries,
including banking and financial services, and telecommunications.
The Company believes that it has established a reputation as a provider of
sophisticated interactive Web sites. The Company has developed more than 100 Web
sites for clients in many diverse industries, including sites for AT&T, Synovus
Financial Corporation ("Synovus"), SouthTrust Bank Corporation ("SouthTrust"),
Norwest Corporation ("Norwest"), Marine Midland Bank ("Marine Midland"),
Rainforest Cafe, Incorporated ("Rainforest"), Excalibur Group, a joint venture
between Time Warner Cable and Time, Inc. ("Time Warner"), Brinker International
("Brinker"), Executrain Corporation ("Executrain"), American International
Underwriters ("AIG"), and American Family Life Assurance Corporation ("AFLAC").
The Company has a highly trained staff that is able to design Web sites ranging
from basic "inquiry only" sites to complex, interactive sites capable of
providing on-line commerce, database integration and manipulation and
sophisticated graphics, animation, sound and video. The Company uses its
proprietary Post On The Fly(TM) software in designing and developing many of its
Web sites.
HomeCom also provides Internet outsourcing services and presently hosts
more than 8,000 Web sites for clients in approximately 45 countries. HomeCom
establishes and maintains the resources and facilities necessary to create and
support a customer's Internet server. As a provider of Internet outsourcing
services, HomeCom (i) advises its clients as to the appropriate hardware,
including servers and routers, and software necessary to create an Internet
server; (ii) coordinates the purchase of this hardware and software, including
operating system and Internet server software; and (iii) provides the facilities
to house and maintain the server. HomeCom provides network management, including
all network functions, the maintenance of an environmentally conditioned, secure
facility and access to the Internet.
The Company has developed advanced software products that it presently
includes in its custom applications. The Company has developed software, called
Post On The Fly(TM), which enables non-technical users to add, retrieve and
update information through the Internet or an Intranet using standard browser
software. Post On The Fly(TM) Conference permits intuitive and easy conferences
among employees, customers and business partners. The product uses database
technology to archive the user's data, ideas and innovations for later retrieval
and review. The Company's Marketplace product facilitates the creation and
updating of an on-line store or catalog. HomeCom is also developing a suite of
software modules known as the Personal Internet Banker(TM), a scaleable
financial software package that maintains a customer's personal banking history
and preferences for Internet banking.
HomeCom's Internet security division provides security consulting services
and solutions for businesses connecting to the Internet. The Company plans to
develop and integrate advanced value-added security
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features into its custom software applications and products, and to provide
consulting and integration services to companies seeking to communicate and
transact business securely over the Internet.
The Company markets its services through its direct sales force, print
advertising and its own Web site. The Company also generates customer leads
through its business partner relationships with leading technology companies
such as AT&T, Microsoft, Netscape and Unisys.
The Company's staff of 37 full-time software engineers design and develop
custom applications as well as run the Company's outsourcing services and design
Web sites. The Company's software engineers have experience with various
computer operating systems, including Sun Solaris, SGI's IRIX, Windows NT,
Digital's Unix on the Alpha platform, Intel's Pentium Pro on BSDI Unix, Hewlett
Packard's HP 9000 and Apple's Macintosh operating system. The software engineers
write software programs using various tools and languages, including Perl, JAVA,
CGI Programming, C and C++. The software engineers also have database expertise
in Oracle, Informix, Sybase and SQL, and many software development tools. The
Company's multimedia artists and engineers utilize many of the generally
available software programs and tools such as Adobe Photoshop, MacroMedia
Shockwave, RealAudio and VDOLive.
INDUSTRY OVERVIEW
THE INTERNET AND THE WORLD WIDE WEB
The Internet represents a global network of thousands of interconnected
computers and computer networks. By using the Internet, businesses, individuals,
educational institutions and government agencies communicate electronically to
access and share information and conduct business. Open communications on the
Internet are enabled by TCP/IP, an inter-networking protocol software standard.
Advances in microprocessor technology and the development of Web technologies,
such as Hypertext Markup Language ("HTML") technology (which allows users to
move directly from one Web site to another) and advanced graphical user
interface browser and search engine software, have made the Internet easier to
navigate and more accessible to a larger number of users and for a broader range
of applications. These recent technological advances have led to dramatic
increases in the use of the Internet by businesses and individuals.
The World Wide Web is a worldwide network of computer services that uses a
special communications protocol, Hypertext Transfer Protocol ("HTTP"), that
links different servers throughout the Internet and enables non-technical users
to move from Web site to Web site easily and to access information using browser
software. The development of the Web and Internet-based technologies has allowed
fundamental and structural changes in the way information is published,
distributed and retrieved, thereby lowering the cost of publishing information
and expanding its potential reach. By facilitating the publishing and exchange
of information, the Web dramatically increases the amount of information
available to users. Businesses are increasingly recognizing that the Internet
can enhance the delivery and exchange of information, both among their
geographically dispersed locations and employees and with their business
partners and customers. Businesses are also realizing that the Internet can
facilitate relatively inexpensive, standards-based and easy-to-use methods for
accessing and delivering business information, such as sales, marketing and
distribution data. As a result, many businesses are using Web sites as a new
medium for advertising, promotion, conferencing, technical support and exchange
of information.
WEB SITES
A Web site is a collection of one or more electronic documents or "Web
pages," which may contain graphics, text, audio and video information, which is
available to a visitor accessing the Web site. Web sites can contain from one to
hundreds of pages, and can be searched, retrieved and viewed through the use of
widely available "browsers," such as Netscape Navigator or Microsoft Internet
Explorer. Using Web browser software, computer users can connect to a Web site
by entering the site's unique electronic Web address, known as its Universal
Resource Locator ("URL"). Users can navigate the Web sites by utilizing
hypertext link capabilities contained in Web pages. Hypertext links are active
areas on a Web page which, when selected by a user, automatically identify and
display a specific page, which can be located anywhere else on the Web, thus
enabling users to move from one Web page to another without specifying the
underlying URL address.
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Web sites can vary significantly in complexity and interactivity. A simple Web
site may display only text, and more complex sites may display colored text,
graphics, pictures, sound, animation, video and database information.
The Company believes that increased processor speed, higher
telecommunications bandwidth (resulting in increased transmission speed) and the
development of software standards have led to the growing acceptance of the
Internet as a communications tool. As a result, many businesses are choosing to
re-engineer their distribution, logistics, customer service and marketing
functions into "Information Depots" accessible through their Web sites.
Consequently, the Company believes that there is an expanding market for
developers of sophisticated, graphically enhanced, interactive Web sites.
ENTERPRISE NETWORKS AND INTRANETS
As network technology has advanced, business-wide networking has evolved.
Organizations have developed local area networks ("LANs") and have connected
geographically dispersed LANs into wide area networks ("WANs"). Many LANs employ
proprietary communications software, such as Novell NetWare. Today, in addition
to proprietary protocols, an increasing number of businesses are using the
Internet protocol TCP/IP for communications. TCP/IP facilitates communications
over internal networks using Internet software tools and applications. An
Intranet is a TCP/IP network inside a company that links the company's people
and information in a way that makes information more accessible and facilitates
navigation through all the resources and applications of the company's computing
environment.
Enterprise networks have increasingly used high-cost leased data lines to
create private and secure LANs and WANs. Internet protocol network software now
allows organizations to use the Internet for a lower-cost communications system
by reducing long distance and leased line charges. Businesses now can expand the
reach of and access to their internal information systems and enterprise
applications to allow geographically dispersed facilities, remote offices,
mobile employees, customers and business partners to access their networks
through the Internet at lower communications costs. The integration of LANs and
WANs through the Internet, plus the advancement of encryption security
capabilities, has promoted the use of high-speed virtual private networks
("VPNs"), which may be maintained at a fraction of the operating cost of
dedicated, leased line networks. VPNs that facilitate Internet banking, sales
entry and express delivery shipment tracking services are examples of this
fast-growing segment of the computing industry. The rapid growth of Intranets
and VPNs has increased the need for specialized software applications that
facilitate information delivery and communication using TCP/IP protocol.
INTERNET SECURITY
An integral part of developing Internet based software applications for
businesses is protecting against unauthorized access to enterprise networks and
corporate data. Examples of valuable corporate data include financial results,
medical records, personnel files, research and development projects, marketing
plans and credit information. Businesses are vulnerable to unauthorized access
to this information both by employees and outside persons. Unauthorized access
may go undetected by the computer user or network administrator. The Company
believes that concerns about the security of data transmitted over the Internet
have limited growth in the Internet's commercial use. As a result, the Company
believes that there is a rapidly expanding need for the services of Internet
security specialists.
THE INTERNET-ENABLING PRODUCTS AND SERVICES MARKET
The explosive growth of the Internet and World Wide Web has led to the
rapid development of increasingly sophisticated and advanced TCP/IP-enabled
software applications such as Web browsers and HTML compatible server software.
These Internet tools enable users to obtain and communicate information more
efficiently and effectively. The Company believes that there is a rapidly
growing need for businesses to expand and integrate their existing information
and communications systems to take advantage of the global communications
framework and advanced graphics capabilities of Internet-enabled systems. The
Company also believes that businesses today face a paradigm shift from
proprietary protocol based local area networks
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and wide area networks to Internet-enabled global communications systems.
However, the Company believes that there is a need for high quality software
applications designed to support these new systems.
THE HOMECOM SOLUTION
HomeCom was established to provide advanced software applications and
integration services to businesses seeking to take advantage of the Internet.
Integration of existing business operations with new Internet technologies is a
costly and complex undertaking which the Company believes requires a high level
of expertise to complete effectively. HomeCom believes that many businesses do
not have the in-house experience and expertise to establish effective
Internet-based communications in order to increase their productivity and
compete more effectively in the marketplace. Also, HomeCom believes that the
growth of electronic commerce over the Internet has been impeded by the
perceived lack of effective security components. Finally, the Company believes
that there presently is a lack of specialized software applications to support
the growing Internet market. Therefore, the Company believes that businesses
will engage specialized firms like HomeCom to implement Internet solutions.
HomeCom believes it is well positioned to become a leading Internet solutions
provider for the following reasons:
- HomeCom focuses on creating Internet "Information Depots" for clients,
including sophisticated database integrated software applications and
interactive Web sites, to provide valuable information to business'
customers, prospects, employees, stockholders and business partners. This
is in contrast to the public relations material that represents much of
the content currently on Web sites.
- The Company has assembled a team of professional programmers, database
experts and graphic artists that is able to create advanced interactive
Web sites with database integration that function as effective
Information Depots. Through developing specialized Internet applications
for clients in vertical industries, HomeCom's team attains valuable
knowledge about industry specific Internet needs and solutions, which it
uses to provide efficient, value-added services to its customers.
- HomeCom's Internet security division furthers the Company's knowledge
of, and expertise in, Internet security. As a result, the Company is able
to include advanced security features to create a more comprehensive
Internet solution.
- The Company provides businesses with a "one stop shop" for Internet
communications applications. The Company can provide applications
development, Web site creation, Internet security and Web server
outsourcing. By combining its advanced programming, database and security
expertise with outsourcing capabilities, the Company intends to create
next generation Internet business solutions.
HOMECOM BUSINESS STRATEGY
The Company's objective is to be a leading provider of business
communications solutions using Internet standard protocol technologies. The
Company intends to achieve this position by implementing the following key
elements of its growth strategy:
DEVELOP AND MARKET INDUSTRY-SPECIFIC APPLICATIONS
The Company develops specialized software applications and markets these
applications to large businesses. The Company intends to focus on
industry-specific applications such as banking, insurance, financial institution
client account access systems, inventory order entry systems, human resources
information directories, and collaborative and groupware environments. The
Company's goal is to develop a reputation as a leading full-service Internet
applications developer for the financial services industry.
DEVELOP AND INTEGRATE ADVANCED SECURITY SERVICES
HomeCom's Internet security division provides advanced security integration
consulting services and develops Internet applications with high levels of
integrated security. HomeCom's Internet security division is staffed by Internet
software and integration security consultants with a broad range of Internet and
Intranet security applications and integration experience to both commercial and
government users. HomeCom intends
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to market these advanced services and applications both as part of a total
package of Internet conversion services and as a single service. The Company's
objective is to become a leading provider of integrated security services and
applications to large business enterprises and to government agencies.
EXPAND THROUGH ACQUISITION
The Internet/Intranet products and services market is highly fragmented.
The Company is one of numerous Internet software applications and advanced
multimedia developers who design, develop and provide Internet software products
and services. In addition, a substantial number of client/server developers,
database systems integrators and resellers provide services to established
clients but do not provide Internet-based solutions for those clients. The
Company will seek to make strategic acquisitions of companies that have
developed specific industry expertise or have existing relationships with large
businesses needing Internet/Intranet solutions. On April 16, 1998, the Company
acquired all of the outstanding capital stock of the Insurance Resource Center,
Inc. ("IRC") (see "Recent Transactions"). The Company has not entered into any
additional binding agreement or commitment. Moreover, the Company has extremely
limited sources of cash. Consequently, the Company has limited resources
available to it to complete an acquisition and no assurance can be given that
the Company will be able to successfully complete any acquisition.
PRODUCTS AND SERVICES
HomeCom provides Internet/Intranet solutions in three integrated areas:
custom software applications design, development and integration; Internet
outsourcing services; and security consulting and integration services.
CUSTOMIZED SOFTWARE APPLICATIONS FOR THE INTERNET
HomeCom designs and develops specialized software applications that enable
companies to obtain and communicate important business information through
Internet standard protocol communications. To date, the Company has completed
custom applications projects for clients such as Data Track Systems, Inc.,
Coverdell Insurance, Inc., AFLAC and Vital Integration Solutions, Inc.
The Company works closely with its customers to analyze and design
specifications for Internet standard software applications. To begin a custom
applications project, the Company's customers generally either request a
proposal from the Company or meet with Company personnel to discuss their
Internet/Intranet communications needs. The Company generally analyzes the
customers' present system and provides a recommendation and a quotation. A
typical quotation specifies a fixed fee for significant design and development
activities, a variable fee for maintenance support services, and includes
pricing for equipment, software and communications. Criteria for pricing these
services include the complexity of the project, the amount of custom programming
required, the anticipated usage and traffic and the level of security required.
The Company's custom application projects have generated fees ranging from
approximately $40,000 to approximately $200,000.
HomeCom is an established provider of advanced Web site design and
implementation services, having developed more than 100 Web sites for clients in
many industries. The Company has a highly trained staff able to design Web sites
ranging from basic "inquiry only" sites to complex, interactive sites capable of
providing on-line commerce, data base integration and manipulation,
sophisticated graphics, animation, sound and other multimedia content.
The Company has developed a standard process for the design and
implementation of Web sites. Initially, the Company's creative director and
project manager meet with the customer to discuss its current methods for
serving its customers, employers and suppliers, as well as its objectives and
marketing needs. Prices for the design of Web sites currently range from $5,000
to more than $100,000.
The Company's staff of software engineers uses a variety of computer
operating systems, tools and language to develop Web sites. In particular, the
Company's software engineers have developed a high level of expertise using C,
C++, Perl, JAVA and CGI programming languages. These programmers write complex
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computer programs to create special features on a Web site. In addition, they
regularly assess new applications and tools that may assist the Company in
providing leading edge Web site services.
The Company's graphics designers create sophisticated Web sites which
include functions such as interactive on-line commerce, 3-D modeling, virtual
reality and audio and video creation and editing. The Company's staff of
professional artists, multimedia programmers and graphic designers develops Web
sites to meet the customers' creative needs. HomeCom and its clients have won
several awards for Web sites created by HomeCom, including the MGM-UA "Top 10,"
Point "Top 5% of All Web Sites" and Magellan "Four Star Site." The Company
intends to continue to recruit the best available multimedia artistic talent.
