<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
<TABLE>
<C> <S>
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
</TABLE>
COMMISSION FILE NUMBER: 0-29204
HOMECOM COMMUNICATIONS, INC.
(Exact name of registrant specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2153309
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
</TABLE>
BUILDING 14, SUITE 100
3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(Address of principal executive offices and zip code]
Registrant's Telephone Number, Including Area Code:
(404) 237-4646
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
- ----------------------------------------------------------- -----------------------------------------------------------
<S> <C>
Common Stock, par value $0.0001 per share The Nasdaq SmallCap-TM- Market
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average of the closing bid and ask quotations for the
Common Stock on March 26, 1999 as reported by The Nasdaq Stock Market, was
approximately $30,505,000. The shares of Common Stock held by each officer and
director and by each person known to the company who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 26, 1999, Registrant
had outstanding 6,399,571 shares of Common Stock.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. DESCRIPTION PAGE NO.
- -------- -------------------------------------------------- --------
<S> <C><C> <C>
PART I
1. BUSINESS.......................................... 1
2. PROPERTIES........................................ 6
3. LEGAL PROCEEDINGS................................. 6
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS........................................... 7
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS............................... 7
6. SELECTED FINANCIAL DATA........................... 8
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............... 9
8. FINANCIAL STATEMENTS.............................. 14
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE............... 32
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT........................................ 32
11. EXECUTIVE COMPENSATION............................ 32
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.................................... 32
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.... 32
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K............................... 32
SIGNATURES........................................ 32
</TABLE>
ii
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
HomeCom Communications, Inc. is a Delaware corporation, organized in 1994 to
provide advanced software applications and integration services to businesses
seeking to take advantage of the Internet. In the fourth quarter of 1997, the
Company made a strategic decision to move away from horizontally focused
Internet Web design and hosting services to become a vertically focused
financial applications and solutions provider to the financial services market,
including banking, insurance, and securities brokerage firms.
HomeCom Communications, Inc. develops and markets specialized software
applications, products and services that enable consumers and financial
institutions to use the Internet and intranets/extranets to obtain and
communicate important business information, conduct commercial transactions and
improve business productivity. HomeCom's principal mission is to enable
financial institutions to establish an electronic channel to consumers and
business by providing secure, innovative, Internet-based solutions to the
banking, insurance and brokerage industries. As a technology provider to this
electronic channel, HomeCom intends to continually enrich the content, host and
maintain its own as well as third party software applications, and to provide
strategic consulting to financial institutions on e-commerce and marketing.
HomeCom derives revenue from software licensing, application development, and
hosting and transactions fees. HomeCom has grown to approximately 100 full-time
employees and occupies approximately 30,000 square feet of office space with
offices in Atlanta, Houston, New York City, and the Washington, D.C. area.
HomeCom's solutions, which are built around industry standards such as Open
Financial Exchange ("OFX"), are designed to enable its clients to increase
revenues, achieve distinct competitive advantages, reduce costs, and improve
customer support. The Company employs full time multimedia artists, Ph.D.
computer programmers, Internet security experts, licensed financial brokers and
agents, and network engineers. HomeCom provides Internet/intranet solutions in
three areas: (i) the design, development and integration of customized software
application, including World Wide Web site development and related network
outsourcing; (ii) the development, sale and integration of HomeCom's existing
software applications into the client's operations; and, (iii) security
consulting and integration services.
PRODUCTS AND SERVICES
Businesses such as banks, brokerage firms, and insurance companies can use
HomeCom's Personal Internet Banker-TM- and InsureRate-TM- software to allow
customers to access account information and insurance quotes. Its
Harvey-TM-software collects demographic information from users for personally
tailored marketing efforts. HomeCom also creates Web sites, designs custom
software for interactive Web sites, intranets/extranets, sells third party
Internet security software, and provides server hosting and outsourcing
facilities.
HomeCom provides its product and service offerings through four distinct but
integrated business units:
- HomeCom Financial Applications, Solutions and Technology ("FAST") creates
Internet and intranet business applications, solutions and technology
focused on the banking, insurance and brokerage client markets.
Applications include software programs ranging from simple mathematical
calculators to extremely sophisticated intranets/extranets communicating
with legacy systems and client/server databases. HomeCom also provides
turnkey hosting and security integration services for these applications.
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- HomeCom's Financial Solutions provides cost effective, one-stop financial
services to the banking, credit union and brokerage industries that allow
customers on-line access to transact personal banking business. HomeCom's
turnkey solutions are targeted to the 14,000 banks and credit unions with
assets between $500 million and $20 billion:
- Personal Internet Banker-TM- ("PIB") provides interactive Internet
banking including bill payment, balance inquiry, funds transfer, and
statement download for checking, savings and credit card accounts.
- Harvey-TM- enables banks to both advertise and market targeted consumers
based on demographics and web site browsing preferences. As consumers
interact with the financial institution's web site, Harvey-TM- mines the
data they enter on application forms, adds information about what they
looked at or clicked on and then combines that information with data
from a variety of legacy systems to dramatically increase the financial
institution's cross selling and profit capability.
- Post on the Fly-TM- Conference is an online bulletin board,
collaboration and conferencing system, allowing customers to capture
their most valuable property--the living, moving body of knowledge
within an organization, its business partners and its customers.
Specifically designed for the needs of financial services companies,
Conference can run unlimited numbers of investor forums, private analyst
meetings, financial planning workshops, or customer support groups.
- HomeCom Internet Security Services ("HISS") provides professional services
to businesses that are concerned about network applications and
information security. Management and technological staff directly support
end customers by offering both consulting and integration engagements.
HomeCom believes HISS world-class services provide a distinct competitive
edge to the financial services industry. Customers include Fortune 500
financial service providers, airlines, energy companies, media
conglomerates, manufacturers and others. Since its inception in 1996, HISS
has successfully completed nearly 50 contract engagements including eleven
with Fortune 500 companies. Its customers include Citicorp, the CIA,
Fiserv, Washington Post, Reebok, Raytheon E-Systems, MCI WorldCom,
Crestar, HomeDepot and others. HISS is the only business unit that
provides services to non-financial institutions. Management believes that
knowledge gained from these assignments serves it well in the financial
services marketplace.
- HomeCom's InsureRate-TM- provides consumer information and education on
insurance via its website--www.insurerate.com. Consumers are also offered
a choice of competitively priced and innovative insurance products for
direct purchase via the Internet. InsureRate's technology makes it a low
cost insurance product vendor. Management also intends to add
broker/dealer operations and expects to derive additional profits by
sharing in the reinsurance product selling agreements and sharing
management fees on client assets that it accumulates. Management expects
to offer a selection of fixed annuity, term life, modified endowment
contracts, long-term care, personal auto, homeowners and other policies.
On March 24, 1999, HomeCom acquired First Institutional Marketing, Inc.
("FIMI") which (i) provides innovative insurance products and marketing
programs for the commercial banking industry, (ii) introduces banks to the
sale of insurance and investment products, and (iii) trains bank personnel
to market and sell leading insurance and investment products to their
customers. The Company plans to combine FIMI and InsureRate-TM- to provide
integrated insurance offerings. InsureRate-TM- will in effect become the
electronic distribution arm of FIMI. FIMI was recognized as the 7th largest
third party marketing company selling insurance products in the banking
channel in 1996 and has sold $2 billion worth of annuities through this
channel. In 1998 FIMI generated approximately $4 million in revenues.
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.
2
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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 the financial services industry.
The Company's staff of 58 full-time software engineers design and develop
custom applications and software products. The Company's software engineers have
experience with various computer operating systems, including Sun Solaris, SGI's
IRIX, Windows NT, Digitars 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.
ACQUISITIONS AND DIVESTITURES
On April 16, 1998, the Company acquired all of the outstanding capital stock
of The Insurance Resource Center, Inc. ("IRC") for 351,391 shares of the
Company's common stock. IRC provides Internet development and hosting services
to the insurance industry and was incorporated into the Company's FAST group.
On November 6, 1998 the Company signed a definitive agreement and plan of
merger (the "Merger Agreement") to acquire, among other things, all of the
outstanding shares of First Institutional Marketing, Inc. and certain of its
affiliates ("FIMI") for 1,252,174 shares of common stock. In addition, the
Company entered into employment agreements for an initial term of 3 years with
the three principals of FIMI, calling for them to continue in their current
roles for the acquired companies. On March 24, 1999, the Company completed this
acquisition.
On June 9, 1998, the Company sold substantially all of the assets of its
HostAmerica Internet network outsourcing services division to Sage Acquisition
Corp. ("Sage") for cash of $4,250,000 and Sage's assumption of approximately
$250,000 of unearned revenue. The Company recorded a gain on the sale of
approximately $4,402,000. This transaction allowed the Company to further
consolidate its business focus on the financial services market.
The Company will seek to make additional strategic and tactical acquisitions
of companies that have developed specific industry expertise or have existing
relationships with large businesses needing Internet/ intranet solutions.
However, the Company has not entered into any additional binding agreements or
commitments. Moreover, the Company has extremely limited sources of cash.
Consequently, the Company has limited resources available to complete an
acquisition and no assurance can be given that the Company will be able to
successfully complete any additional acquisitions.
SALES AND MARKETING
The Company's products and services have been developed to serve the needs
of the financial services market, including banking, insurance, and securities
brokerage. The Company markets its products and services through its direct
sales force, print advertising and its own Web site. The Company also generates
customer leads through its business partner relationships with leading
technology companies. The Company also utilizes traditional print and media
marketing strategies to enhance Company and product name recognition.
3
<PAGE>
In February 1999, HomeCom and USATODAY created a marketing alliance to
provide direct online access and online promotion for InsureRate-TM-. The
agreement should build further momentum for sales to banks, credit unions,
brokerage companies and other financial institutions.
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 application design and development, the Company
competes with numerous businesses that also provide software design and
development services, companies that have developed and market application
specific Internet software products, companies that provide software tools that
enable customers to develop specific Internet-enabled software applications and
companies that choose to develop Internet application products internally.
Andersen Consulting L.L.P., Electronic Data Systems Corporation ("EDS"),
International Business Machines Corporation ("IBM") and Cap Gemini America are
significant custom software developers, integrators and resellers whose services
include a broad range of Internet and Intranet software applications design and
development services. Companies such as Broadvision, Inc., Edify Corporation and
Security First Network Bank have developed application specific Internet
software products that are broadly marketed and licensed and perform such
functions as interactive one-to-one marketing, human resources benefits inquiry,
enrollment and training and Internet banking. In addition, companies that offer
and sell client/server based Internet-enabled software products, such as
Netscape and Microsoft, may in the future bundle software capabilities and
applications with existing products in a manner which may limit the need for
software capabilities and application services such as those offered by the
Company. The Company also competes with the information technology departments
of significant business enterprises who may choose to design and develop their
Internet applications internally. The emergence of sophisticated software
products and tools that enable companies to build customized Internet-enabled
software applications internally also may have the effect of encouraging
internal development and, thus, may materially reduce the demand for the
Company's custom software application services.
The Company's 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-,"
"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
4
<PAGE>
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 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.
CUSTOMERS
During 1996, 1997 and 1998, 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.
EMPLOYEES
At March 26, 1999, the Company employed 103 full-time employees, of whom 58
were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 33 were marketing and sales personnel
and 12 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
5
<PAGE>
be used for those activities. The constitutionality of these provisions was
successfully challenged in federal district court and ultimately found
unconstitutional by the United States Supreme Court in Reno v. American Civil
Liberties Union.
Except for the 1996 Telecommunications Act, the Company does not believe
that it is currently subject to direct regulation by any government agency,
other than regulations applicable to businesses generally, and believes that
there are currently few laws or regulations directly applicable to Web site
service companies. The Federal Communications Commission is studying the
possible regulation of the Internet. Any such regulations adopted by the Federal
Communications Commission may adversely impact the manner in which the Company
conducts its business. It is possible that a number of additional laws and
regulations may be adopted with respect to the Internet, covering issues such as
user privacy, pricing, characteristics, and quality of products and services.
The adoption of any such laws or regulations may decrease the growth of the
Internet, which could in turn decrease the demand for the Company's products and
services and increase the Company's cost of doing business or cause the Company
to modify its operations, or otherwise have an adverse effect on the Company's
business, financial condition and operating results. Moreover, the applicability
to the Internet of existing laws governing issues such as property ownership,
libel, and personal privacy is uncertain. The Company cannot predict the impact,
if any, that future regulation or regulatory changes may have on its business.
In addition, Web site developers such as the Company face potential liability
for the actions of customers and others using their services, including
liability for infringement of intellectual property rights, rights of publicity,
defamation, libel, fraud, misrepresentation, unauthorized computer access,
theft, tort liability and criminal activity under the laws of the U.S., various
states and foreign jurisdictions. Any imposition of liability could have a
material adverse effect on the Company.
In addition, the Company's network services are transmitted to its customers
over dedicated and public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for communications. Changes
in the regulatory environment relating to the telecommunications and media
industry could have an effect on the Company's business, including regulatory
changes which directly or indirectly affect use or access of the Internet or
increase the likelihood or scope of competition from regional telephone
companies, could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company occupies approximately 17,000 square feet in two office
buildings in Atlanta, Georgia under leases expiring in March 2001 and October
2002. These facilities serve as the Company's headquarters and computer center.
The Company also has an office in McLean, Virginia occupying approximately 6,000
square feet under a lease expiring in June 2002, and an office in New York City
occupying approximately 3,400 square feet under a lease expiring in January
2003.