During 1996 and 1997, custom Internet and Intranet applications and
integration services (including hardware resales) accounted for approximately
66% and 56%, respectively, of the Company's net sales.
INTERNET OUTSOURCING SERVICES
HomeCom provides full service Internet network outsourcing services,
consisting of Web site and Internet application hosting and facilities, which it
markets both as an integrated part of its full-service Internet solution and as
a separate service. HomeCom's customers utilize the Company to maintain the
customers' Internet servers and network functions at facilities located at
HomeCom's Network Operations Center ("NOC"). HomeCom presently hosts
approximately 8,000 Web sites. HomeCom's NOC is housed in Class A office space
with 24-hour manned on-premises security. Access to the NOC computer room is
key-card secured. HomeCom provides its Internet outsourcing services through
multiple leased T1 and T3 data lines. See "Facilities."
Because the Company is an established provider of these services, conducts
its operations using sophisticated technologies and operates in Class A office
space, it believes it can compete effectively to provide Internet outsourcing
services for large businesses. At the same time, because the Company prices its
outsourcing services competitively, it believes it can compete effectively for
the hosting services of small business and individuals.
The Company maintains the file servers for a customer's Web site for a
monthly fee. Presently, the monthly fees range from approximately $25 to $1,600.
Pricing levels vary depending on the amount of storage used on the file server.
The Company also provides ongoing maintenance, problem correction and periodic
updates, as well as outsourcing services for customers who own their own
equipment.
During 1996 and 1997, Internet outsourcing services generated approximately
16% and 29%, respectively, of the Company's total revenues.
INTERNET SECURITY SERVICES
In August 1996, HomeCom acquired an Internet security division to provide
security solutions for businesses connecting to the Internet. See "Certain
Transactions." The Company plans to develop and integrate advanced value-added
security features into its custom software applications and products, and
provide consulting and integration services to companies seeking to communicate
securely and transact business over the Internet.
The Company's objective is to provide its customers with a comprehensive
family of integrated network security solutions. The Internet security division
will assess the customer's needs and recommend and install "firewalls,"
encryption and authentication applications, other repudiation techniques and
secured networks. Management of the Internet security division has experience in
performing Internet security services for the federal government.
During 1996 and 1997, Internet security services generated approximately 3%
and 14%, respectively, of the Company's net sales.
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SALES AND MARKETING
The Company markets its services through its direct sales force, print
advertising and its own Web site. The Company also generates customer leads
through its business partner relationships with leading technology companies
such as AT&T, Microsoft, Netscape and Unisys. The Company is focusing its
marketing on large businesses with industry-specific applications needs in areas
such as insurance and real estate sales force data systems, financial
institution client account access systems, inventory order entry systems, parts
databases and collaborative and groupware environments. The Company also
utilizes traditional print and media marketing strategies to enhance Company and
product name recognition.
CUSTOMERS
During 1996 and 1997, no customer accounted for more than 10% of the
Company's total net sales. Because substantially all of the Company's customers
have retained the Company for a single project, customers from whom the Company
generated substantial revenue in one quarter generally have not been a
substantial source of revenue in a subsequent quarter.
FACILITIES
The Company occupies approximately 17,000 square feet in two office
buildings in Atlanta, Georgia under leases expiring in March 2001 and October
2002. These facilities serve as the Company's headquarters and computer center.
The Company also has an office in McLean, Virginia occupying approximately 6,000
square feet under a lease expiring in June 2002, and an office in New York City
occupying approximately 3,400 square feet under a lease expiring in January
2003.
The Company's Internet services are maintained in its key-card
access-secured, dual Leibert air-conditioned NOC in Class A office space near
the Company's principal offices. Company personnel monitor server and network
functions on a 24 hour per day, 7 days per week basis. Back-up servers replace
production servers in the event of failure or down time. Tape back-ups are
performed on a daily basis and transported to secure off-site storage. Each
server is SNMP managed and utilizes devices located on a separate network to
notify network personnel by pager in the event of problems that are not
otherwise detected by HomeCom's own SNMP.
All power supplied to the NOC computer room is supplied by two separate
power substations through American Power Conversion Matrix UPS lines, with
back-up battery power. Telecommunications are provided to the computer room
through multiple leased T1 and T3 lines directly connected to the T3 Internet
provided by interexchange carriers. Each T1 and T3 line is provisioned on
separate local carrier fiber optics using the latest SONET and FDDI technology.
Telecommunications lines are provided through two physically diverse entrance
facilities. The Company has acquired and installed multiple Cisco routers for
connection to the Internet, which automatically redistribute traffic load in the
event of telecommunications failure.
The Company believes that the properties which it currently has under lease
are adequate to serve the Company's business operations for the foreseeable
future. The Company believes that if it were unable to renew the lease on either
of these facilities, it could find other suitable facilities with no material
adverse effect on the Company's business.
COMPETITION
The market for specialized Internet applications is highly competitive, and
the Company expects that this competition will intensify in the future. In
providing specialized software design and development, the Company competes with
numerous businesses that also provide software design and development services,
companies that have developed and market application specific Internet software
products, companies that provide software tools that enable customers to develop
specific Internet-enabled software applications and companies that choose to
develop Internet application products internally. Andersen Consulting, L.L.P.,
Electronic Data Systems Corporation ("EDS"), International Business Machines
Corporation ("IBM") and
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Cap Gemini America are significant custom software developers, integrators and
resellers whose services include a broad range of Internet and Intranet software
applications design and development services. Companies such as Broadvision,
Inc., Edify Corporation and Security First Network Bank have developed
application specific Internet software products that are broadly marketed and
licensed and perform such functions as interactive one-to-one marketing, human
resources benefits inquiry, enrollment and training and Internet banking. In
addition, companies that offer and sell client/server based Internet-enabled
software products, such as Netscape and Microsoft, may in the future bundle
software capabilities and applications with existing products in a manner which
may limit the need for software capabilities and application services such as
those offered by the Company. The Company also competes with the information
technology departments of significant business enterprises who may choose to
design and develop their Internet applications internally. The emergence of
sophisticated software products and tools that enable companies to build
customized Internet-enabled software applications internally also may have the
effect of encouraging internal development and, thus, may materially reduce the
demand for the Company's custom software application services.
The Company's Web site development services face competition from a variety
of sources, from small operations to large global competitors like EDS and
Computer Sciences Corporation. The Company believes Web site development
presently is a fragmented market, with no business commanding a dominant share.
HomeCom believes that as Web sites increase in interactivity and complexity, Web
site development companies will increasingly need to maintain an integrated team
of Intranet-enabled software engineers, advanced graphics programmers,
multi-media artists and Internet security experts in order to compete
effectively for large business customers. Consequently, HomeCom believes that it
will need to continue to expand its personnel and work to maintain leading edge
technology capabilities in order to remain competitive. Although there is likely
to be a continuing market for individual Web site development, the Company
intends to continue to focus its Web site development services on large
businesses with complex interactive requirements.
The Company's Internet outsourcing services face competition from numerous
large and small competitors that provide comparable outsourcing services. Such
competition includes BBN Planet, AT&T, MCI Communications Corporation ("MCI"),
IBM, EDS and WorldCom, Inc., as well as numerous regional Internet outsourcing
services providers.
The Company's security services division faces competition from many
sources, including companies that provide security consulting services and
companies that market specific Internet-based security solutions. Such
competitors include Digital Equipment Corporation, IBM, Andersen Consulting,
L.L.P. and EDS. In addition, many companies currently market Internet-based
application-specific software products that incorporate security and
confidentiality features and functions.
The Company believes that the rapid expansion of the market for Internet
software applications will foster the growth of many significant competitors
performing comparable services and offering comparable products to those offered
by the Company. The Company competes on the basis of creative talent, price,
reliability of services and responsiveness. Many of the Company's current and
prospective competitors have substantially greater financial, technical,
marketing and other resources than the Company. The Company believes that it
presently competes favorably with respect to each of its various service
offerings. There can be no assurance that the Company's present and proposed
products will be able to compete successfully with current or future competitors
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition and operating
results.
INTELLECTUAL PROPERTY RIGHTS
In accordance with industry practice, the Company relies primarily on a
combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company has a registered service mark for
its logo, and has applied for federal registration of the names "HomeCom(TM),"
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"Post On The Fly(TM)" and "Personal Internet Banker(TM)." Despite the Company's
efforts to protect its proprietary rights, unauthorized parties may attempt to
copy aspects of the Company's products or to obtain and use information that the
Company regards as proprietary. There can be no assurance that the Company's
means of protecting its proprietary rights will be adequate or that the
Company's competitors will not independently develop competing products and
services. In distributing its software products, the Company intends to rely
primarily on "shrink wrap" licenses that are not signed by licensees and,
therefore, may be unenforceable under the laws of certain jurisdictions. In
addition, the laws of some foreign countries do not protect the Company's
proprietary rights to as great an extent as the laws of the United States. The
Company does not believe that any of its proposed products infringe the
proprietary rights of third parties. There can be no assurance, however, that
third parties will not claim infringement by the Company with respect to its
products. The Company expects that software product developers will increasingly
be subject to infringement claims as the number of products and competitors in
electronic commerce grows and the functionality of products in different
industry segments overlaps. Any such claims, with or without merit, could be
time-consuming, result in costly litigation, cause product shipment delays or
require the Company to enter into royalty or licensing agreements. Such royalty
or licensing agreements, if required, may not be available on terms acceptable
to the Company. In addition, Web site developers such as the Company face
potential liability for the actions of customers and others using their
services, including liability for infringement of intellectual property rights,
rights of publicity, defamation, libel fraud, misrepresentation, unauthorized
computer access, theft, tort liability and criminal activity under the laws of
the United States, various states and foreign jurisdictions. The Company
routinely enters into non-disclosure and confidentiality agreements with
employees, vendors, contractors, consultants and customers.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. The Company believes that, due to the
rapid pace of Internet innovation and related software industries, factors such
as the technological and creative skills of its personnel are more important in
establishing and maintaining a leadership position within the industry than are
the various legal protections of its technology.
EMPLOYEES
At April 15, 1998, the Company employed 59 full-time employees, of whom 37
were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 8 were marketing and sales personnel
and 14 were involved in administration and finance.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. The Company believes
that such insurance is adequate to cover potential claims relating to its
existing business activities.
GOVERNMENT REGULATION
The Telecommunications Act of 1996 (the "1996 Telecommunications Act"),
which became effective on February 8, 1996, imposes criminal liability on
persons sending or displaying in a manner available to minors indecent material
on an interactive computer service such as the Internet. The 1996
Telecommunications Act also imposes criminal liability on an entity knowingly
permitting facilities under its control to be used for those activities. The
constitutionality of these provisions was successfully challenged in federal
district court and ultimately found unconstitutional by the United States
Supreme Court in Reno v. American Civil Liberties Union.
Except for the 1996 Telecommunications Act, the Company does not believe
that it is currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and believes that
there are currently few laws or regulations directly applicable to Web site
service companies. The Federal Communications Commission is studying the
possible regulation of the Internet. Any such regulations adopted by the Federal
Communications Commission may adversely impact the manner in which the
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Company conducts its business. It is possible that a number of additional laws
and regulations may be adopted with respect to the Internet, covering issues
such as user privacy, pricing and characteristics and quality of products and
services. The adoption of any such laws or regulations may decrease the growth
of the Internet, which could in turn decrease the demand for the Company's
products and services and increase the Company's cost of doing business or cause
the Company to modify its operations, or otherwise have an adverse effect on the
Company's business, financial condition and operating results. Moreover, the
applicability to the Internet of existing laws governing issues such as property
ownership, libel, and personal privacy is uncertain. The Company cannot predict
the impact, if any, that future regulation or regulatory changes may have on its
business. In addition, Web site developers such as the Company face potential
liability for the actions of customers and others using their services,
including liability for infringement of intellectual property rights, rights of
publicity, defamation, libel, fraud, misrepresentation, unauthorized computer
access, theft, tort liability and criminal activity under the laws of the U.S.,
various states and foreign jurisdictions. Any imposition of liability could have
a material adverse effect on the Company.
In addition, the Company's network services are transmitted to its
customers over dedicated and public telephone lines. These transmissions are
governed by regulatory policies establishing charges and terms for
communications. Changes in the regulatory environment relating to the
telecommunications and media industry could have an effect on the Company's
business, including regulatory changes which directly or indirectly affect use
or access of the Internet or increase the likelihood or scope of competition
from regional telephone companies, could have a material adverse effect on the
Company.
LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and executive officers of the Company, their
ages as of December 31, 1997 and certain information about them are set forth
below.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Harvey W. Sax........................... 46 President, Chief Executive Officer and Director
Nat Stricklen........................... 54 Senior Vice President and Director
Krishan H. Puri......................... 32 Executive Vice President and Director
Gia Bokuchava, Ph.D..................... 32 Chief Technical Officer and Director
Roger J. Nebel.......................... 44 Vice President and Director
Carl W. Peede........................... 50 Senior Vice President and Chief Operating Officer
Norman H. Smith......................... 34 Chief Financial Officer
Gregory Abowd, Ph.D.(1)................. 33 Director
Claude A. Thomas(1)..................... 55 Director
</TABLE>
- ---------------
(1) Member of the Audit and Compensation Committees.
HARVEY W. SAX is a founder of the Company and has served as President and
Chief Executive Officer of the Company since January 1995 and as Chairman of the
Board of Directors since September 1997. He was Secretary of the Company from
December 1994 until January 1995. From October 1994 until December 1995, when he
began working as a full-time employee of the Company, Mr. Sax served as a Vice
President of Oppenheimer & Co., Inc. From February 1993 until September 1994,
Mr. Sax served as a Senior Vice President of D. Blech & Co. From July 1992 until
February 1993, Mr. Sax was a Vice President of PaineWebber, Inc. From January
1989 until July 1992, Mr. Sax was a Vice President of Bear, Stearns & Co. Inc.
Mr. Sax received a Bachelor of Arts degree from Emory University in 1972. Mr.
Sax has been a member of the Board of Directors since December 1994.
NAT STRICKLEN has served as Senior Vice President of the Company since
January 1996. Mr. Stricklen was President of the Company from December 1994
until January 1995, and Vice President and Secretary of the Company from January
1995 until January 1996. For more than 25 years prior to joining the Company in
December 1994, Mr. Stricklen was employed by IBM where from 1988 until November
1994 he was the senior product manager for the IBM Link product used for
electronic communication for IBM employees and business partners. Mr. Stricklen
was a member of the team that developed the original IBM Internet home page. Mr.
Stricklen received a Bachelor of Science degree in Data Processing and
Application Systems Design from Washington University in 1975. Mr. Stricklen has
been a member of the Board of Directors since December 1994.
KRISHAN H. PURI has served as Executive Vice President of the Company since
February 1996, and was a member of its former Board of Advisors from May 1995
until August 1996. From March 1994 until January 1996, Mr. Puri was a Senior
Management Consultant with Deloitte & Touche Consulting Group in its
telecommunications practice. From March 1992 until March 1994, Mr. Puri served
as a Senior Engineer for International Communications Network Services for
British Telecom and MCI's Concert joint venture in Atlanta, Georgia. From March
1990 until March 1992, Mr. Puri was a network analyst with Sprint Corporation, a
long distance telecommunications company. Mr. Puri received a Bachelor of
Science degree in Electrical Engineering from Georgia Institute of Technology in
1987 and a Master of Business Administration degree from Georgia State
University in 1992. Mr. Puri has been a member of the Board of Directors since
September 1996.
GIA BOKUCHAVA, PH.D., has served as the Company's Chief Technical Officer
since August 1995. Dr. Bokuchava served as a visiting professor at Emory
University from September 1994 until August 1995 and was employed by the
National Library of Medicine, assisting in the development of Internet based
applications, from January 1995 until August 1995. From July 1990 until
September 1994, Dr. Bokuchava was the Director of The Computer Center at the
Institute of Mechanical Engineering at Georgia Technical University, Tblisi,
Georgia (formerly a part of the Soviet Union). Dr. Bokuchava has taught computer
science
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as a visiting associate professor at the Universities of Moscow and China. Dr.
Bokuchava received a doctorate in theoretical physics from Georgia Technical
University, Tblisi, in 1990. Dr. Bokuchava has been a member of the Board of
Directors since September 1996.
ROGER J. NEBEL has served as Vice President of the Company since August
1996. From May 1991 until July 1996, Mr. Nebel was a Department Manager (May
1991 to February 1993) and Senior Manager -- Enterprise Assurance (March 1993 to
July 1996) for PRC, Inc., a subsidiary of Litton Industries, Inc., which
provides information technology consulting and systems integration services for
governments and businesses. Mr. Nebel received a Bachelor of Science degree in
Engineering from California Coast University in 1990 and a Master of Science
degree in Management from National-Louis University in 1993. Mr. Nebel has been
a member of the Board of Directors since September 1996.
CARL W. PEEDE has served as Senior Vice President and Chief Operating
Officer of the Company since November 1997. Mr. Peede joined HomeCom in June
1997 as Senior Vice President and General Manager of Software Products. From
June 1996 to April 1997, Mr. Peede was employed by NetManage, Inc., located in
Cupertino, California, where he was the Senior Vice President of Worldwide
Marketing. From September 1994 to May 1996, Mr. Peede was the Vice President of
Worldwide Marketing at Attachmate/DCA in Bellevue, Washington prior to joining
NetManage, Inc. From January 1993 to September 1994, Mr. Peede managed the
marketing effort for Wall Data, Inc., a high-growth company in Redmond,
Washington. He began his career in 1970 with AT&T Western Electric in Atlanta as
a Project Manager after graduating with a BSEE from Georgia Tech and an MBA from
Georgia State University, both in Atlanta, Georgia.
NORMAN H. SMITH has served as Chief Financial Officer of the Company since
May 1997. Before joining the Company, Mr. Smith was employed by First Image
Management Company, a division of First Data Corporation, from January 1990 to
May 1997. Mr. Smith served in a number of accounting and finance positions with
First Image, most recently as Executive Director of Finance for the Data
Acquisition Division based in Lexington, Kentucky. Prior to that, Mr. Smith was
employed by Deloitte & Touche as a Senior Accountant in its audit practice. Mr.
Smith received a Master of Business Administration from Xavier University in
1991 and a Bachelor of Business Administration from Eastern Kentucky University
in 1985.
GREGORY ABOWD, PH.D., has been an assistant professor in the College of
Computing at the Georgia Institute of Technology since August 1994, where he is
a member of the Software Systems Design Group. From October 1989 until August
1994, Dr. Abowd held post-doctoral positions with the Human Computer Interaction
Group at the University of York in England (October 1989 until September 1992)
and with the Software Engineering Institute and Computer Science Department at
Carnegie Mellon University (September 1992 until August 1994). From October 1989
until September 1992, Dr. Abowd was a student at the University of Oxford, where
he attended as a Rhodes Scholar. Dr. Abowd received a Bachelor of Science degree
in Mathematics from the University of Notre Dame in 1986 and a Master of Science
degree in Computation and a Doctorate of Philosophy in Computation from the
University of Oxford in 1987 and 1991, respectively. Dr. Abowd has been a member
of the Board of Directors since September 1996.
CLAUDE A. THOMAS is a principal of Ambassador Capital Corporation, an
investment banking firm specializing in emerging technology companies. In his
present position, Mr. Thomas assists electronic commerce and emerging technology
companies with financing, business strategies, strategic alliances and financial
restructuring. From 1994-1997, he was Executive Vice President, Corporate
Development and Software Solutions for CheckFree Corporation (NASDAQ: CKFR).
Previously, he held positions as CEO of International Banking Technologies and
other subsidiaries of First Financial Management (now FirstData Corporation,
NYSE: FDC). He started his 30-year career with Electronic Data Systems (NYSE:
EDS) in the Wall Street division, and subsequently held executive positions with
Coopers & Lybrand and Digital Equipment Corporation. Mr. Thomas holds a BE cum
laude in Chemical Engineering from Vanderbilt University and an MBA in Marketing
and Finance with honors from Washington University. Mr. Thomas has been a member
of the Board of Directors since February 1998.
The Company's Board of Directors is divided into three classes. The Class I
director (Dr. Abowd) serves until the 1998 Annual Meeting of Stockholders, the
Class II directors (Dr. Bokuchava and Messrs. Puri and Nebel) serve until the
1999 Annual Meeting of Stockholders and the Class III directors (Messrs. Sax and
Stricklen) serve until the 2000 Annual Meeting of Stockholders. Upon election,
each class serves a three-year
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term. The classification of the Board of Directors could have the effect of
making it more difficult for a third party to acquire control of the Company.
Officers are elected at the first Board of Directors meeting following the
stockholders meeting at which directors are elected, and officers serve at the
discretion of the Board of Directors. Each executive officer of the Company was
chosen by the Board of Directors and serves at the pleasure of the Board of
Directors until his or her successor is appointed or until his or her earlier
resignation or removal in accordance with applicable law. There are no family
relationships between any of the directors or executive officers of the Company.
BOARD COMMITTEES
The Board of Directors has two standing committees: a Compensation
Committee and an Audit Committee. The Compensation Committee provides
recommendations to the Board of Directors concerning salaries and incentive
compensation for officers and employees of the Company. The Audit Committee
recommends the Company's independent auditors and reviews the results and scope
of audit and other accounting-related services provided by such auditors.
DIRECTOR COMPENSATION
Directors do not receive any cash compensation for their services as
members of the Board of Directors but are reimbursed for their reasonable travel
expenses in attending Board of Directors and committee meetings. Directors who
are not employees of the Company are eligible to receive automatic grants of
stock options under the Company's Non-Employee Directors Stock Option Plan, and
may receive additional grants of options under such plan at the discretion of
the Compensation Committee of the Board of Directors. See "Stock Option
Plan -- Non-Employee Directors Stock Option Plan." The Company may in the future
establish a policy for compensating members of the Board of Directors for
attending Board of Directors or committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, compensation of executive officers of the Company was
determined by Harvey W. Sax, the Company's President and Chief Executive
Officer. In September 1996, the Company established a Compensation Committee to
review the performance of executive officers, establish overall employee
compensation policies and recommend salaries and incentive compensation for
officers and employees of the Company. No member of the Compensation Committee
is or will be an executive officer of the Company.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
the Company in 1997 for its Chief Executive Officer and each executive officer
of the Company whose total annual salary and bonuses determined at December 31,
1997 exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION AWARDS
---------------- --------------------
NUMBER OF SECURITIES ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS UNDERLYING OPTIONS COMPENSATION
- ------------------------------ -------- ----- -------------------- ------------
<S> <C> <C> <C> <C>
Harvey W. Sax.................................. $152,998 $0 10,000 -0-
President, Chief Executive Officer
Krishan Puri................................... $169,844 $0 25,000 -0-
Executive Vice-President
Roger Nebel.................................... $108,333 $0 20,000 -0-
Vice-President
Gia Bokuchava, Ph.D............................ $170,663 $0 25,000 -0-
Chief Technical Officer and Director
</TABLE>
As of December 31, 1997, the annual salaries for the Company's executive
officers were as follows: Harvey W. Sax, President and Chief Executive Officer
($135,000); Nat Stricklen, Senior Vice President,
35
<PAGE> 36
Sales and Marketing, ($75,000); Norm Smith, Chief Financial Officer ($75,000);
Krishan Puri, Executive Vice President ($100,000); Gia Bokuchava, Ph.D., Chief
Technical Officer ($90,000); Roger Nebel, Vice President ($100,000); and Carl
Peede, Chief Operating Officer ($115,000). Pursuant to the employment agreements
with Dr. Bokuchava and Mr. Puri, each is eligible to receive cash bonuses to
repay certain promissory notes issued by them to the Company in connection with
their purchase of shares of Common Stock from the Company in August 1996. See
"Certain Transactions." Each of the Company's executive officers also is
eligible to receive cash bonuses to be awarded at the discretion of the
Compensation Committee of the Board of Directors.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning options granted to
the Named Executive Officer during the year ended December 31, 1997:
INDIVIDUAL GRANTS
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED ANNUAL
NUMBER OF GRANTED RATES OF STOCK PRICE
SECURITIES TO EXERCISE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES OR BASE TERM(2)
OPTIONS FISCAL PRICE PER EXPIRATION -----------------------
EXECUTIVE OFFICER GRANTED(1) YEAR SHARE DATE 5% 10%
- ----------------- ---------- ---------- --------- ---------------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Harvey Sax........... 10,000 1.64% $4.06 November 4, 2007 25,533 64,706
Krishan Puri......... 5,000 $6.00 June 18, 2007
20,000 $4.06 November 4, 2007
------
25,000 4.10% 69,933 177,224
Roger Nebel.......... 5,000 $6.00 May 6, 2007
5,000 $6.00 June 18, 2007
10,000 $4.06 November 4, 2007
------
20,000 3.28% 63,267 160,330
Gia Bokuchava,
Ph.D. ............. 5,000 $6.00 June 18, 2007
20,000 $4.06 November 4, 2007
------
25,000 4.10% 69,933 177,224
</TABLE>
OPTION EXERCISES IN LAST FISCAL AND YEAR-END OPTION VALUES
The following table sets forth the aggregate dollar value of all options
exercised, and the total number of unexercised options held, on December 31,
1997 by the Named Executive Officer:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT IN-THE-MONEY OPTIONS AT
ACQUIRED DECEMBER 31,1997 DECEMBER 31,1997(1)
ON VALUE --------------------------- ---------------------------
EXECUTIVE OFFICER EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------- -------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Harvey Sax............... 0 0 0 10,000 0 $115,025
Krishan Puri............. 0 0 0 25,000 0 389,063
Roger Nebel.............. 0 0 0 20,000 0 311,250
Gia Bokuchava, Ph.D...... 0 0 0 25,000 0 389,063
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with Harvey W. Sax,
its President and Chief Executive Officer, which provides a five year term
commencing on January 1, 1996, subject to automatic extension for an additional
one year on each one-year anniversary of the agreement. This employment
36
<PAGE> 37
agreement is subject to early termination as provided therein, including
termination by the Company "for cause" (as defined in the employment agreement).
The employment agreement provides for an annual base salary of $150,000, and for
bonus compensation to be awarded at the discretion of the Compensation Committee
of the Board of Directors.
STOCK OPTION PLANS
Employee Stock Option Plan. The Company's Stock Option Plan (the "Stock
Option Plan") was adopted by the Company's stockholders in September 1996. The
purpose of the Stock Option Plan is to provide incentives for officers and key
employees to promote the success of the Company, and to enhance the Company's
ability to attract and retain the services of such persons. The Company has
reserved 600,000 shares of Common Stock for issuance under the Stock Option
Plan. Options granted under the Stock Option Plan may be either (i) options
intended to qualify as "incentive stock options" under Section 422 of the Code
or (ii) non-qualified stock options. Stock options may be granted under the
Stock Option Plan for all employees of the Company, or of any present or future
subsidiary or parent of the Company. The Stock Option Plan is administered by
the Compensation Committee of the Board of Directors. The Compensation Committee
has the authority to determine exercise prices applicable to the options, the
eligible employees or consultants to whom options may be granted, the number of
shares of Common Stock subject to each option and the terms upon which options
are exercisable. The Compensation Committee has the authority to interpret the
Stock Option Plan and to prescribe, amend and rescind the rules and regulations
pertaining to the Stock Option Plan. No option is transferable by the optionee
other than by will or the laws of descent and distribution, and each option is
exercisable during the lifetime of the optionee only by such optionee.
Any incentive stock option that is granted under the Stock Option Plan may
not be granted at a price less than the fair market value of the Common Stock on
the date of grant (or less than 110% of fair market value in the case of holders
of 10% or more of the total combined voting power of all classes of stock of the
Company or a subsidiary or parent of the Company). Non-qualified stock options
may be granted at the exercise price established by the Compensation Committee,
which will not be less than 85% of the fair market value of the Common Stock on
the date of grant.
Each option granted under the Stock Option Plan is exercisable for a period
not to exceed ten years from the date of grant (or five years in the case of a
holder of 10% or more of the total combined voting power of all classes of stock
of the Company or a subsidiary or parent of the Company) and shall lapse upon
expiration of such period, or earlier upon termination of the recipient's
employment with the Company, or as determined by the Compensation Committee.
As of April 22, 1998, options to purchase 557,160 shares of Common Stock
were outstanding under the Stock Option Plan at exercise prices ranging from
$2.18 to $8.06 per share and at a weighted average exercise price of $4.58 per
share. All outstanding options vest 25% per year from their date of grant.
Non-Employee Directors Stock Option Plan. The Company's Non-Employee
Directors Stock Option Plan (the "Non-Employee Directors Plan") was adopted by
the Company's stockholders in September 1996 and amended in October 1996. The
Company has reserved 300,000 shares of Common Stock for issuance under the
Non-Employee Directors Plan.
The Non-Employee Directors Plan provides for the automatic granting of
non-qualified stock options to directors who are not officers or employees of
the Company ("Non-Employee Directors"). Each Non-Employee Director who is first
appointed or elected to the Board of Directors is granted an option to purchase
10,000 shares of Common Stock. Also, each Non-Employee Director automatically
receives an option to purchase 5,000 shares of Common Stock on the date of each
annual meeting of the Company's stockholders. The Non-Employee Directors Plan
also allows the Compensation Committee to make extraordinary grants of options
to Non-Employee Directors. All options granted under the Non-Employee Directors
Plan vest 50% per year of service by the Non-Employee Director on the Board of
Directors. No option is transferable by the optionee other than by will or laws
of descent and distribution, and each option is exercisable, during the lifetime
of the optionee, only by such optionee. The exercise price of all options will
be the fair market value of the shares of Common Stock on the date of grant, and
the term of each option may not exceed seven years.
37
<PAGE> 38
The Non-Employee Directors Plan will continue in effect for a period of ten
years unless sooner terminated by the Board of Directors.
During September 1996, Dr. Abowd was granted an option under the
Non-Employee Directors Plan to purchase 10,000 shares of Common Stock at an
exercise price of $6.50 per share. During February 1998, Mr. Thomas was granted
an option under the Non-Employee Directors Plan to purchase 10,000 shares of
Common Stock at an exercise price of $2.18 per share.
Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan
(the "Stock Purchase Plan") became effective on March 1, 1997. A total of
150,000 shares of Common Stock have been reserved for issuance under the Stock
Purchase Plan. The Stock Purchase Plan is intended to qualify under Section 423
of the Code. The purpose of the Stock Purchase Plan is to encourage and enable
employees of the Company to acquire a proprietary interest in the Company
through ownership of shares of Common Stock. Eligible employees of the Company
will purchase shares of Common Stock at 85% of fair market value and the Company
will partially subsidize purchases under the Stock Purchase Plan and will pay
the expenses of its administration.