The Company's Internet services are maintained in its key-card
access-secured, dual Leibert air-conditioned Network Operations Center ("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 Simple Network Management Protocol
("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 Synchronous Optical Network
("SONET") and Fiber Distributed Data
6
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Interface ("FDDI") technology. Telecommunications lines are provided through two
physically diverse entrance facilities. The Company has acquired and installed
multiple Cisco routers for connection to the Internet, which automatically
redistribute traffic load in the event of telecommunications failure.
The Company believes that the properties which it currently has under lease
are adequate to serve the Company's business operations for the foreseeable
future. The Company believes that if it were unable to renew the lease on either
of these facilities, it could find other suitable facilities with no material
adverse effect on the Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. From time to
time, the Company is involved in various routine legal proceedings incidental to
the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap-TM- Market under
the symbol "HCOM." The following table shows for the periods indicated the high
and low sale prices for the Common Stock as reported by the Nasdaq SmallCap-TM-
Market.
<TABLE>
<CAPTION>
HIGH LOW
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<S> <C> <C>
1997
Second quarter (since initial public offering--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.............................................................. 18.25 1.13
Third quarter............................................................... 4.94 1.63
Fourth quarter.............................................................. 8.88 1.38
1999
First quarter (through March 26, 1999)...................................... $ 7.63 $ 3.50
</TABLE>
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
7
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of HomeCom Communications, Inc. should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes.
<TABLE>
<CAPTION>
DECEMBER 2
(INCORPORATION) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------
1994 1995 1996 1997 1998
----------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales:
Service sales............................................. $ -- $ 327,574 $2,112,878 $ 2,792,306 $ 2,941,047
Equipment sales........................................... -- -- 185,977 86,322 351,363
----------------- --------- ---------- ----------- -----------
Total net sales....................................... -- 327,574 2,298,855 2,878,628 3,292,410
----------------- --------- ---------- ----------- -----------
Cost of sales:
Cost of services.......................................... -- 59,871 715,377 2,254,200 2,372,617
Cost of equipment sold.................................... -- -- 128,938 68,974 228,694
----------------- --------- ---------- ----------- -----------
Total cost of sales................................... -- 59,871 844,315 2,323,174 2,601,311
----------------- --------- ---------- ----------- -----------
Gross profit................................................ -- 267,703 1,454,540 555,454 691,099
----------------- --------- ---------- ----------- -----------
Operating expenses:
Sales and marketing....................................... 1,045 124,253 962,200 1,499,397 1,392,306
Product development....................................... -- 20,239 78,887 514,655 677,590
General and administrative................................ 16,407 121,313 909,230 2,733,924 3,406,876
Depreciation and amortization............................. -- 3,722 85,068 238,537 542,269
----------------- --------- ---------- ----------- -----------
Total operating expenses.............................. 17,452 269,527 2,035,405 4,986,513 6,019,041
----------------- --------- ---------- ----------- -----------
Operating loss.............................................. (17,452) (1,824) (580,865) (4,431,059) (5,327,942)
Other expenses (income):
Gain on sale of division.................................. -- -- -- -- (4,402,076)
Interest expense, net..................................... -- 3,469 51,272 543,420 445,216
Other expense (income), net............................... -- 147 (6,554) (93,800) (166,942)
----------------- --------- ---------- ----------- -----------
Loss before income taxes.................................... (17,452) (5,440) (625,583) (4,881,181) (1,204,140)
Income taxes................................................ -- -- -- -- --
----------------- --------- ---------- ----------- -----------
Net loss.................................................... (17,452) (5,440) (625,583) (4,881,181) (1,204,140)
Preferred stock dividend.................................... -- -- -- -- (666,667)
----------------- --------- ---------- ----------- -----------
Loss applicable to common shareholders...................... $ (17,452) $ (5,440) $ (625,583) $(4,881,181) $(1,870,807)
----------------- --------- ---------- ----------- -----------
----------------- --------- ---------- ----------- -----------
Basic and diluted loss per share............................ $ (0.01) $ (0.00) $ (0.34) $ (1.88) $ (0.44)
----------------- --------- ---------- ----------- -----------
----------------- --------- ---------- ----------- -----------
Weighted average common shares outstanding.................. 1,850,447 1,850,447 1,862,223 2,602,515 4,287,183
----------------- --------- ---------- ----------- -----------
----------------- --------- ---------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............. $ 8,455 $ 133,792 $(1,304,682) $2,721,930 $2,265,725
Total assets.......................... 10,254 247,382 1,726,522 4,664,779 4,565,490
Long-term obligations................. -- 160,792 147,833 1,652,009 88,242
Total liabilities..................... -- 242,568 2,347,191 2,708,007 1,117,041
Stockholders' equity (deficit)........ 10,254 4,814 (620,669) 1,956,772 3,448,449
</TABLE>
8
<PAGE>
Selected quarterly financial data for the Company is as follows:
<TABLE>
<CAPTION>
Q1 Q2 Q3 Q4
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
1998:
Revenue.............................................. $ 882,427 $ 897,153 $ 711,295 $ 801,535
Gross profit......................................... 369,702 264,299 11,011 91,020
Net income (loss) available to common shareholders... (1,569,630) 2,623,821 (1,616,316) (1,308,682)
Basis and diluted earnings (loss) per share.......... $ (0.51) $ 0.63 $ (0.33) $ (0.26)
1997:
Revenue.............................................. $ 909,177 $ 708,397 $ 713,401 $ 547,653
Gross profit (loss).................................. 444,699 196,774 (58,788) (27,231)
Net loss available to common shareholders............ (374,650) (917,148) (2,095,949) (1,493,434)
Basis and diluted loss per share..................... $ (0.19) $ (0.35) $ (0.71) $ (0.51)
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, some matters discussed
in this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company notes that a variety of
risk factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. Reference is made in particular to the
discussion set forth in the Company's Registration Statements on Forms S-1 (File
Nos. 333-12219, 333-42599, 333-45383 and 333-56795) and S-3 (333-73123).
GENERAL
HomeCom Communications, Inc. specializes in Internet/intranet solutions
software applications, products and services that enable consumers and financial
institutions to interface important business information, conduct commercial
transactions and improve business productivity. HomeCom derives revenue from
software licensing, application development, hosting and transaction fees in
three areas: (i) the design, development and integration of customized software
applications, including World Wide Web site development and related network
outsourcing; (ii) the integration of HomeCom's existing software applications in
to the client's operations; and (iii) security consulting and integration
services.