An employee electing to participate in the Stock Purchase Plan must
authorize a stated dollar amount or percentage of the employee's regular pay to
be deducted by the Company from the employee's pay during each of four quarterly
payroll deduction periods (each a "Purchase Period"). Purchase Periods begin on
January 1, April 1, July 1 and October 1 of each calendar year during which the
Stock Purchase Plan is in effect. The Company is deemed on the last day of each
Purchase Period to have granted a purchase right to each participant as of the
first day of the Purchase Period to purchase as many full and fractional shares
of Common Stock as can be purchased with the participant's payroll deductions.
On the last day of the Purchase Period, the participant will be deemed to have
exercised this option, at the option price, to the extent of such participant's
accumulated payroll deductions. In no event, however, may the participant
purchase Common Stock having a fair market value (measured on the first business
day of the Purchase Period) of greater than $25,000 during a calendar year. The
option price under the Stock Purchase Plan is equal to 85% of the fair market
value of the Common Stock on either the first business day or the last business
day of the applicable Purchase Period, whichever is lower.
The initial Purchase Period under the Stock Purchase Plan will begin at a
date to be determined by the Board of Directors (the "Initial Purchase Period").
With respect to the Initial Purchase Period, an employee electing to participate
in the Stock Purchase Plan may authorize a stated dollar amount of the
employee's regular pay to be deducted by the Company from the employee's pay
during the Initial Purchase Period, or the employee may make a direct cash
contribution to his or her account under the Stock Purchase Plan. On the last
day of the Initial Purchase Period, the Company will be deemed to have granted a
purchase right to each participant to purchase as many full and fractional
shares of Common Stock as can be purchased with the participant's payroll
deductions and cash contributions, as of the first business day after the date
of this Prospectus.
Employees of the Company who have completed six full months of service with
the Company and whose customary employment is more than 20 hours per week and
five or more months per calendar year are eligible to participate in the Stock
Purchase Plan. An employee may not be granted an option under the Stock Purchase
Plan if after the granting of the option such employee would be deemed to own 5%
or more of the combined voting power of value of all classes of stock of the
Company. As of September 30, 1997, approximately 40 employees would have been
eligible to participate in the Stock Purchase Plan. An employee's rights under
the Stock Purchase Plan may not be assigned, transferred, pledged or otherwise
disposed of, except by will or the laws of descent and distribution. An
employee's rights under the Stock Purchase Plan terminate upon termination of
his or her employment for any reason, including retirement. Upon such
termination, the Company will refund the employee's payroll deductions or
contributions made during the Purchase Period.
An employee may not sell shares of Common Stock purchased under the Stock
Purchase Plan until the later of: (i) 180 days after the date of this
Prospectus; or (ii) the first day of the second Purchase Period following the
Purchase Period in which the option for such shares was granted.
38
<PAGE> 39
The Stock Purchase Plan is administered by the Compensation Committee. No
member of the Board of Directors will be eligible to participate in the Stock
Purchase Plan during the period he or she serves as a member of the Compensation
Committee. The Compensation Committee may terminate or amend the Stock Purchase
Plan at any time. However, any termination or amendment may not affect or change
purchase rights previously granted under the Stock Purchase Plan without the
consent of the affected participants. Also, any amendment that materially
increases the benefits or number of shares under the Stock Purchase Plan (except
for adjustments due to changes in the Company's capital structure) or that
materially modifies the eligibility requirements of the Stock Purchase Plan will
be subject to stockholder approval. If not sooner terminated by the Compensation
Committee, the Stock Purchase Plan will terminate at the time that all
authorized shares of Common Stock reserved for grant under the Stock Purchase
Plan have been purchased.
401(k) Profit Sharing Plan. The Company's Board of Directors has approved
the adoption of a 401(k) Profit Sharing Plan (the "401(k) Plan") which is
intended to be a tax-qualified defined contribution plan under Section 401(k) of
the Code. This plan was implemented in March 1998. In general, all employees of
the Company will be eligible to participate. The 401(k) Plan includes a salary
deferral arrangement pursuant to which participants may contribute amounts not
to exceed limitations imposed by the Code. Subject to certain Code limitations,
the Company may make a matching contribution of up to $1,000 of the salary
deferral contributions of participants at a rate of 50% of the participant's
contributions, up to 4% of the participant's salary. The Company may also make
an additional contribution to the 401(k) Plan each year at the discretion of the
Board of Directors. Separate accounts are maintained for each participant in the
401(k) Plan. The portion of a participant's account attributable to his or her
own contributions will be 100% vested. The portion of the account attributable
to Company contributions (including matching contributions) will vest after 5
years of service with the Company. Distributions from the 401(k) Plan may be
made in the form of a lump-sum cash payment or in installment payments.
AGREEMENTS WITH EMPLOYEES
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company (i) restricting the ability of
the employee to compete with the Company during his or her employment and for a
period of eighteen months thereafter, (ii) restricting solicitation of customers
and employees following employment with the Company, and (iii) providing for
ownership and assignment of intellectual property rights to the Company.
CERTAIN TRANSACTIONS
During the period December 1994 through December 1995, Harvey W. Sax, the
Company's President and Chief Executive Officer, loaned a total of approximately
$63,497 to the Company pursuant to a promissory note payable by the Company on
September 12, 2000, which accrues interest at the prime rate plus 1% per annum.
The Company used approximately $56,000 of the net proceeds of its initial public
offering to repay the remaining outstanding amounts owed under this promissory
note.
In February 1996, in connection with a recapitalization of the Common
Stock, the Company issued 787,844 shares of Common Stock to Harvey W. Sax, its
President and Chief Executive Officer and then its sole stockholder, for $.001
per share. In December 1994, the Company granted Nat Stricklen, a co-founder and
director of the Company, an option to acquire, for an aggregate exercise price
of $10.00, shares of Common Stock which, when issued, would represent
approximately 10% of the issued and outstanding Common Stock. Mr. Stricklen
exercised this option in February 1996 and received 93,070 shares of Common
Stock.
In February 1996, the Company (i) sold for $.0001 per share 335,052 shares
to Margery Germain; and (ii) issued to Mark Germain for $200,000 an unsecured
promissory note due September 1997 in the principal amount of $200,000 and
bearing interest at the rate of 8% per annum. Pursuant to the terms of the
promissory note with Mr. Germain, in May, 1997 the Company issued Mr. Germain
33,333 shares of Common Stock in repayment of the $200,000 outstanding principal
balance of this note.
39
<PAGE> 40
Mr. David A. Blech, Mrs. Esther Blech and the Edward A. Blech Trust
(collectively the "Blech Interests") have agreed in writing with the Nasdaq
Stock Market, Inc. that, for a period of three years from the date of their
original purchases of securities from the Company, none of them will sell,
transfer, assign, pledge or hypothecate any shares of Common Stock. Gifts of
shares of the Common Stock are permitted provided that the recipient of such
gift agrees in writing to be bound by the terms of the agreement. The Blech
Interests further agreed that while the Common Stock is listed on any Nasdaq
market, there will be no financial relationship between David Blech or any of
the foregoing Blech Interests, on the one hand, and the Company, on the other
hand; that the direct or indirect ownership of shares of Common Stock held by
Mr. David A. Blech and/or the Blech Interests may not exceed 5% of the Common
Stock; and that there may be no advisory relationship between Mr. David A. Blech
and the Company. To the best of the Company's knowledge and belief, the Blech
Interests beneficially own less than 5% of the Common Stock.
In August 1996, Harvey W. Sax, the Company's President and Chief Executive
Officer, contributed 3,956 shares of Common Stock to the Company.
In August 1996, the Company issued and sold to six of its employees an
aggregate of 102,855 shares of Common Stock for a total of $468,004, payable
through the issuance of promissory notes payable in four equal annual
installments, bearing interest at 8% per annum and secured by the shares of
Common Stock purchased therewith. Also in August 1996, the Company entered into
employment agreements with such persons which provide that for each of the first
four years of employment, the Company will issue a bonus to the employee in the
amount necessary to repay the annual amount due under such promissory note (plus
the taxes due by the employee as a consequence of receiving such bonus).
Pursuant to the terms of the employment agreements, the Company will continue to
make these annual payments if the employee is terminated other than "for cause,"
as defined in the employment agreements. Pursuant to the terms of the
subscription agreements for such shares, if the employee's employment is
terminated within such four-year period, the Company has the right to repurchase
that percentage of the shares purchased by the employee which shall equal the
percentage of the promissory note which is not yet due, payment for such
repurchase to be made by canceling the applicable outstanding amount of the
promissory note. Gia Bokuchava, Ph.D., Chief Technical Officer and a director,
and Krishan Puri, Executive Vice President and a director, purchased 39,559 and
29,669 shares of Common Stock, respectively, in this transaction. Mr. Vinod
Keni, a former director, purchased 3,955 shares in this transaction. The Company
has agreed with Mr. Keni that all 11,865 options to acquire Common Stock held by
Mr. Keni (at a weighted average exercise price of $5.16 per share) shall
continue to vest as if Mr. Keni were still employed by the Company. The Company
also agreed to cancel and forgive indebtedness of approximately $18,000
represented by the promissory note given by Mr. Keni to purchase such 3,955
shares and to give Mr. Keni a cash payment to cover Mr. Keni's estimated tax
liability from such cancellation of indebtedness.
In August 1996, Krishan Puri, Executive Vice President and a director,
exercised a warrant to purchase 9,307 shares of Common Stock for a total
exercise price of $1.00. Mr. Puri was granted the warrant in June 1995 in
connection with his agreeing to serve on the Company's former Board of Advisors.
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a Delaware corporation formed
in July 1996 to provide Internet and Intranet security system consulting
services. In the transaction, the former holders of HISS's capital stock
received the right to receive their pro rata share of four annual earnout
payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each,
an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal
to 30% of HISS's gross revenues for the 12 month period ending December 31,
1997; provided, however, that (i) the amount of each Annual Earnout will be
limited to the amount of HISS's net profits for the 12-month period ended
December 31 immediately preceding the payment date (the "Profit Cap"), (ii)
amounts not paid in a year as a result of the Profit Cap will be carried forward
to the subsequent year, and (iii) amounts not paid in the fourth year as a
result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in
whole or in part in cash or, at HomeCom's option, in shares of Common Stock
based upon the average trading price of the Common Stock for the ten trading
days immediately preceding payment of the Annual Earnout. An Annual Earnout will
not be paid if the recipient is then in violation of the non-solicitation and
non-competition provisions contained in the Stock Purchase Agreement to which
the former holders of
40
<PAGE> 41
HISS's capital stock are subject. Roger Nebel, Vice President and a director of
the Company, owned 48% of HISS's outstanding capital stock and will be entitled
to receive 48% of the Annual Earnouts. HISS was merged with and into the Company
on September 11, 1996.
RECENT TRANSACTIONS
INSURERATE
In January 1998, the Company formed InsureRate, Inc. ("InsureRate") for the
purpose of providing Internet web development and web hosting services to
entities engaged in the sale, marketing or underwriting of insurance and other
financial products and services. The Company has committed to loan InsureRate up
to $100,000 for the operation of InsureRate's business, including the purchase
of machinery, equipment, fixtures and furnishings, leasehold improvements and
other necessary business expenses and working capital needs. The unpaid
principal balance of this loan will bear interest at the Applicable Federal
Rate. The outstanding principal balance advanced to InsureRate plus accrued
interest is payable in January 2008. InsureRate has the option to repay this
loan to HomeCom in either cash or in shares of common stock of InsureRate having
a value on the repayment date equal to the aggregate principal amount advanced
by HomeCom to InsureRate, together with interest thereon.
The Company, InsureRate, Jerome R. Corsi ("Corsi") and Hamilton Dorsey
Alston Company ("HDA") (a licensed insurance agency) are parties to an agreement
(the "Purchase Agreement") pursuant to which HDA purchased InsureRate common
stock for a total purchase price of $100,000. The Company and HDA concurrently
entered into a shareholders agreement which, among other things, provides that:
(i) the Company has a right of first refusal to purchase HDA's InsureRate stock
prior to a proposed sale of such stock by HDA to a third party unaffiliated with
HDA; (ii) HDA has the right to cause the Company to purchase from HDA all of
HDA's InsureRate stock at a purchase price equal to $100,000 at any time,
payable by HomeCom at its sole discretion either in the form of cash or shares
of Common Stock of HomeCom having a value equal to $100,000; provided, however,
that if HDA exercises such right within 30 days after the date on which
InsureRate's Internet web site is first open for public access through the World
Wide Web on the Internet, then the Company must pay the $100,000 in cash; and
(iii) the Company has the right to purchase from HDA 50% of HDA's InsureRate
stock at a purchase price equal to $50,000 at any time; provided that HDA may,
in its sole discretion, elect to receive the purchase price either in the form
of cash or shares of the Company's Common Stock.
InsureRate agreed to deposit the $100,000 received from HDA into an escrow
account. Pursuant to an escrow agreement with a third party escrow agent, HDA
had the sole and absolute discretion until 30 days after the first date on which
the InsureRate Internet web site is open for public access through the World
Wide web on the Internet, for any or no reason, to cause the escrow agent to
deliver to HDA the escrowed funds, without interest, upon receipt by the escrow
agent from HDA of the share certificate representing HDA's shares of InsureRate
stock. On April 2, 1998, HDA exercised its right under the shareholders
agreement to cause the Company to purchase from HDA all of ADA's InsureRate
stock for $100,000. Accordingly, the escrow funds were delivered to HDA on that
date. As a result, the Company owns 90% of InsureRate's Common Stock and Corsi
owns 10%.
HomeCom also granted to HDA a warrant to purchase 25,000 shares of the
Company's Common Stock for an exercise price of $3.70 per share. HDA may
exercise this warrant according to the following vesting schedule: (i) 8,333.33
shares are purchasable as of January 23, 1999; (ii) 8,333.33 shares are
purchasable as of January 23, 2000; and (iii) 8,333.33 shares are purchasable as
of January 23, 2001. This warrant expires on March 31, 2001 if not earlier
exercised.
SALE OF 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,
41
<PAGE> 42
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, and an effective Registration Statement
filed with the Commission, the entirety of the aggregate value of the Debentures
are convertible at the option of the holders immediately as of the date of this
Prospectus. 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) $2.625. The number
of shares issuable upon conversion of the Debentures is equal to the aggregate
principle balance of the Debentures divided by the 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 12, 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."
THE INSURANCE RESOURCE CENTER
On April 16, 1998, the Company acquired all of the outstanding capital
stock of The Insurance Resource Center, Inc. ("IRC") for 351,391 shares of the
Company's Common Stock. Pursuant to the Agreement and Plan of Reorganization,
dated April 15, 1998 (the "Reorganization Agreement"), the Company has agreed
that fifty percent of such shares (the "IRC Registration Shares") shall be
registered pursuant to a registration statement to be filed with the Commission
by June 30, 1998 and the remaining shares shall have certain piggyback
registration rights. In the event that the Registration Shares are not so
registered by June 30, 1998, then the Company shall pay to the former
Stockholders of IRC a penalty fee of ten percent (10%) per month of the original
number of shares of the Company's Common Stock to be so registered to be paid in
newly issued shares of the Company's Common Stock, which shall also then be
registered as provided in the Reorganization Agreement. IRC shall remain a
wholly-owned subsidiary of the Company. In addition, IRC has pursuant to an
employment agreement retained the services of Tim James Higham, one of the
former shareholders of IRC as Vice President of Insurance Sales.