The Company's revenues and operating results have varied substantially from
period to period, and should not be relied upon as an indication of future
results. The Company historically has operated with no significant backlog
because its services are provided as requested by customers. As a result,
revenues in any period are substantially affected by the amount of services
requested by its customers. An unanticipated termination of a major project, a
client's decision not to pursue a new project or proceed to succeeding stages of
a current project, or the completion during a quarter of several major client
projects, could require the Company to pay underutilized employees and could
therefore have a material adverse effect on the Company's results of operations,
financial condition, and cash flows.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased 14.4% from $2,878,628 in 1997 to $3,292,410
in 1998. Revenues from service sales increased 5.3% from $2,792,306 in 1997 to
$2,941,047 in 1998. This increase of $148,741 is primarily attributable to an
increase in security consulting revenue of approximately $169,000. Revenues
9
<PAGE>
from equipment sales increased from $86,322 in 1997 to $351,363 during 1998 due
to increased sales of security hardware and software.
COST OF SALES. Cost of sales includes salaries for programmers, technical
staff and customer support, as well as a pro-rata allocation of
telecommunications, facilities and data center costs. Cost of sales for services
increased from $2,254,200, or 78.3% of revenues in 1997 to $2,372,617, or 72.1%
of revenues in 1998. This increase reflects increased costs for technical
personnel hired in advance of anticipated revenue growth, offset by costs
eliminated due to the sale of HostAmerica in June 1998. The decrease in cost of
sales as a percentage of revenues is due to the mix of products and services
sold.
GROSS PROFIT. Gross profit increased by $135,645 from $555,454 in 1997 to
$691,099 in 1998. Gross profit margins also increased from 19.3% during 1997 to
21.0% during 1998. This increase as a percentage of net sales is due to the mix
of products and services sold.
SALES AND MARKETING. Sales and marketing expenses include salaries,
variable commissions, and bonuses for the sales force, advertising and
promotional marketing materials, and a pro-rata allocation of
telecommunications, facilities and data center costs. Sales and marketing
expenses decreased 7.1% from $1,499,397 in 1997 to $1,392,306 in 1998. This
decrease was primarily attributable to a decrease in advertising and promotional
marketing materials. As a percentage of net sales, these expenses decreased from
52.1% in 1997 to 42.3% in 1998.
PRODUCT DEVELOPMENT. Product development costs consist of personnel costs
required to conduct the Company's product development efforts, and a pro-rata
allocation of telecommunications, facilities and data center costs. Management
believes that continuing investment in product development is required to
compete effectively in the Company's industry. Total expenditures for product
development were $677,590, or 20.6% of net sales in 1998, of which none were
capitalized. This compares to total product development expenditures of
$683,488, or 23.7% of net sales in 1997, of which $168,833 were capitalized.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as a pro-rata allocation of telecommunications, and facilities
and data center costs. General and administrative expenses increased from
$2,733,924 in 1997 to $3,406,876 in 1998. As a percentage of net sales, these
expenses increased from 95.0% in 1997 to 103.5% in 1998. These increases reflect
additional expenditures for operational and administrative support personnel
incurred to support anticipated growth, professional services for public and
investor relations, and accounting and legal support for the Company's
securities filings and divestiture activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases, and goodwill increased from $238,537, or 8.3% of
net sales in 1997 to $542,269, or 16.5% in 1998, reflecting increased
expenditures on capital equipment and the amortization of goodwill associated
with the IRC acquisition.
OTHER INCOME. During 1998, the Company recorded a gain on the sale of its
HostAmerica division of $4,402,076 (see Note 9).
INTEREST EXPENSE. Interest expense decreased from $543,420 in 1997 to
$445,216 during 1998, due to lower amortization of the discount associated with
the convertible debentures issued in September 1997.
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 decreased from
$185,977 during 1996 to $86,322 during 1997, reflecting lower security hardware
and software sales.
10
<PAGE>
COST OF SALES. Cost of sales for services increased from $715,377, or 31.1%
of revenues in 1996 to $2,254,200, or 78.3% 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 an effort to control cash expenditures, the Company subsequently reduced this
staff to approximately 30 persons by December 31, 1997.
GROSS PROFIT. Gross profit decreased by $899,086 from $1,454,540 in 1996 to
$555,454 in 1997. Gross profit margins decreased from 63.3% in 1996 to 19.3% in
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 55.8% from
$962,220 in 1996 to $1,499,397 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 41.9% in 1996 to 52.1% in 1997. During the
third quarter of 1997, the Company implemented procedures intended to
substantially reduce advertising and marketing expenses.
PRODUCT DEVELOPMENT. Total expenditures for product development were
$683,488, or 23.7% 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. This increase was due to
increases in product development staff and expenditures for the Company's
Personal Internet Banker-TM- product.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $909,230 in 1996 to $2,733,924 in 1997. As a percentage of net sales, these
expenses increased from 39.6% in 1996 to 95.0% 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 1999 (January 1,
2000 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company has substantially limited sources of capital. As of December 31,
1998, the Company had net working capital of approximately $2.3 million.
Management has undertaken steps to address the Company's ongoing cash
requirements including concentrating the Company's market focus, identifying
additional operational and administrative efficiencies, and actively managing
working capital. The Company intends to continue to raise additional capital
through additional debt and equity offerings.
Because the Company expects to continue to incur substantial operating
losses, the Company will continue to use substantial sums of cash in its
operations for an indefinite period. Accordingly, the Company will be required
to obtain additional capital. No assurance can be given that the Company will be
successful in its efforts to obtain additional capital, or that capital will be
available on terms acceptable to the Company or on terms that will not
significantly dilute the interests of existing stockholders. In September 1999,
HomeCom announced that it had entered into a letter of intent with J.P. Turner &
Company, L.L.C. to consummate an underwritten public offering of $10 million of
the securities of the Company. There is no assurance that such public offering
will be successful, or that HomeCom will not exhaust its current capital
resources before the consummation of the offering.
On September 7, 1999, we announced a restructuring of our business
consistent with our core internet banking, insurance offerings, and professional
services operations. This restructuring is expected to result in a reduction of
expenses of approximately $3.5 million over the next twelve months, and a
reduction in our personnel by about 60 employees, to about 95 employees (after
taking into effect the anticipated divestiture of our security consulting and
integration division). There is no such assurance that such actions will be
sufficient. As of September 7, 1999, the Company only has sufficient working
capital to last for the next 2-3 months. If the Company exhausts its current
sources of capital and is not able to obtain additional capital, the Company
will be required to undertake additional steps to continue its operations. Such
steps may include further reduction of the Company's operating costs and other
expenditures, including reductions of personnel and suspension of salary
increases and capital expenditures. If such measures are not sufficient, the
Company may elect to implement other cost reduction actions as the Company may
determine are necessary and in the Company's best interests, including the
possible sale of certain of the Company's business lines. Any such actions
undertaken may limit the Company's opportunities to realize continued increases
in sales and the Company may not be able to reduce its costs in amounts
sufficient to achieve break-even or profitable operations. If the Company
exhausts its sources of capital, and subsequent cost reduction measures are not
sufficient to allow the Company to achieve positive cash flows, the Company will
be forced to seek protection from its creditors. The aforementioned factors
raise substantial doubt about the Company's ability to continue as a going
concern. The financial statements included herein have been prepared assuming
the Company is a going concern and do not include any adjustments that might
result should the Company be unable to continue as a going concern.
Net cash used in operating activities was $4,404,190 for the year ended
December 31, 1998. 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. 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 $4.7 million. 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 $1.7 million principal amount of the Company's 5% convertible
debentures due September 22, 2000. 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
$1.8 million. During 1998, the Company's 5% convertible debentures and its
Series A preferred stock were converted into
12
<PAGE>
961,460 and 711,456 shares of common stock, respectively. In June 1998, the
Company sold its HostAmerica division to Sage Acquisition Corp., for net
proceeds of approximately $4,500,000. In March 1999, the Company issued 125
shares of its Series B preferred stock for aggregate net proceeds of
approximately $2.3 million. On July 28, 1999, the Company sold 175 shares of its
Series C Preferred Stock for net proceeds of approximately $3.3 million.
The Company spent $362,689 and $387,209 during 1998 and 1997, respectively,
for the purchase of capital equipment. These amounts were expended primarily for
computer equipment, communications equipment and software necessary for the
Company to increase its presence in the Internet and Intranet applications
marketplace. The Company's commitments as of December 31, 1998 consist primarily
of leases on its Atlanta, Vienna, Virginia, Houston, Texas, Chicago, and New
York City facilities.
Accounts receivable, net of allowance for doubtful accounts, totaled
$680,790 as of December 31, 1998. Trade receivables are monitored by the Company
through ongoing credit evaluations of its customers' financial conditions. The
allowance for doubtful accounts is considered by management to be an adequate
reserve for known and estimated bad debts of the Company. A revision in this
reserve due to actual results differing from this estimate could have a material
impact on the results of operations, financial position and liquidity of the
Company.
YEAR 2000
Many existing computer programs were originally designed to use only two
digits to identify a year in date fields. As a result, date-sensitive software
applications may recognize a date using "00" as the year 1900 rather than the
year 2000. If not corrected, these applications could fail or produce erroneous
results when working with dates in the year 2000 and beyond. If not properly
addressed, the Year 2000 issue could have a material effect on the Company's
financial position and future operating results. The Company primarily relies on
industry standard operating systems and applications for its internal systems
rather than proprietary software, and based on its review of its significant
internal programs and systems, has determined that they are substantially Year
2000 compliant. In addition, the Company is seeking confirmation from its
primary telecommunications service providers that they are developing and
implementing plans to become Year 2000 compliant. Information received to date
has indicated that such respondents are in the process of implementing
remediation procedures to ensure that their computer systems, services, or
products are Year 2000 compliant by December 31, 1999. However, the Company has
not undertaken an in-depth evaluation of such providers in relation to the Year
2000 issue. In addition, the Company cannot predict whether or not all of these
vendors' programs will be successful. To the extent that these vendors fail to
resolve any Year 2000 issues on a timely basis or in a manner that is compatible
with the Company's systems, that failure could have a material adverse effect on
the Company's financial position and future operating results. The Company is
using internal resources to identify and correct its systems for Year 2000
compliance, and expects any incremental costs associated with addressing this
issue to be minimal. The Company does not believe that the costs of addressing
Year 2000 issues will be material to its financial position or future operating
results.
13
<PAGE>
ITEM 8. FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... 15
Balance Sheets as of December 31, 1997 and 1998............................................................ 16
Statements of Operations for Each of the Three Years in the Period Ended December 31, 1998................. 17
Statements of Stockholders' Equity (Deficit) for Each of the Three Years in the Period Ended December 31,
1998..................................................................................................... 18
Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 1998................. 19
Notes to Financial Statements.............................................................................. 21
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
HomeCom Communications, Inc.
In our opinion, the accompanying balance sheets and the related statements
of operations, of changes in stockholders' equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of HomeCom
Communications, Inc. at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 12 to the
financial statements, the Company has experienced recurring losses and negative
cash flows since its inception and has an accumulated deficit. The Company is
dependent on continued financing from investors to sustain its activities and
there is no assurance that such financing will be available. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 12. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 29, 1999, except as to Note 12,
which is as of September 7, 1999
15
<PAGE>
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $3,187,948 $2,291,932
Restricted cash.................................................. -- 250,000
Accounts receivable, net......................................... 470,839 680,790
Other current assets............................................. -- 4,796
---------- ----------
Total current assets......................................... 3,658,787 3,227,518
FURNITURE, FIXTURES AND EQUIPMENT, NET............................. 627,624 797,263
SOFTWARE DEVELOPMENT COSTS, NET.................................... 31,778 --
DEPOSITS........................................................... 85,731 80,231
DEFERRED ACQUISITION COSTS......................................... -- 109,158
DEFERRED DEBT ISSUE COSTS.......................................... 248,359 --
INTANGIBLE ASSETS, NET............................................. -- 351,320
OTHER NON-CURRENT ASSETS........................................... 12,500 --
---------- ----------
Total assets................................................. $4,664,779 $4,565,490
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................ $ 427,886 $ 424,094
Accrued payroll liabilities...................................... 264,180 300,927
Unearned revenue................................................. 190,978 128,345
Current portion of obligations under capital leases.............. 53,813 108,427
---------- ----------
Total current liabilities.................................... 936,857 961,793
---------- ----------
CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $122,778 AS OF DECEMBER
31, 1997......................................................... 1,577,222 --
OBLIGATIONS UNDER CAPITAL LEASES................................... 74,787 88,242
OTHER LIABILITIES.................................................. 119,141 67,006
---------- ----------
Total liabilities............................................ 2,708,007 1,117,041
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 15,000,000 shares authorized,
2,956,396 and 5,072,397 shares issued and outstanding at
December 31, 1997 and 1998, respectively....................... 295 507
Preferred stock, Series A, convertible, $100 par value, 1,000,000
shares authorized, 20,000 and 0 shares issued and outstanding
at December 31, 1997 and 1998, respectively; participating;
$2,000,000 liquidation value at December 31, 1997.............. 200 --
Additional paid-in capital....................................... 7,800,542 10,355,724
Subscriptions receivable......................................... (337,501) (196,878)
Accumulated deficit.............................................. (5,506,764) (6,710,904)
---------- ----------
Total stockholders' equity................................... 1,956,772 3,448,449
---------- ----------
Total liabilities and stockholders' equity................... $4,664,779 $4,565,490
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE>
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1996 1997 1998
---------- ----------- -----------
<S> <C> <C> <C>
NET SALES:
Service sales........................................................................... $2,112,878 $ 2,792,306 $ 2,941,047
Equipment sales......................................................................... 185,977 86,322 351,363
---------- ----------- -----------
Total net sales..................................................................... 2,298,855 2,878,628 3,292,410
---------- ----------- -----------
COST OF SALES:
Cost of services........................................................................ 715,377 2,254,200 2,372,617
Cost of equipment sold.................................................................. 128,938 68,974 228,694
---------- ----------- -----------