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<PAGE> 43
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, with respect to (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of the Common Stock;
(ii) each director; (iii) all executive officers and directors as a group; and
(iv) the Selling Securityholders, certain information with respect to the
beneficial ownership of the Common Stock as of May 8, 1998.
<TABLE>
<CAPTION>
COMMON PERCENTAGE NUMBER OF COMMON PERCENTAGE
STOCK OF COMMON SHARES OF STOCK OF COMMON
BENEFICIALLY STOCK COMMON BENEFICIALLY STOCK
OWNED BENEFICIALLY STOCK OWNED BENEFICIALLY
BEFORE OWNED BEFORE OFFERED AFTER OWNED AFTER
NAME OF BENEFICIAL OWNER(1) OFFERING(2) OFFERING HEREBY OFFERING(2) OFFERING(3)
- --------------------------- ------------ ------------ --------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Harvey W. Sax(4)........................ 844,744 20.3% -- 844,744 17.9%
Nat Stricklen(5)........................ 68,170 1.6 -- 68,170 1.4
Krishan H. Puri(6)...................... 43,976 1.1 -- 43,976 *
Gia Bokuchava, Ph.D.(7)................. 40,059 1.0 -- 40,059 *
Roger J. Nebel(8)....................... 2,100 * -- 2,100 *
Gregory Abowd, Ph.D.(9)................. 5,000 * -- 5,000 *
Carl W. Peede(10)....................... -- * -- -- *
Norman H. Smith(11)..................... -- * -- -- *
Adar Equities, LLC(12).................. 400,000 9.6 400,000 0 *
Mark Germain(13)........................ 350,885 8.4 -- 350,885 7.4
Margery Germain(14)..................... 350,885 8.4 -- 350,885 7.4
Tim James Higham........................ 179,209 4.3 -- 179,209 3.8
Cameron M. Harris & Company(23)......... 172,182 4.1 -- 172,182 3.6
FTS Worldwide Corporation(15)........... 57,143 1.4 -- -- *
Euro Factors International, Inc.(16).... 22,857 * -- -- *
Beauchamp Finance(17)................... 15,238 * -- -- *
COLBO(18)............................... 19,048 * -- -- *
Dominion Capital Fund, LTD.(19)......... 484,822 11.7 428,572 0 *
Sovereign Partners, L.P.(20)............ 161,607 3.9 142,857 0 *
Ladenburg Thalmann & Co. Inc.(21)....... 100,000 2.5 100,000 0 *
The Malachi Group, Inc.(22)............. 50,000 1.2 50,000 0 *
All executive officers and directors as
a group (8 persons)................... 1,004,049 24.2% -- 1,004,049 21.2%
</TABLE>
- ---------------
* Less than 1%.
(1) Except as otherwise noted, the street address of the named beneficial owner
is Building 14, Suite 100, 3535 Piedmont Road, Atlanta, Georgia 30305.
(2) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares
of Common Stock beneficially owned, subject to community property laws
where applicable. Shares of Common Stock subject to options that are
currently exercisable or exercisable within sixty days of May 8, 1998 are
deemed to be outstanding and to be beneficially owned by the person holding
such options for the purpose of computing the percentage ownership of such
person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(3) The number and percentage of Common Stock beneficially owned after the
offering assumes that the remaining unconverted Debentures are converted
into an aggregate 114,286 shares at a Debenture Conversion Price of $2.625
per share, which is the Debenture Conversion Price that would be effective
if the Company received notice of conversion of the Debentures after the
close of trading on May 8, 1998. The post offering ownership also assumes
that the Series A Preferred Stock is converted into an aggregate of 571,429
shares of Common Stock at a Series A Preferred Conversion Price of $3.50,
which is the Series A Preferred Conversion Price that would be effective if
the Company received notice of conversion of the Series A Preferred Stock
after the close of trading on May 8, 1998 and further assumes the issuance
of 625,00 shares of Common Stock upon exercise of the Offered Warrants. The
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<PAGE> 44
Debenture Conversion Price and the Series A Preferred Conversion Price are
variable, and the number of shares issuable upon conversion of the
Debentures and the Series A Preferred Stock will increase if the average
closing bid price of the Company's Common Stock is less than $2.625 or
$3.50 per share for the three or five trading days immediately prior to
issuance, respectively. See "Description of Securities -- Convertible
Debentures."
(4) Excludes 10,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of May 8, 1998 at an exercise price of $4.06 per
share which is not currently exercisable and which becomes exercisable more
than 60 days following the date of the date of this Prospectus.
(5) Excludes 14,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.61 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(6) Excludes 25,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.45 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(7) Excludes 25,000 shares of Common Stock issuable upon the exercise of a
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.45 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(8) Includes 1,250 shares of Common Stock issuable upon the exercise of an
option outstanding as of May 8, 1998 at an exercise price of $6.00 per
share. Excludes 18,750 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $5.07 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus. Also excludes an indeterminate number of shares of Common Stock
which may be issued in connection with the Company's acquisition of HISS.
See "Certain Transactions."
(9) Includes 5,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of May 8, 1998 at an exercise price of $6.50 per
share which is currently exercisable. Excludes 5,000 shares of Common Stock
issuable upon the exercise of an option outstanding as of May 8, 1998 at an
exercise price of $6.50 per share which is not currently exercisable and
which becomes exercisable more than 60 days following the date of the date
of this Prospectus.
(10) Excludes 60,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $5.10 per share which are not currently exercisable and which become
exercisable more than 60 days following the date of the date of this
Prospectus.
(11) Excludes 25,000 shares of Common Stock issuable upon the exercise of
options outstanding as of May 8, 1998 at a weighted average exercise price
of $4.84 per share, which are not currently exercisable and which become
exercisable more than 60 days following the date of this Prospectus.
(12) The address of this security holder is 1276 50th Street, Brooklyn, NY
11219. Includes 400,000 shares of Common Stock issuable upon the exercise
of currently exercisable warrants at an exercise price of $4.00 per share
for 200,00 of the shares of Common Stock issuable thereunder and $6.00 per
share for the remaining 200,000 shares of Common Stock issuable thereunder.
(13) The address of this stockholder is 81 Main Street White Plains, NY 10601.
Includes 335,052 shares of Common Stock owned by Margery Germain, the wife
of Mr. Germain, as to which shares Mr. Germain disclaims beneficial
ownership.
(14) The address of this stockholder is 6 Olmstead Road Scarsdale, NY 10583.
Includes 15,833 shares of Common Stock owned by Mark Germain.
(15) The address of this Selling Securityholder is 24 Route de Malagnov, Geneva,
Switzerland, CH 1208. Represents shares of Common Stock issuable upon
conversion of an aggregate $150,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.625.
(16) The address of this Selling Securityholder is 140 Birmensdorferstrasse,
Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable
upon conversion of an aggregate $60,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially
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<PAGE> 45
owned by this Selling Securityholder is estimated based upon an assumed
Debenture Conversion Price of $2.625.
(17) The address of this Selling Securityholder is 140 Birmensdorferstrasse,
Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable
upon conversion of an aggregate $40,000 of Debentures held by this Selling
Securityholder. The number of shares of Common Stock represented as
beneficially owned by this Selling Securityholder is estimated based upon
an assumed Debenture Conversion Price of $2.625.
(18) The address of this Selling Securityholder is Szigetszentmiklos, Gyari Ut.
Hungary H-2310. Represents shares of Common Stock issuable upon conversion
of an aggregate $50,000 of Debentures held by this Selling Securityholder.
The number of shares of Common Stock represented as beneficially owned by
this Selling Securityholder is estimated based upon an assumed Debenture
Conversion Price of $2.625.
(19) The address of this shareholder is Bahamas Financial Centre, Third Floor,
Charlotte & Shirley Street, Nassau, Bahamas CB-13136. Represents shares of
Common Stock issuable upon conversion of an aggregate 15,000 shares of
Series A Preferred Stock. The number of shares of Common Stock represented
as beneficially owned by this shareholder is estimated based upon an
assumed Series A Preferred Conversion Price of $3.50. Also includes 56,250
shares of Common Stock issuable upon the exercise of warrants at a weighted
average exercise price of $14.72604 per share.
(20) The address of this shareholder is Bahamas Financial Centre, Third Floor,
Charlotte & Shirley Street, Nassau, Bahamas CB-13136. Represents shares of
Common Stock issuable upon conversion of 5,000 shares of Series A Preferred
Stock held by the shareholder. The number of shares of Common Stock
represented as beneficially owned by this shareholder is estimated based
upon an assumed Series A Preferred Conversion Price of $3.50. Also includes
18,750 shares of Common Stock issuable upon the exercise of warrants at a
weighted average exercise price of $14.72604 per share.
(21) The address of this shareholder is 35th Floor, 590 Madison Avenue, New
York, NY 10022. Includes 100,000 shares of Common Stock issuable upon the
exercise of warrants at an exercise price of $7.20 per share.
(22) The address of this shareholder is Suite 1132, 3390 Peachtree Road NE,
Atlanta, GA 30326. Includes 50,000 shares of Common Stock issuable upon the
exercise of warrants at an exercise price $15.825 per share.
(23) The address of this shareholder is 6400 Fairview Road, P.O. Box 220748,
Charlotte, NC 28222-0748.
DESCRIPTION OF SECURITIES
The Company's authorized capital stock consists of 15,000,000 shares of
Common Stock, $.0001 par value, and 1,000,000 shares of preferred stock, $.01
par value. As of May 8, 1998, the Company had issued and outstanding 4,154,965
shares of Common Stock and 20,000 shares of Series A Preferred Stock. As of such
date, there were 44 holders of record of shares of Common Stock and two holders
of record of the Series A Preferred Stock. As of May 8, 1998, the Company had
outstanding an aggregate $300,000 of its Debentures.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share for
the election of directors and all matters to be submitted to a vote of the
Company's stockholders. Subject to the rights of any holders of preferred stock
which may be issued in the future, the holders of shares of Common Stock are
entitled to share ratably in such dividends as may be declared by the Board of
Directors out of funds legally available therefor. In the event of dissolution,
liquidation or winding up of the Company, holders of shares of Common Stock are
entitled to share ratably in all assets remaining after payment of all
liabilities and the aggregate liquidation preference of outstanding shares of
preferred stock. Holders of shares of Common Stock have no preemptive,
subscription, redemption or conversion rights. The outstanding shares of Common
Stock are, and the shares of Common Stock to be issued by the Company in this
offering will be, duly authorized, validly issued, fully paid and nonassessable.
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<PAGE> 46
PREFERRED STOCK
The Company's Restated Certificate of Incorporation authorizes the issuance
of preferred stock with designations, rights and preferences determined from
time to time by the Board of Directors. Accordingly, the Board of Directors is
empowered, without stockholder approval, to issue preferred stock with
dividends, liquidation, conversion, voting and other rights that could adversely
affect the voting power or other rights of the holders of Common Stock. In the
event of issuance, the preferred stock could be used, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company.
SERIES A CONVERTIBLE PREFERRED STOCK
The Company has designated 20,000 shares of its preferred stock as Series A
Convertible Preferred Stock (the "Series A Preferred Stock"). In transactions
completed in December 1997, the Company issued 20,000 shares of the Series A
Preferred Stock for aggregate consideration of $2,000,000. See "Recent Sale of
Series A Preferred Stock." The shares of Series A Preferred Stock have the
designations, rights and preferences described below.
DIVIDENDS
The holders of the Series A Preferred Stock are entitled to receive
dividends pari passu, on an as-converted basis, with any dividend which shall be
declared and paid upon or set aside for the Common Stock in any year, when, as,
and if declared by the Board of Directors of the Company out of funds legally
available for that purpose, with each share of Series A Preferred Stock being
entitled to receive dividends based on the number of shares of Common Stock into
which a share of Series A Preferred Stock could be converted on the record date
for the dividend. Dividends shall be payable in cash, stock or otherwise in an
amount not less than the per share amount, if any, of any cash, stock, or other
dividend declared on the Common Stock during such fiscal year.
LIQUIDATION RIGHTS
In the event of any liquidation, dissolution or winding up of the Company,
whether voluntary or not, the holders of Series A Preferred Stock shall be
entitled to receive, before any amount shall be paid to holders of Common Stock,
an amount per share equal to $100.00 for each outstanding share of Series A
Preferred Stock (as equitably adjusted for stock splits, combinations or similar
events and hereafter individually referred to as the "Original Issue Price")
plus, in each case, all declared and unpaid dividends, if any (such amount being
herein referred to as the "Series A Preference"). If, upon the occurrence of a
liquidation, dissolution or winding up, the assets and surplus funds distributed
among the holders of Series A Preferred Stock shall be insufficient to permit
the payment to such holders of the full amount of the Series A Preference, then
the entire assets and surplus funds of the Company legally available for
distribution shall be distributed ratably among the holders of Series A
Preferred Stock based upon the aggregate Original Issue Price of Series A
Preferred Stock held by each holder. If, upon the occurrence of a liquidation,
dissolution or winding up, after the payment to the holders of all series of
Preferred Stock of the full amount of the Series A Preference, assets or surplus
funds remain in the Company, all such remaining assets and surplus funds shall
be distributed ratably among the holders of the Common Stock. A liquidation,
dissolution or winding up of the Company shall be deemed to be occasioned by,
and to include, the Company's sale of all or substantially all of its assets or
the acquisition of the Company by another entity by means of merger,
consolidation or reorganization (other than a merger which solely effects a
change of domicile) or consolidation, where, after such merger or consolidation,
less than 50% of the surviving entity is held by persons who were stockholders
of the Company immediately before the merger, consolidation or reorganization.
VOTING RIGHTS
The holders of shares of Series A Preferred Stock have no voting rights.
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<PAGE> 47
CONVERSION
Each share of Series A Preferred Stock shall be convertible, at the option
of the holder thereof, into a number of shares of Common Stock equal to the
quotient of (a) the product of the number of shares of Series A Preferred Stock
being converted multiplied by $100 divided by (b) the then-applicable Conversion
Price. The Conversion Price shall equal the lesser of: (i) 75% of the average
closing bid price of the Common Stock for the five trading days ending on the
day the Company actually receives a conversion notice, or (ii) $3.00 (the "Fixed
Conversion Price". However, if the Registration Statement is not declared
effective by the Commission by May 16, 1998, then the Fixed Conversion Price
shall be $3.00 per share. Upon conversion, all declared and unpaid dividends on
the Series A Preferred Stock shall be paid, to the extent funds are legally
available therefor, either in cash or in shares of Common Stock of the Company,
at the election of the Company, wherein the shares of Common Stock shall be
valued at the Closing Price on the day the Company actually receives a
conversion notice. The Series A Preferred Stock shall be convertible on a
non-cumulative basis into shares of Common Stock according to the following
conversion table (the "Conversion Table" or "Gating Restrictions"): (i) the
first 25% at any time within thirty (30) days after the effective date (the
"Registration Effective Date") and thereafter no more than 25% of the Series A
Preferred Stock shall be convertible on a non-cumulative basis into shares of
Common Stock during any thirty (30) day period thereafter. However, in the event
that the Closing Price of the Common Stock as reported by NASDAQ or on other
securities exchanges or markets on which the Common Stock is listed for the
previous five (5) trading days is $3.50 or greater, the foregoing Gating
Restrictions shall not apply as long as the Closing Price for the previous five
(5) trading days is $3.50 or greater.