Total cost of sales................................................................... 844,315 2,323,174 2,601,311
---------- ----------- -----------
GROSS PROFIT.............................................................................. 1,454,540 555,454 691,099
---------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing..................................................................... 962,220 1,499,397 1,392,306
Product development..................................................................... 78,887 514,655 677,590
General and administrative.............................................................. 909,230 2,733,924 3,406,876
Depreciation and amortization........................................................... 85,068 238,537 542,269
---------- ----------- -----------
Total operating expenses............................................................ 2,035,405 4,986,513 6,019,041
---------- ----------- -----------
OPERATING LOSS............................................................................ (580,865) (4,431,059) (5,327,942)
OTHER EXPENSES (INCOME)
Gain on sale of division................................................................ -- -- (4,402,076)
Interest expense........................................................................ 51,272 543,420 445,216
Other expense (income), net............................................................. (6,554) (93,298) (166,942)
---------- ----------- -----------
LOSS BEFORE INCOME TAXES.................................................................. (625,583) (4,881,181) (1,204,140)
INCOME TAXES.............................................................................. -- -- --
---------- ----------- -----------
NET LOSS.................................................................................. (625,583) (4,881,181) (1,204,140)
PREFERRED STOCK DIVIDEND.................................................................. -- -- (666,667)
---------- ----------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS.................................................... $ (625,583) $(4,881,181) $(1,870,807)
---------- ----------- -----------
---------- ----------- -----------
BASIC AND DILUTED LOSS PER SHARE.......................................................... $ (0.34) $ (1.88) $ (0.44)
---------- ----------- -----------
---------- ----------- -----------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING............................................. 1,862,223 2,602,515 4,287,183
---------- ----------- -----------
---------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
--------------- -------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
------- ------ --------- --------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995.................................................. -- -- 1,000 27,706 --
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.................................................. -- -- 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
Issuance of stock........................................................... 443,085 45 884,086
Conversion of convertible debentures to common shares....................... 961,460 96 1,699,904
Conversion of preferred stock to common shares.............................. (20,000) (200) 711,456 71 129
Cancellation of subscriptions receivable under employment agreements........
Other....................................................................... (28,937)
Net loss.................................................................... -- -- -- -- --
------- ------ --------- --------- -----------
BALANCE, December 31, 1998.................................................. -- $ -- 5,072,397 $ 507 $10,355,724
------- ------ --------- --------- -----------
------- ------ --------- --------- -----------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS'
RECEIVABLE DEFICIT EQUITY (DEFICIT)
------------- ----------- ----------------
<S> <C> <C> <C>
BALANCE, December 31, 1995...................................................... (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
Issuance of stock............................................................... 884,131
Conversion of convertible debentures to common shares........................... 1,700,000
Conversion of preferred stock to common shares.................................. --
Cancellation of subscriptions receivable under employment agreements............ 140,623 140,623
Other........................................................................... (28,937)
Net loss........................................................................ -- (1,204,140 ) (1,204,140)
------------- ----------- ----------------
BALANCE, December 31, 1998...................................................... $(196,878) $(6,710,904) $ 3,448,449
------------- ----------- ----------------
------------- ----------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements
18
<PAGE>
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................... $(625,583) $(4,881,181) $(1,204,140)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization........................ 87,733 457,113 542,269
Amortization of debt discount........................ -- 443,889 122,778
Amortization of debt issue costs..................... -- 22,578 283,754
Forgiveness of subscriptions receivable.............. -- 130,501 140,623
Expense recorded for issuance of warrants............ -- -- 36,093
Non-cash compensation expense........................ -- -- 44,933
Gain on sale of division............................. -- -- (4,402,076)
Provision for bad debts.............................. 104,360 244,893 167,675
Deferred rent expense................................ 73,424 45,717 (52,135)
Change in operating assets and liabilities:
Accounts receivable................................ (506,289) (227,478) (309,248)
Accounts payable and accrued expenses.............. 316,641 (221,908) (3,793)
Accrued payroll liabilities........................ 284,367 (74,274) 36,747
Unearned revenue................................... 90,691 57,808 187,367
Other.............................................. (41,266) (21,674) 4,964
--------- ---------- ----------
Net cash used in operating activities................ (215,925) (4,024,016) (4,404,190)
--------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment.......... (349,646) (387,209) (362,689)
Proceeds from sale of division, net of restricted cash
of $250,000.......................................... -- -- 4,000,000
Payment of acquisition costs........................... -- -- (152,407)
Software development costs............................. (84,182) (168,834) --
--------- ---------- ----------
Net cash provided by (used in) investing
activities......................................... (433,828) (556,043) 3,484,904
--------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs..................... (88,096) (415,448) (28,937)
Payment of deferred debt issue costs................... -- (220,937) (35,395)
Repayment of capital lease obligations................. (4,404) (51,010) (144,492)
Proceeds from issuance of common shares and exercise of
warrants............................................. -- -- 232,094
Payment of preferred stock issue costs................. -- (190,748) --
Proceeds from issuance of convertible debentures and
warrants............................................. -- 1,700,000 --
Proceeds from issuance of preferred shares and
warrants............................................. -- 2,000,000 --
Proceeds from notes payable to stockholders............ 889,904 490,000 --
Repayment of notes payable to stockholders............. (5,115) (1,335,581) --
Proceeds from note payable............................. 70,000 -- --
Repayment of note payable.............................. (9,354) (60,646) --
Proceeds from sale of stock, net of underwriting
discounts and commissions............................ 100 5,520,000 --
--------- ---------- ----------
Net cash provided by financing activities............ 853,035 7,435,630 23,270
--------- ---------- ----------
</TABLE>
19
<PAGE>
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1997 1998
--------- ---------- ----------
<S> <C> <C> <C>
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 203,282 2,855,571 (896,016)
CASH AND CASH EQUIVALENTS at beginning of period......... 129,095 332,377 3,187,948
--------- ---------- ----------
CASH AND CASH EQUIVALENTS at end of period............... $ 332,377 $3,187,948 $2,291,932
--------- ---------- ----------
--------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON
CASH INVESTING AND FINANCING ACTIVITIES:
Interest paid.......................................... $ 6,277 $ 56,365 $ 16,277
--------- ---------- ----------
--------- ---------- ----------
Capital lease obligations incurred during year on lease
of computer equipment................................ $ 64,667 $ 119,346 $ 208,065
--------- ---------- ----------
--------- ---------- ----------
Conversion of notes payable to affiliate to common
stock................................................ $ -- $ 200,000 $ --
--------- ---------- ----------
--------- ---------- ----------
Issuance of warrants and compensatory stock options.... $ -- $ 89,611 $ --
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
During 1998, the Company issued 351,391 shares of common stock for the net
assets of The Insurance Resource Center, Inc.