As long as there is no Material Default by the Company which remains
uncured by the Company within thirty (30) days from the date written notice is
sent to the Company from the holder of Debentures (excepting such material
default by virtue of the failure of the Company to register the shares of Common
Stock with the U.S. Securities Exchange Commission through and until June 30,
1998 pursuant to the Registration Rights Agreement), the holder of Debentures or
its affiliates shall not, directly or indirectly, engage in any short or other
hedging transaction, such as option writing, equity swaps or other types of
derivative transactions in the Common Stock or other securities of the Company
or acquire or establish any "put equivalent position" within the meaning of Rule
16a-1 promulgated under the 1934 Act. Material Default shall mean (i) the
failure of the Company to deliver, from time to time, Common Stock pursuant to a
valid Conversion Notice within 30 days of the Delivery Date or (ii) a failure of
the Company to cause the Registration Statement to become effective by June 30,
1998.
ANTIDILUTION ADJUSTMENTS
The number of shares of Common Stock issuable upon conversion of the Series
A Preferred Stock is subject to adjustment for stock splits, stock dividends,
any distribution payable in securities of the Company other than shares of
Common Stock and provision is not made for payment of such distribution to
holders of the Series A Preferred Stock on an as-converted basis or any change
of the Common Stock into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision, combination or consolidation of shares
provided for above).
REDEMPTION
The Company shall have the right to call for redemption all or any part of
the outstanding Series A Preferred Stock, at any time or from time to time,
including after receipt of a conversion notice, prior to the issuance shares of
Common Stock upon conversion of the Series A Preferred Stock. The redemption
price (the "Redemption Price") for each share of Series A Preferred Stock
redeemed shall be equal to (a) the sum of $100 per share, plus all accrued but
unpaid dividends thereon up to and including the Redemption Date (as defined
below), multiplied by (b) one hundred twenty-five (125%) percent. The Redemption
Price shall be payable in cash within ten business days following the date the
Company initiates the delivery of a redemption notice to the holders of Series A
Preferred Stock.
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<PAGE> 48
CONVERTIBLE DEBENTURES
GENERAL
The Debentures were issued under the Debenture Agreement between the
Company and the Selling Securityholders. The following summaries of certain
provisions of the Debentures and the Debenture Agreement do not purport to be
complete and are subject to, and are qualified in their entirety by reference
to, all the provisions of the Debentures and the Debenture Agreement, including
the definitions therein of certain terms which are not otherwise defined in this
Prospectus and those terms made a part of the Debenture Agreement.
The Debentures represent general unsecured debt obligations of the Company
and are convertible into Common Stock as described below under "-- Conversion of
Debentures." The Debentures will mature on September 22, 2000, unless earlier
converted into shares of Common Stock at the option of the holders upon written
notice to the Company. Upon maturity, the Company will pay the principal amount
of, and all accrued but unpaid interest on, the Debentures in cash or Conversion
Shares, at its option. The Debentures bear interest from the date of original
issue at the annual rate of 5%, payable on September 22, 2000.
CONVERSION OF DEBENTURES
The Debentures are convertible at the option of the holders. Pursuant to
certain amendments to the Debentures, dated as of April 8, 1998, the Purchasers
agree not to convert any portion of the remaining Debentures held by each of
them for a period beginning April 8, 1998 and ending May 8, 1998 and thereafter
not to convert more than 25% of the Remaining Debentures held by each of them in
any thirty (30) day period thereafter (the "Gating Restrictions"). The Debenture
Conversion Price is equal to the lessor of (a) a 25% discount from the closing
bid price of the Common Stock as reported by Nasdaq or other securities
exchanges or markets on which the Common Stock is listed for the previous three
trading days ending on the day preceding notice of conversion, or (b) $2.625 per
share. However, in the event that the closing bid price of the Common Stock as
reported by NASDAQ or on other securities exchanges or markets on which the
Common Stock is listed for the previous five (5) trading days is $3.50 or
greater, following May 8, 1998 the foregoing Gating Restrictions shall not apply
as long as the closing bid price for the previous five (5) trading days is $3.50
or greater. In addition, if the Common Stock is not traded on the NASDAQ
SmallCap Market or the electronic bulletin board, the foregoing Gating
Restrictions shall no longer apply. The Debenture Conversion Price is subject to
equitable adjustment by the Company upon the occurrence of certain events,
including, but not limited to: (i) forward and reverses stock splits; (ii)
dividend payments on shares of Common Stock; (iii) subdivision of shares of
Common Stock; (iv) combinations or reclassifications of Common Stock; and (v)
issuance of rights, warrants, options or the like. The Company is not required
to issue fractional shares of Common Stock upon conversion of the Debentures;
instead, the number of shares issuable shall be rounded to the nearest whole
share, with the fraction paid in cash at the discretion of the Company.
EVENTS OF DEFAULT AND REMEDIES
An Event of Default is defined in the Debentures as being the occurrence of
one or more of the following: (i) any of the representations or warranties made
by the Company under the Debentures or the Debenture Agreement shall have been
incorrect when made in any material respect; (ii) the Company shall fail to
perform or observe in any material respect to any other covenant, term,
provision, condition, agreement or obligation of the Company under the
Debentures, the Registration Agreements and the Debenture Agreement, and such
failure shall continued uncured for a period of seven days after written notice
from the holder of the Debentures specifically describing such failure; (iii) a
trustee, liquidator or receiver shall be appointed for the Company or for a
substantial part of its property or business without its consent and shall not
be discharged within thirty days after such appointment; (iv) any governmental
agency or any court of competent jurisdiction at the instance of any
governmental agency shall assume custody or control of the whole or any
substantial portion of the properties or assets of the Company and shall not be
dismissed thirty calendar days thereafter; (v) bankruptcy reorganization,
insolvency or liquidation proceedings or other proceedings for relief under any
bankruptcy law or any law for the relief of debtors shall be instituted by or
against the Company,
48
<PAGE> 49
and if instituted against the Company, the Company shall by any action or answer
approve of, consent to or acquiesce in any such proceedings or admit the
material allegations of, or default in answering a petition filed in any such
proceeding; or (vi) the Company's Common Stock is delisted from trading on The
Nasdaq SmallCap(TM) Market unless it is there upon admitted to trading on a
national stock exchange.
The Debentures provide that if any Event of Default shall have occurred and
be continuing, and in each and every such case, unless such Event of Default
shall have been waived in writing by the Holder of the Debentures (which waiver
shall not be deemed to be a waiver of any subsequent Event of Default) at the
option of the Holder and in Holder's sole discretion, the Holder may consider
the Debentures immediately due and payable, without presentment, demand, protest
or notice of any kind, all of which are expressly waived by the Company, and the
Holder may immediately, and without expiration of any period of grace, enforce
any and all of the Holder's rights and remedies provided in the Debentures or
any other rights or remedies afforded by law.
SATISFACTION AND DISCHARGE
The Debentures will cease to be of further effect at the earlier to occur
of when: (i) the Company has paid or caused to be paid the principal of, and
interest on the Debentures when the same has become due and payable upon
maturity; or (ii) all outstanding Debentures have been fully converted into
Conversion Shares.
MODIFICATIONS OF THE DEBENTURES
The Debentures provide that the Debentures nor any terms thereof shall be
amended, waived, discharged or terminated other than by a written instrument
signed by the Company and the holders of the Debentures.
GOVERNING LAW
The Debentures provide that they shall be governed by, and construed in
accordance with, the laws of the State of New York.
WARRANTS
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter, Ladenburg Thalmann & Co. Inc.,
the Underwriter Warrants to acquire 100,000 shares of the Company's Common Stock
at an exercise price of $7.20 per share. The exercise price is subject to
adjustment under certain circumstances. The Underwriter Warrants expire on May
12, 2002 if not earlier exercised.
In connection with the completion of the Debenture Sale, the Company issued
to First Granite Securities, Inc., an entity designated by the holder of the
Debentures, the Debenture Warrants to acquire an aggregate 400,000 shares of
Common Stock (the "First Granite Debenture Warrants"). These warrants were
subsequently assigned by First Granite Securities, Inc. to Adar Equities, LLC.
Of the Debenture Warrants, warrants to acquire an aggregate 200,000 shares are
exercisable at a price of $4.00 per share and warrants to acquire an aggregate
200,000 shares are exercisable at a price of $6.00 per share. The exercise price
of the Debenture Warrants is subject to adjustment. If not earlier exercised,
the Debenture Warrants expire on October 27, 2000. Pursuant to an agreement
dated April 8, 1998, in the event that the Company agrees to adjust the exercise
price of the Series A Preferred Stock Warrants to an exercise price below $5.00
(the "Reduced Exercise Price"), the Company has agreed to amend the exercise
price of any unexercised First Granite Debenture Warrants to the Reduced
Exercise Price.
In connection with the completion of the sale of the Series A Preferred
Stock, the Company issued the Series A Preferred Stock Warrants. The Series A
Preferred Stock Warrants represent the right to acquire an aggregate 125,000
shares of Common Stock, with warrants to purchase 62,500 shares of Common Stock
having an exercise price per share equal to $14.50625 and warrants to purchase
the remaining 62,500 shares having an exercise price equal to $15.825. The
Series A Preferred Stock Warrants will expire on December 31, 2000 and are
eligible to be exercised at any time on or after June 23, 1998. The Company
intends to register the shares of Common Stock issuable upon exercise of the
Series A Preferred Stock Warrants together with the shares of Series A Preferred
Stock. See "-- Registration Rights."
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<PAGE> 50
In connection with the purchase of InsureRate common stock by HDA and as an
inducement for HDA to enter into the Web Development and Hosting Services
Agreement, HomeCom granted to HDA the InsureRate Warrants. The InsureRate
Warrants represent the right to purchase 25,000 shares of Common Stock of
HomeCom for an aggregate purchase price of $92,500. HDA may exercise its right
to purchase such shares subject to the following vesting schedule: (i) 8,333.33
shares are purchasable as of January 23, 1999; (ii) 8,333.33 shares are
purchasable as of January 23, 2000; and (iii) 8,333.33 shares are purchasable as
of January 23, 2001. The InsureRate Warrants expires on March 31, 2001 if not
earlier exercised.
LIMITATIONS ON LIABILITY OF DIRECTORS
The Company's Restated Certificate of Incorporation contains provisions
which eliminate the personal liability of its directors for monetary damages
resulting from breaches of their fiduciary duty, other than liability for a
breach of the duty of loyalty, acts or omissions not in good faith that
constitute a breach of the director's duty to the Company, acts that involve
intentional misconduct or a knowing violation of the law, transactions in which
the director receives an improper benefit and acts or omissions for which
liability is expressly provided by an applicable statute. While the Restated
Certificate of Incorporation provides directors with protection from awards for
monetary damages for breach of duties to the Company, it does not eliminate
those duties. Accordingly, the Restated Certificate of Incorporation should not
affect the availability of equitable remedies, such as injunction or rescission,
based on a director's breach of the duty of care. However, equitable remedies
may not provide stockholders adequate monetary compensation for damages caused
by breach of duties to the Company. The Company's Restated Bylaws contain
provisions requiring the indemnification of the Company's directors and
officers, and persons serving at the request of the Company as a director or
officer of another corporation, to the fullest extent permitted under the
Delaware General Corporation Law. These provisions do not apply to liabilities
under federal securities laws. The Company believes that these Restated
Certificate of Incorporation and Bylaws provisions are necessary to attract and
retain qualified persons as directors and officers of the Company.
STATUTORY BUSINESS COMBINATION PROVISION
Upon completion of the offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person, or affiliate or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the board of directors of the corporation before the person becomes an
interested stockholder, (ii) the interested stockholder acquired 85% or more of
the outstanding voting stock of the corporation in the same transaction that
makes it an interested stockholder (excluding shares owned by persons who are
both officers and directors of the corporation and shares held by certain
employee stock ownership plans) or (iii) on or after the date the person becomes
an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined (with certain limited exceptions) as any
person that is (i) the owner of 15% or more of the outstanding voting stock of
the corporation or (ii) an affiliate or associate of the corporation that was
the owner of 15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date on which it
is sought to be determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or bylaws by action of
its stockholders to exempt itself from coverage, provided that such charter or
bylaw amendment shall not become effective until twelve months after the date it
is adopted. Neither the Restated Certificate of Incorporation nor the Restated
Bylaws of the Company contains any such exclusion, although the Board of
Directors has excluded the stockholders of the Company prior to the offering
from the coverage of Section 203.
50
<PAGE> 51
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 other against certain
liabilities, including certain liabilities under the Securities Act, or will be
entitled to contribution in connection therewith.
51
<PAGE> 52
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 Sims Moss Kline & Davis a Limited Liability Partnership,
Atlanta, Georgia.
EXPERTS
The balance sheets as of December 31, 1996 and 1997 and the statements of
operations, stockholders' equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997, included in this Registration
Statement, have been included herein in reliance on the report, which includes
an explanatory paragraph relating to the uncertainty of the Company's ability to
continue as a going concern, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other information
with the Securities and Exchange Commission (the "Commission"). Such reports,
proxy and information statements, and other information filed by the Company can
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the regional offices of the Commission located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy
statements and other information can also be inspected at the offices of the
National Association of Securities Dealers, Inc. at 1735 K Street, N.W.,
Washington, D.C. 20006. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements, and other information that
are filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval System. This Web site can be accessed at http://www.sec.gov.
The Company has filed with the Commission two Registration Statements on
Form S-1 (together with all amendments and exhibits thereto, the "Registration
Statements") under the Securities Act with respect to the Offered Shares and
shares of Common Stock issuable upon conversion of the Debentures. This
Prospectus does not contain all of the information set forth in the Registration
Statements and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, the Debentures, the Series A
Preferred Stock and the shares of Common Stock offered by such Registration
Statements, reference is made to the Registration Statements and the exhibits
and schedules thereto. Statements contained in this Prospectus as to the
contents of any contract or other document are not necessarily complete and, in
each instance, reference is made to the copy of such contract or document filed
as an exhibit to the Registration Statements, each such statement being
qualified in all respects by such reference. Copies of the Registration
Statements, including all exhibits thereto, may be obtained from the
Commission's principal office in Washington, D.C. upon payment of the fees
prescribed by the Commission, or may be examined without charge at the offices
of the Commission described above.
52
<PAGE> 53
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of December 31, 1996 and 1997............. F-3
Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1997............................ F-4
Statements of Stockholders' Equity (Deficit) for Each of the
Three Years in the Period Ended December 31, 1997......... F-5
Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1997............................ F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
HOMECOM COMMUNICATIONS, INC.
We have audited the accompanying balance sheets of HomeCom Communications,
Inc. as of December 31, 1996 and 1997, and the related statements of operations,
stockholders' equity (deficit) and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of HomeCom Communications, Inc.
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred net losses from operations since
its incorporation and has an accumulated deficit that raises substantial doubt
about its ability to continue as a going concern. The financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
COOPERS & LYBRAND L.L.P.