During 1998, $1,700,000 of convertible debentures were converted into
961,460 shares of common stock.
During 1998, 20,000 shares of preferred stock were converted into 711,456
shares of common stock.
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
HomeCom Communications, Inc. (the "Company") specializes in Internet
application solutions for the financial services industry. HomeCom's integrated
Web-enabled solutions for one-stop financial services include a complete range
of products and services such as secure banking services, fee-income producing
insurance and brokerage products, and intelligent one-to-one marketing. In
addition, HomeCom offers custom Web development and hosting services, as well as
Internet security products and 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, 1998, and has used
substantial cash in its operations. Management believes that future debt and
equity offerings and successful commercialization of its products and services
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.
RESTRICTED CASH
Under the terms of the sale of the Company's HostAmerica division in June,
1998, $250,000 of the proceeds of the sale are to be held in escrow until May 1,
1999 for the purpose of indemnifying the Purchaser for representations and
warranties made by the Company under the Asset Purchase Agreement.
ACCOUNTS RECEIVABLE, NET
Accounts receivables are shown net of the allowance for doubtful accounts.
The allowance was approximately $161,000 and $95,000 at December 31, 1997 and
1998, respectively. Write-offs were approximately $191,000 and $233,000 for the
years ended December 31, 1997 and 1998, 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
21
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 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 approximately
$3,000, $219,000, and $32,000 in 1996, 1997, and 1998, respectively. These
expenses are included in cost of sales. At December 31, 1998, capitalized
software development costs have been fully amortized.
DEFERRED ACQUISITION COSTS
Costs incurred in connection with the Company's acquisition of First
Institutional Marketing, Inc. have been deferred. These costs consist of legal,
accounting, and printing costs and will be capitalized upon the closing of this
transaction.
DEFERRED DEBT ISSUE COSTS
Costs in connection with the Company's offering of convertible debentures
were deferred and amortized over the term of the debt. As of December 31, 1998,
all of the convertible debentures had been converted into shares of common stock
and, accordingly, all of the deferred debt issue costs had been amortized.
INTANGIBLE ASSETS
Intangible assets consist of cost in excess of net assets acquired arising
from the purchase of The Insurance Resource Center, Inc. ("IRC") which is being
amortized using the straight-line method over three years. Impairment of value,
if any, is recognized in the period in which it is determined. Management
assesses the recoverability of intangible assets at each balance sheet date
based on undiscounted projected cash flows and operating income.
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. 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
22
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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
Advertising costs are expensed when incurred. Advertising expenses were
approximately $724,000 and $263,000 for the years ended December 31, 1997 and
1998, 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 $2,500,000 at
December 31, 1998 is primarily due to operating loss carryforwards generated
since February 9, 1996, and is fully offset by a valuation allowance. The effect
of a change in the valuation allowance that results from a change in
circumstances that causes a change in judgment about the realizability of the
related deferred tax asset in future years would be included in income in that
period.
As a result of termination of the S Corporation in February 1996, the
accumulated deficit as of that date was transferred to additional paid-in
capital.
BASIC AND DILUTED EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") are calculated according to the
provisions of Statement of Financial 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, 1998, the numerator and
denominator are the same for both basic and diluted EPS.
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current year
presentation.
23
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net, are comprised of the following as
of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
--------- ---------
<S> <C> <C>
Furniture and fixtures................................................ $ 191,107 $ 257,424
Computer equipment.................................................... 579,486 861,400
Computer equipment under capital leases............................... 184,012 382,055
--------- ---------
954,605 1,500,879
Less: accumulated depreciation and amortization....................... (326,981) (703,616)
--------- ---------
$ 627,624 $ 797,263
--------- ---------
--------- ---------
</TABLE>
3. NOTES PAYABLE
Notes payable are comprised of the following as of:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Convertible debentures (interest accrues at 5%), 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..................... $ 1,577,222 --
Less current maturities of notes payable.............................................. -- --
------------ ------------
$ 1,577,222 $ --
------------ ------------
------------ ------------
</TABLE>
These notes were converted into 961,460 shares of common stock during 1998.
4. SEGMENT INFORMATION
During 1998, HomeCom reorganized into five separate business units,
organized on the basis of products and services. Prior to that time, the Company
operated in a single business segment. The Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by product and service category into
business units. HomeCom's reportable segments are: custom Web development
(FAST), Internet outsourcing services (HostAmerica), Internet security services
(HISS), software products, and InsureRate. On June 9, 1998, the Company sold
substantially all of the assets of its HostAmerica Internet outsourcing services
business unit to Sage Acquisition Corp.
The table below presents information about the reported business unit income
for HomeCom Communications, Inc. for the year ended December 31, 1998:
<TABLE>
<CAPTION>
SOFTWARE RECONCILING
FAST HOSTAMERICA HISS PRODUCTS INSURERATE ITEMS
--------- --------------- --------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues...................................... $ 1,950 $ 531 $ 782 $ 29 $ 0 $ 0
Net Income (Loss)............................. $ (363) $ 256 $ (67) $ (443) $ (357) $ (230)
<CAPTION>
CONSOLIDATED
TOTALS
---------
<S> <C>
Revenues...................................... $ 3,292
Net Income (Loss)............................. $ (1,204)
</TABLE>
24
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION (CONTINUED)
Reconciling items represent adjustments that are made to the total of the
segments' operating income in order to arrive at consolidated net loss and
include the following:
<TABLE>
<CAPTION>
(IN THOUSANDS)
---------------
<S> <C>
Depreciation and amortization.................................................. $ (587)
Interest expense, net.......................................................... (278)
Gain on sale of division....................................................... 4,402
Corporate sales and marketing and product development expenses................. (360)
General and administrative expenses............................................ (3,407)
------
$ (230)
------
------
</TABLE>
The Company evaluates the performance of its segments based on segment
revenue and identifiable segment direct expenses, consisting primarily of
salaries and wages, travel and other costs of segment operating and sales
personnel. Common expenses for general and administrative costs, facilities,
equipment, telecommunications, and depreciation and amortization expenses are
not allocated to the business segments but are included in Corporate expenses.