Atlanta, Georgia
March 13, 1998
F-2
<PAGE> 55
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1996 1997
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 332,377 $3,187,948
Accounts receivable....................................... 488,254 470,839
Other current assets...................................... 621 --
---------- ----------
Total current assets.............................. 821,252 3,658,787
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 359,260 627,624
SOFTWARE DEVELOPMENT COSTS, NET............................. 81,520 31,778
DEPOSITS.................................................... 57,527 55,731
DEFERRED DEBT ISSUE COSTS................................... -- 248,359
DEFERRED OFFERING COSTS..................................... 406,963 --
OTHER NON-CURRENT ASSETS.................................... -- 42,500
---------- ----------
Total assets...................................... $1,726,522 $4,664,779
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 649,794 $ 427,886
Accrued salaries and payroll taxes payable................ 309,377 235,103
Accrued vacation.......................................... 14,935 29,077
Current portion of notes payable to stockholders.......... 989,904 --
Current portion of note payable to bank................... 13,614 --
Unearned revenue.......................................... 133,170 190,978
Current portion of obligations under capital leases....... 15,140 53,813
---------- ----------
Total current liabilities......................... 2,125,934 936,857
CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $122,778......... -- 1,577,222
NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 55,677 --
NOTE PAYABLE TO BANK........................................ 47,032 --
OTHER LIABILITIES........................................... 73,424 119,141
OBLIGATIONS UNDER CAPITAL LEASES............................ 45,124 74,787
---------- ----------
Total liabilities................................. 2,347,191 2,708,007
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value, 15,000,000 shares
authorized, 1,923,063 and 2,956,396 shares issued and
outstanding at December 31, 1996 and 1997,
respectively........................................... 192 295
Preferred stock, $.01 par value, 1,000,000 shares
authorized, 20,000 shares issued and outstanding at
December 31, 1997; participating; $2,000,000
liquidation value...................................... -- 200
Additional paid-in capital................................ 472,726 7,800,542
Subscriptions receivable.................................. (468,004) (337,501)
Accumulated deficit....................................... (625,583) (5,506,764)
---------- ----------
Total stockholders' equity (deficit).............. (620,669) 1,956,772
---------- ----------
Total liabilities and stockholders' equity
(deficit)....................................... $1,726,522 $4,664,779
========== ==========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-3
<PAGE> 56
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1996 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
NET SALES:
Service sales............................... $ 327,574 $2,112,878 $ 2,792,306
Equipment sales............................. -- 185,977 86,322
---------- ---------- -----------
Total net sales..................... 327,574 2,298,855 2,878,628
---------- ---------- -----------
COST OF SALES:
Cost of services............................ 59,871 546,409 1,645,646
Cost of equipment sold...................... -- 128,938 68,974
---------- ---------- -----------
Total cost of sales................. 59,871 675,347 1,714,620
---------- ---------- -----------
GROSS PROFIT.................................. 267,703 1,623,508 1,164,008
---------- ---------- -----------
OPERATING EXPENSES:
Sales and marketing......................... 124,253 845,690 1,367,247
Product development......................... 20,239 78,887 435,810
General and administrative.................. 121,313 1,194,728 3,553,473
Depreciation and amortization............... 3,722 85,068 238,537
---------- ---------- -----------
Total operating expenses............ 269,527 2,204,373 5,595,067
---------- ---------- -----------
OPERATING LOSS................................ (1,824) (580,865) (4,431,059)
OTHER EXPENSES (INCOME)
Interest expense............................ 3,469 51,272 543,420
Other expense (income), net................. 147 (6,554) (93,298)
---------- ---------- -----------
LOSS BEFORE INCOME TAXES...................... (5,440) (625,583) (4,881,181)
INCOME TAXES.................................. -- -- --
---------- ---------- -----------
NET LOSS...................................... $ (5,440) $ (625,583) $(4,881,181)
========== ========== ===========
BASIC AND DILUTED LOSS PER SHARE.............. $ (.00) $ (.34) $ (1.88)
========== ========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.... 1,850,447 1,862,223 2,602,515
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-4
<PAGE> 57
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------ ------ --------- --------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994................... 0 0 1,000 $ 27,706
Net loss..................................... -- -- -- -- --
------ ---- --------- --------- ----------
BALANCE, December 31, 1995................... 0 0 1,000 27,706 0
Conversion from S to C Corporation........... $ (22,892)
Issuance of stock............................ 19,663 468,104
Net loss
Stock split and recapitalization to $0.0001
par value.................................. -- -- 1,902,400 (495,618) 495,618
------ ---- --------- --------- ----------
BALANCE, December 31, 1996................... 0 0 1,923,063 192 472,726
Conversion of note payable to common
shares..................................... 33,333 3 199,997
Issuance of common shares, net of offering
costs...................................... 1,000,000 100 4,672,489
Issuance of preferred shares, net of offering
costs...................................... 20,000 $200 1,799,052
Issuance of warrants and compensatory stock
options.................................... 89,611
Cancellation of subscriptions receivable
under employment agreements
Favorable conversion feature of convertible
debentures................................. 566,667
Net loss..................................... -- -- -- -- --
------ ---- --------- --------- ----------
BALANCE, December 31, 1997................... 20,000 $200 2,956,396 $ 295 $7,800,542
====== ==== ========= ========= ==========
</TABLE>
<TABLE>
<CAPTION>
SUBSCRIPTIONS ACCUMULATED TOTAL STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY (DEFICIT)
------------- ----------- -------------------
<S> <C> <C> <C>
BALANCE, December 31, 1994........................... -- $ (17,452) $ 10,254
Net loss............................................. -- (5,440) (5,440)
--------- ----------- -----------
BALANCE, December 31, 1995........................... 0 (22,892) 4,814
Conversion from S to C Corporation................... 22,892 --
Issuance of stock.................................... $(468,004) 100
Net loss............................................. (625,583) (625,583)
Stock split and recapitalization to $0.0001 par
value.............................................. -- -- --
--------- ----------- -----------
BALANCE, December 31, 1996........................... (468,004) (625,583) (620,669)
Conversion of note payable to common shares.......... 200,000
Issuance of common shares, net of offering costs..... 4,672,589
Issuance of preferred shares, net of offering
costs.............................................. 1,799,252
Issuance of warrants and compensatory stock
options............................................ 89,611
Cancellation of subscriptions receivable under
employment agreements.............................. 130,503 130,503
Favorable conversion feature of convertible
debentures......................................... 566,667
Net loss............................................. -- (4,881,181) (4,881,181)
--------- ----------- -----------
BALANCE, December 31, 1997........................... $(337,501) $(5,506,764) $ 1,956,772
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements.
F-5
<PAGE> 58
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $ (5,440) $(625,583) $(4,881,181)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation.............................................. 3,722 79,064 183,262
Amortization of assets under capital leases............... -- 6,004 55,275
Amortization of software development costs................ -- 2,662 218,576
Amortization of debt discount............................. -- -- 443,889
Amortization of debt issue costs.......................... -- -- 22,578
Provision for bad debts................................... 2,485 104,360 244,893
Cancellation of subscriptions receivable under employment
agreements.............................................. -- -- 130,501
Deferred rent expense..................................... -- 73,424 45,717
Change in operating assets and liabilities:
Accounts receivable..................................... (88,810) (506,289) (227,478)
Accounts payable and accrued expenses................... 14,287 316,641 (221,908)
Accrued salaries and payroll taxes payable.............. 25,010 284,367 (74,274)
Unearned revenue........................................ 42,479 90,691 57,808
Other................................................... (148) (41,266) (21,674)
-------- --------- -----------
Net cash used in operating activities.............. (6,415) (215,925) (4,024,016)
-------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of furniture, fixtures and equipment............ (33,737) (349,646) (387,209)
Software development costs................................ -- (84,182) (168,834)
-------- --------- -----------
Net cash used in investing activities.............. (33,737) (433,828) (556,043)
-------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common shares, net of underwriting
discounts and commissions............................... 100 5,520,000
Payment of deferred offering costs........................ -- (88,096) (415,448)
Proceeds from issuance of preferred shares and warrants... -- -- 2,000,000
Payment of preferred stock issue costs.................... -- -- (190,748)
Proceeds from issuance of convertible debentures and
warrants................................................ -- -- 1,700,000
Payment of deferred debt issue costs...................... -- -- (220,937)
Proceeds from note payable................................ -- 70,000 --
Repayment of note payable................................. -- (9,354) (60,646)
Proceeds from notes payable to stockholders............... 163,497 889,904 490,000
Repayment of notes payable to stockholders................ (2,705) (5,115) (1,335,581)
Repayment of capital lease obligations.................... -- (4,404) (51,010)
-------- --------- -----------
Net cash provided by financing activities.......... 160,792 853,035 7,435,630
-------- --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 120,640 203,282 2,855,571
CASH AND CASH EQUIVALENTS at beginning of period............ 8,455 129,095 332,377
-------- --------- -----------
CASH AND CASH EQUIVALENTS at end of period.................. $129,095 $ 332,377 $ 3,187,948
======== ========= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON
CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for interest.................. $ 3,469 $ 6,277 $ 56,365
======== ========= ===========
Capital lease obligations incurred during year on lease of
computer equipment........................................ -- $ 64,667 $ 119,346
======== ========= ===========
Conversion of notes payable to affiliate to common stock.... -- -- $ 200,000
======== ========= ===========
Issuance of warrants and compensatory stock options......... -- -- $ 89,611
======== ========= ===========
</TABLE>
The accompanying notes are an integral part of these Financial Statements
F-6
<PAGE> 59
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS
HomeCom Communications, Inc. (the "Company") develops and markets
specialized software applications and products and provides services that enable
businesses to use the Internet and Intranets to obtain and communicate important
business information, conduct commercial transactions and improve business
productivity. HomeCom provides Internet/Intranet services in one business
segment in five integrated areas: customized software applications design,
development and integration; World Wide Web site development; Internet
outsourcing services; specialized Internet-enabled software products; and
security consulting and integration services.
BASIS OF PRESENTATION -- GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplate the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has incurred net losses from operations since its
incorporation, has an accumulated deficit at December 31, 1997, and has used
substantial cash in its operations which raises substantial doubt about the
Company's ability to continue as a going concern. Management believes that
future debt and equity offerings, successful commercialization of its products
and services, and sales of non-strategic service lines will generate the
required capital necessary to continue as a going concern.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, management considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are shown net of the allowance for doubtful accounts.
The allowance was $106,845 and $160,551 at December 31, 1996 and 1997,
respectively.
FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation, which is computed using the straight-line method over the
estimated useful lives of the related assets (three to five years). Assets
recorded under capital leases are amortized over the shorter of their useful
lives or the term of the related leases using the straight line method.
Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income.
SOFTWARE DEVELOPMENT COSTS, NET
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting For Costs
of Computer Software To Be Sold, Leased, or
F-7
<PAGE> 60
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Otherwise Marketed". The capitalization of these costs begins when a product's
technological feasibility has been established and ends when the product is
available for general release to customers. Amortization is computed on an
individual product basis and is the greater of (a) the ratio of current gross
revenues for a product to the total current and anticipated future gross
revenues for the product or (b) the straight-line method over the estimated
economic life of the product. Amortization of capitalized software development
costs totaled $2,662 and $218,576 in 1996 and 1997, respectively. These expenses
are included in cost of sales. As of December 31, 1997, software development
costs were $31,778, net of $221,238 of accumulated amortization.
DEFERRED DEBT ISSUE COSTS
Costs in connection with the Company's offering of convertible debentures
have been deferred and will be amortized over the term of the debt. As of
December 31, 1997, deferred debt issue costs were $248,359, net of amortization
of $22,578.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts reported in the balance sheet for the Company's notes
payable and capital lease obligations approximate fair value.
REVENUE RECOGNITION
The Company recognizes revenues on web page development and specialized
software application contracts using the percentage-of-completion method. The
percentage of completion is determined by relating the actual hours of work
performed to date to the current estimated hours at completion of the respective
contracts. Earned revenue is based on the percentage that incurred hours to date
bear to total estimated hours after giving effect to the most recent estimates
of total hours. Earned revenue reflects the original contract price adjusted for
agreed upon claim and change order revenue, if any. If estimated total costs on
any of these contracts indicate a loss, the entire amount of the estimated loss
is recognized immediately. Revenues related to other services are recognized as
the services are performed. Revenues from equipment sales and related costs are
recognized when products are shipped to the customer. Unearned revenue, as
reflected on the accompanying balance sheet, represents the amount of billings
recorded on contracts in advance of services being performed.
ADVERTISING EXPENSES
All advertising costs are expensed when incurred. Advertising expenses were
approximately $211,000 and $724,000 for the years ended December 31, 1996 and
1997, respectively.
INCOME TAXES
Prior to February 9, 1996, the Company qualified as an S Corporation for
federal and state income tax purposes. Accordingly, no provision was made for
income taxes for its operations prior to February 9, 1996. Effective February 9,
1996, the Company converted from an S corporation to a C corporation for income
tax purposes and is, therefore, subject to corporate income taxes. Deferred
income tax assets and liabilities reflect differences between the bases of the
Company's assets and liabilities for financial reporting and income tax
purposes. The net deferred income tax asset of approximately $2,080,000 at
December 31, 1997 is primarily due to operating loss carryforwards generated
since February 9, 1996 and is fully offset by a valuation allowance. The effect
of a change in the valuation allowance that results from a change in
circumstances that causes a change in judgment about the realizability of the
related deferred tax asset in future years would be included in income in that
period.
F-8
<PAGE> 61
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As a result of termination of the S Corporation in February 1996, the
accumulated deficit as of that date was transferred to additional paid-in
capital.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated according to
the provisions of Statement of Accounting Standards No. 128, "Earnings per
Share" ("FAS 128"). Due to the net loss position of the Company for each of the
three years in the period ending December 31, 1997, the numerator and
denominator is the same for both basic and diluted EPS.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes
standards for reporting and display of comprehensive income and its components,
and is effective for fiscal years beginning after December 15, 1997. The
adoption of FAS 130 is not expected to have a material effect on the Company's
disclosures.
In June 1997, Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") was issued. FAS 131 is designed to improve the information provided in
financial statements about the different types of business activities in which
the enterprise engages and economic environments in which the enterprise
operates, and is effective for fiscal years beginning after December 15, 1997.
The adoption of FAS 131 is not expected to have a material effect on the
Company's disclosures.
In October 1997, the American Institute of Certified Public Accountants
issued Statement of Position 97-2 "Software Revenue Recognition" ("SOP 97-2").
SOP 97-2 provides guidance on applying generally accepted accounting principles
in recognizing revenue on software transactions, and is effective for
transactions entered into in fiscal years beginning after December 31, 1997. The
adoption of SOP 97-2 is not expected to have a material effect on the Company's
financial statements.
In early 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance
on accounting for the costs of computer software developed or obtained for
internal use, and is effective for fiscal years beginning after December 31,
1998. The adoption of SOP 98-1 is not expected to have a material effect on the
Company's financial statements.
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET:
Furniture, fixtures and equipment, net, are comprised of the following as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1997
-------- --------
<S> <C> <C>
Furniture and fixtures...................................... $145,066 $191,107
Computer equipment.......................................... 238,317 579,486
Computer equipment under capital leases..................... 64,667 184,012
-------- --------
448,050 954,605
Less: accumulated depreciation and amortization............. (88,790) (326,981)
-------- --------
$359,260 $627,624
======== ========
</TABLE>
F-9
<PAGE> 62
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. NOTES PAYABLE:
Notes payable are comprised of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
Convertible debentures (interest accrues at 5%; 19%
effective rate), payable September 22, 2000,
non-collateralized, convertible at the option of the
holders into shares of the Company's common stock, net of
unamortized discount of $122,778 (See note 6)............. -- $1,577,222
Promissory note payable to a spouse of a stockholder
(interest accrues at 8%); the Company issued 33,333 shares
in satisfaction of the principal amount payable under the
note in May 1997.......................................... $ 200,000 --
Promissory notes payable to stockholders and affiliates
(interest accrues at 8%), balance paid during May 1997.... 789,904 --
Promissory notes payable to a stockholder (interest accrues
at the prime rate plus 1%), balance paid during May
1997...................................................... 55,677 --
Promissory note payable to a bank (interest accrues at the
prime rate plus 1.5%), balance paid during May 1997....... 60,646 --
---------- ----------
1,106,227 1,577,222
Less current maturities of notes payable.................... 1,003,518 --
---------- ----------
$ 102,709 $1,577,222
========== ==========
</TABLE>
Future principal payments on notes payable at December 31, 1997 are as
follows:
<TABLE>
<S> <C>
1998........................................................ --
1999........................................................ --
2000........................................................ $1,700,000
2001........................................................ --
2002........................................................ --
</TABLE>
4. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2003. During 1997, the Company entered into
several capital leases to purchase computer equipment.
F-10
<PAGE> 63
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
-------- ----------
<S> <C> <C>
1998........................................................ $ 62,136 $ 582,308
1999........................................................ 60,190 596,917
2000........................................................ 15,937 606,634
2001........................................................ 537 410,261
2002........................................................ -- 254,324
-------- ----------
Total minimum lease payments...................... 138,800 $2,450,444
==========
Less amount representing interest........................... (10,200)
--------
Present value of minimum lease payments..................... 128,600
Less: current portion....................................... (53,813)
--------
$ 74,787
========
</TABLE>
During May 1997, the Company executed five-year leases for new office space
in New York City, Vienna, Virginia and Atlanta, Georgia. The total amount of the
base rent payments is being charged to expense on a straight-line method over
the term of these leases. The Company has recorded a deferred credit to reflect
the excess of rent expense over cash payments since inception of the leases.
Rental expense under operating leases was $22,188, $226,700 and $506,844,
for the years ended December 31, 1995, 1996 and 1997, respectively.
Various legal proceedings may arise in the normal course of business.
Additionally, the Company's software and equipment are vulnerable to computer
viruses or similar disruptive problems caused by customers or other Internet
users. Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. Although the Company attempts to limit its liability
to customers for these types of risks through contractual provisions, there can
be no assurance that these provisions will be enforceable. Management does not
believe that there are currently any asserted or unasserted claims that will
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
5. CONCENTRATION OF CREDIT RISKS:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable.
The Company places its cash and cash equivalents with quality financial
institutions.
Concentration of credit risk with respect to trade receivables is monitored
by the Company through ongoing credit evaluations of its customers' financial
condition. The Company's sales to its five largest customers represented
approximately 26% and 15% of total revenues for the years ended December 31,
1996 and 1997, respectively. No company accounted for more than 10% of the
revenues of the Company during
F-11
<PAGE> 64
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
1997. The five most significant customer balances represented approximately 39%
and 26% of the accounts receivable balance at December 31, 1996 and 1997,
respectively.
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS:
All share and per share amounts presented below have been adjusted to
reflect the 93.07-for-one stock split effective September 11, 1996.
During 1995, the Company issued warrants to its former Board of Advisors to
purchase 37,228 shares of common stock for total consideration of $4.00. The
warrants were granted at the fair market value of the common stock at the time
of issuance. These warrants were exercised in August 1996.
During February 1996, the Company issued 707,332 additional shares to the
previous sole stockholder, 93,070 shares to an executive officer of the Company
pursuant to the exercise of options granted in connection with the founding of
the Company, and 893,472 shares to four private investors.
In August 1996, the Company sold to certain key employees an aggregate of
102,855 shares of common stock for an aggregate consideration of $468,004,
payable through the issuance of promissory notes payable in four equal
installments, bearing interest at 8% per annum and secured by the shares of
common stock purchased therewith. Also in August 1996, the Company entered into
employment agreements with such persons which provide that, assuming continued
employment with the Company, for each of the first four years of employment, the
Company will issue a bonus to the employee in the amount necessary to repay the
annual amount due under such promissory note (plus the taxes due by the employee
as a consequence of receiving such bonus). Pursuant to the terms of the
employment agreements, the Company will continue to make these annual payments
if the employee is terminated other than "for cause," as defined in the
employment agreements. Pursuant to the terms of the subscription agreements for
such shares, if the employee's employment is terminated within such four-year
period, the Company has the right to repurchase that percentage of the shares
purchased by the employee which shall equal the percentage of the promissory
note which is not yet due, payment for such repurchase to be made by canceling
the applicable outstanding amount of the promissory note. For financial
reporting purposes, these notes receivable have been presented as a separate
component of stockholders' equity.
In September 1996, the Company amended and restated its Certificate of
Incorporation (i) to reclassify its common stock from no par value stock to
stock with a par value of $0.0001 per share, (ii) to increase the authorized
shares of common stock to 15,000,000, and (iii) to authorize the issuance of
1,000,000 shares of $0.01 par value preferred stock. In addition, the Board of
Directors approved a 93.07-for-one stock split effected in the form of a stock
dividend, whereby each common stockholder of record as of September 11, 1996
received 92.07 additional shares of common stock for each share owned as of the
record date. As a result of the stock split and recapitalization, 1,902,400
shares were issued and $495,618 was transferred from Common Stock to Paid-in
Capital. Weighted average common shares outstanding and per share amounts for
all periods presented have been restated to reflect the stock split.
In May 1997, the Company completed an initial public offering of its common
stock. The Company issued 1,000,000 shares at an initial public offering price
of $6.00 per share. The total proceeds of the offering, net of underwriting
discounts, commissions and offering expenses, were approximately $4,700,000. The
Company used a portion of the proceeds from the initial public offering to repay
outstanding principal amounts of approximately $1,300,000 loaned to the Company
by stockholders and affiliates plus accrued interest of approximately $65,000.
The Company issued 33,333 shares of common stock as payment in full of the
outstanding principal balance of a $200,000 loan from an investor.
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter warrants to acquire 100,000 shares
of the Company's common stock at an exercise price of $7.20
F-12
<PAGE> 65
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
per share. The exercise price is subject to adjustment under certain
circumstances. These warrants expire on May 12, 2002 if not earlier exercised.
In September 1997, the Company issued $1,700,000 of 5% convertible
debentures due September 22, 2000. The debentures are convertible into shares of
the Company's common stock at the lesser of (a) 75% of the closing bid price of
the common stock on the Nasdaq SmallCap(TM) Market for the three trading days
preceding notice of conversion; or (b) $4.00. The number of shares issuable upon
conversion of the debentures is equal to the aggregate principal balance of the
debentures divided by the conversion price. Net proceeds to the Company from the
issuance of the debentures totaled approximately $1,500,000. Outstanding
principal and interest on the debentures is payable on September 22, 2000. The
debentures are convertible at the option of the holders. Due to the beneficial
conversion feature of the debentures, a portion of the proceeds ($566,667) has
been allocated to additional paid-in capital. The corresponding discount on the
debentures will be amortized over the period from the date the debentures first
become convertible as a non-cash charge to interest expense. Events of default
include, among others, the common stock of the Company being delisted from
trading on the Nasdaq SmallCap(TM) Market, unless it is there upon admitted to
trading on a national stock exchange, or waived by the holders. In connection
with the issuance of the debentures, the Company agreed to issue to a broker
designated by the purchaser of the debentures three-year warrants to acquire an
aggregate 400,000 shares of common stock. These warrants were issued in October
1997. Of these warrants, warrants to purchase an aggregate 200,000 shares of
common stock are exercisable at a price of $4.00 per share, and warrants to
purchase the remaining 200,000 shares of common stock are exercisable at a price
of $6.00 per share. If not earlier exercised, the warrants expire on October 27,
2000.
In December 1997, the Company issued 20,000 shares of its Series A
preferred stock for an aggregate purchase price of $2,000,000. Costs in
connection with the offering have been netted against the gross proceeds of the
offering. Net proceeds to the Company from the Series A preferred sale were
approximately $1,800,000.
The Series A preferred stock is convertible at the option of the holder
into a number of shares of common stock equal to the quotient of (a) the product
of the number of shares of Series A preferred stock being converted multiplied
by $100.00 divided by (b) the then-applicable conversion price. The Series A
preferred conversion price is the lesser of (i) 80% of the average closing bid
price of the Company's common stock for the five trading days ending on the day
the Company actually receives a conversion notice; or (ii) $14.50625. The Series
A preferred conversion price is subject to adjustment under certain
circumstances. A discount of $500,000 results from an allocation of the proceeds
to the beneficial conversion feature. This discount is analogous to a dividend
and will be recognized as a return to the Series A preferred holders over the
minimum period such holders realize that return. The shares may be redeemed by
the Company at a price equal to 125% of the sum of the liquidation value of $100
per share plus all accrued and unpaid dividends.
In connection with the issuance and sale of the Series A preferred stock,
the Company granted the Series A preferred warrants to acquire an aggregate of
75,000 shares of Common Stock, with warrants to purchase 62,500 shares of common
stock having an exercise price per share equal to $14.50625 and warrants to
purchase 12,500 shares of common stock having an exercise price per share equal
to $15.825. The Company also granted 50,000 warrants to a placement agent at an
exercise price of $15.825 per share. The Series A preferred stock warrants will
expire on December 31, 2000.
The 625,000 warrants issued in 1997 were at a weighted average exercise
price and weighted average fair value of $7.39 and $.14, respectively. At
December 31, 1997, 550,000 of the warrants are exercisable.
7. STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996. Shares of common stock
may be sold or awarded to officers, key employees
F-13
<PAGE> 66
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
and consultants. The Company has reserved 600,000 shares of common stock for
issuance under the Stock Option Plan. Options granted under the Stock Option
Plan may be either (i) options intended to qualify as "incentive stock options"
under Section 422 of the Internal Revenue Code or (ii) non-qualified stock
options.
During 1997, the Company granted options to purchase shares under the Stock
Option Plan. The options vest 25% per year and expire ten years after the grant
date. The exercise price of the grants was made at or above the fair market
value of the stock on the grant date.
The Company's Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") was adopted by the Company's stockholders in September 1996. Shares of
common stock may be sold or awarded to directors who are not officers or
employees of the Company ("Non-Employee Directors"). The Company has reserved
300,000 shares of common stock for issuance under the Directors' Plan.
The Directors' Plan provides for the automatic granting of an option to
purchase 10,000 shares of common stock to each Non-Employee Director who is
first appointed or elected to the Board of Directors. Also, each Non-Employee
Director is automatically granted an option to purchase 5,000 shares of common
stock on the date of each annual meeting of the Company's stockholders.
Furthermore, the Directors' Plan allows the Board of Directors to make
extraordinary grants of options to Non-Employee Directors.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation ("FAS 123"). This statement requires that companies with
stock-based compensation plans either recognize compensation expense based on
new fair value accounting method or continue to apply the provisions of
Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and disclose pro forma net
income and earnings per share assuming the fair value method had been applied.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. The Company has recognized no
compensation expense for options issued to employees and non-employee directors.
For the year ended December 31, 1997, the Company recognized $4,611 in
compensation expense for stock issued to non-employees.
Pro forma information regarding net income and earnings per share is
required by FAS 123 and has been determined as if the Company had accounted for
its employee stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for 1996 and 1997, respectively: risk-free interest rate of 6.46%
and 5.93%; volatility factors of the expected market price of the Company's
common stock of 80% and 90%; and weighted average expected life of the options
of four and five years.
Had compensation cost for the Company's stock-based compensation plans been
determined under the provisions consistent with FAS 123, the Company's net loss
and loss per share for the years ended December 31, 1996 and 1997, would have
been the pro forma amounts listed below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Net Loss:
As reported............................................... $(625,583) $(4,881,181)
Pro forma................................................. (676,776) (5,025,199)
Basic and diluted loss per share:
As reported............................................... $ (0.34) $ (1.88)
Pro forma................................................. $ (0.36) $ (1.93)
</TABLE>
F-14
<PAGE> 67
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Option activity under all of the stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1996 1997
-------------------------- ---------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- ---------------- -------- ----------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year..... 0 $ -- 220,543 $6.30
Granted.............................. 229,167 6.30 599,555 5.26
Exercised............................ 0 -- 0 --
Forfeited............................ (8,624) 6.19 (398,938) 5.80
------- --------
Outstanding at end of year........... 220,543 6.30 421,160 4.95
======= ========
Options exercisable at year end...... 0 3,090
======= ========
Shares available for future grant.... 79,457 178,840
======= ========
Weighted-average fair value of
options granted during the year.... $ 2.03 $ 3.71
======= ========
</TABLE>
The following table summarizes information about fixed options outstanding
at December 31, 1997.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE PRICES SHARES REMAINING CONTRACTUAL LIFE
--------------- ------- --------------------------
<S> <C> <C>
$4.06 229,000 9.5
4.55 12,361 8.7
6.00 118,799 9.4
6.13 42,000 9.5
8.06 19,000 9.8
-------
421,160
=======
</TABLE>
At December 31, 1997, 3,090 shares are exercisable at a weighted-average
exercise price of $4.55.
8. ACQUISITION:
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. ("HISS"), a start-up company formed in
July 1996 to provide Internet and Intranet security system consulting services.
Consideration to the former holders of HISS's capital stock consisted of the
right to receive their pro rata share of four annual earnout payments to be paid
not later than March 31, 1998, 1999, 2000 and 2001. As of December 31, 1997, the
Company has a maximum potential liability under the earnout agreement of
approximately $113,000, payable in common stock or cash at the Company's option.
The ultimate earnout is not currently determinable due to HISS net income
limitations.
9. RELATED PARTY TRANSACTIONS:
The Company has entered into an employment agreement with its Chief
Executive Officer and principal stockholder which expires December 31, 2000.
Interest expense on notes payable to stockholders and affiliates of
stockholders was approximately $3,000, $45,000, and $51,000, in 1995, 1996, and
1997, respectively.
F-15
<PAGE> 68
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
10. INCOME TAXES:
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows, as of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1997
--------- -----------
<S> <C> <C>
Temporary differences:
Allowance for uncollectibles.............................. $ 40,601 $ 61,009
Vacation accrual.......................................... 5,675 11,049
Depreciation.............................................. 4,820 2,317
Deferred rent expense..................................... 27,901 45,274
Software development expenses............................. (29,515) 55,599
--------- -----------
49,482 175,248
Net operating loss carryforward............................. 190,156 1,903,040
--------- -----------
Deferred tax asset.......................................... 239,638 2,078,288
Valuation allowance......................................... (239,638) (2,078,288)
--------- -----------
Net deferred tax asset............................ $ 0 $ 0
========= ===========
</TABLE>
At December 31, 1997, the Company had net operating loss carryforwards for
income tax purposes of $5,008,001, of which $411,227 expire in 2011 and
$4,596,774 expire in 2012. Realization of these assets is contingent on having
future taxable earnings. In addition, certain stock transactions during the year
resulted in the Company incurring an ownership change as defined in Internal
Revenue Code Section 382. The result of this ownership change is to
substantially limit the utilization of the Company's net operating loss carry-
forwards in the future. Based on the cumulative losses in recent years and the
limitation and the use of the company's net operating losses management believes
that a full valuation allowance should be recorded against the deferred tax
asset. The income tax benefit differs from the amounts computed by applying the
Federal statutory rate of 34% to loss before taxes principally as a result of
the recording of the valuation allowance.
F-16
<PAGE> 69
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN
NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Forwarding-Looking Statements.......... 7
Risk Factors........................... 8
Use of Proceeds........................ 15
Price Range of Common Stock............ 15
Dividend Policy........................ 15
Selected Financial Data................ 16
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 17
Business............................... 23
Management............................. 33
Certain Transactions................... 39
Recent Transactions.................... 41
Principal and Selling Stockholders..... 43
Description of Securities.............. 45
Plan of Distribution................... 51
Legal Matters.......................... 52
Experts................................ 52
Available Information.................. 52
Index to Financial Statements.......... F-1
</TABLE>
======================================================
======================================================
HOMECOM
COMMUNICATIONS,
INC.
UP TO 1,142,858 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
---------------------
May 14, 1998
======================================================