Corporate expenses are included as part of the Reconciling Items column in the
table above.
Revenues for the years ended December 31, 1997 and 1996, were as follows:
<TABLE>
<CAPTION>
SOFTWARE
FAST HOSTAMERICA HISS PRODUCTS INSURERATE
--------- --------------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
Revenues--1997........................................ $ 1,792 $ 692 $ 375 $ 20 $ --
Revenues--1996........................................ $ 1,845 $ 304 $ 70 $ 80 $ --
<CAPTION>
CONSOLIDATED
TOTALS
-------------
<S> <C>
Revenues--1997........................................ $ 2,879
Revenues--1996........................................ $ 2,299
</TABLE>
Prior year operating income (loss) by segment is not presented as the
information is not available.
Asset information by reportable segment is not reported since the Company
does not produce such information internally. All of the Company's revenues and
expenses originate in the United States. No single customer accounted for more
than 10% of the Company's revenues. Therefore, no additional disclosures about
major customers are presented.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2002. The Company has entered into several
capital leases of computer equipment.
25
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
1999........................................................ $ 123,571 $ 524,171
2000........................................................ 69,654 534,529
2001........................................................ 25,785 338,789
2002........................................................ -- 234,424
2003........................................................ -- --
------------- ----------------
Total minimum lease payments................................ 219,010 $ 1,631,913
----------------
----------------
Less: amount representing interest.......................... (22,341)
-------------
Present value of minimum lease payments..................... 196,669
Less: current portion....................................... (108,427)
-------------
$ 88,242
-------------
-------------
</TABLE>
The Company leases 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 approximately $227,000, $507,000
and $440,000 for the years ended December 31, 1996, 1997, and 1998,
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.
6. 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
26
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CONCENTRATION OF CREDIT RISKS (CONTINUED)
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%, 15%, and 27% of total revenues for the
years ended December 31, 1996, 1997, and 1998, respectively. No customer
accounted for more than 10% of the revenues of the Company during 1996, 1997 or
1998. The five most significant customer balances represented approximately 26%
and 50% of the gross accounts receivable balance at December 31, 1997 and 1998,
respectively.
7. 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
27
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS (CONTINUED)
offering, net of underwriting discounts, commissions and offering expenses, were
approximately $4,700,000. The Company used a portion of the proceeds from the
initial public offering to repay outstanding principal amounts of approximately
$1,300,000 loaned to the Company by stockholders and affiliates plus accrued
interest of approximately $65,000. The Company issued 33,333 shares of common
stock as payment in full of the outstanding principal balance of a $200,000 loan
from an investor.
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter warrants to acquire 100,000 shares
of the Company's common stock at an exercise price of $7.20 per share. The
exercise price is subject to adjustment under certain circumstances. These
warrants expire on May 12, 2002 if not earlier exercised.
In September 1997, the Company issued $1,700,000 of 5% convertible
debentures due September 22, 2000. 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. During 1998, the
full principal amount of the debentures was fully converted into 961,460 shares
of common stock. As of December 31, 1998, $44,596 of interest has been accrued
for the debentures, and is payable on September 22, 2000. 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 was amortized in 1998 as a non-cash charge to interest expense.
In connection with the issuance of the debentures, the Company issued 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, 50,000 were exercised in December 1998 at an
exercise price of $4.00 per share. At December 31, 1998, warrants to purchase
150,000 shares of common stock are outstanding and exercisable at a price of
$4.00 per share, and warrants to purchase the remaining 200,000 shares of common
stock are outstanding and 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. Net proceeds to the Company
from the Series A preferred stock issuance were approximately $1,800,000. As of
December 31, 1998, the preferred stock had been fully converted into 711,456
shares of common stock. A discount of $666,667 results from an allocation of the
proceeds to the beneficial conversion feature. This discount is analogous to a
dividend and was recognized as a return to the Series A preferred holders over
the period the preferred stock was outstanding.
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.
At December 31, 1998, 600,000 warrants are outstanding at a weighted average
exercise price of $7.51.
On April 16, 1998, the Company issued 351,391 shares of common stock to
acquire all of the outstanding capital stock of The Insurance Resource Center,
Inc.
28
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
On October 7, 1998, the Company issued 18,959 shares of common stock to the
former holders of HISS's capital stock as an earnout payment, which was recorded
as compensation expense.
8. STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996. Shares of common stock
may be sold or awarded to officers, key employees and consultants. On March 3,
1999 at a Special Meeting of Stockholders, the Company's stockholders approved
an amendment to the Stock Option Plan which increased the number of shares
reserved for issuance under the Stock Option Plan to 2,000,000. 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 and 1998, 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 options was 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 years ended December 31, 1997 and 1998, the Company recognized
approximately $5,000 and $36,000, respectively, in expense for stock issued to
non-employees.
Pro forma information regarding loss 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.
29
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Risk-free interest rate........................................... 6.46% 5.93% 5.11%
Volatility factors of the expected market price of the Company's
common stock.................................................... 80% 90% 110%
Weighted average expected life of the options..................... 4 years 5 years 5 years
</TABLE>
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, 1997 and 1998, would have
been the pro forma amounts listed below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1997 1998
--------- ----------- -----------
<S> <C> <C> <C>
Loss applicable to common shareholders:
As reported......................................................... $(625,583) $(4,881,181) $(1,870,807)
Pro forma........................................................... (676,776) (5,012,634) (2,351,259)
Basic and diluted loss per share:
As reported......................................................... (0.34) (1.88) (0.44)
Pro forma........................................................... (0.36) (1.93) (0.55)
</TABLE>
Option activity under all of the stock option plans is summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 1998
-------------------------- --------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- --------------- --------- ---------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year......... 220,543 $ 6.30 421,160 $ 4.95
Granted.................................. 599,555 5.26 312,700 3.35
Exercised................................ 0 -- (4,375) 4.06
Forfeited................................ (398,938) 5.80 (170,875) 3.34
--------- ---------
Outstanding at end of year............... 421,160 4.95 558,610 4.59
--------- ---------
--------- ---------
Options exercisable at year end.......... 3,090 127,791
--------- ---------
--------- ---------
Shares available for future grant........ 178,840 41,390
--------- ---------
--------- ---------
Weighted-average fair value of options
granted during the year at the shares'
fair value............................. $ 3.71 $ 2.79
--------- ---------
--------- ---------
</TABLE>
30
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about fixed options outstanding
at December 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
EXERCISE PRICES SHARES LIFE
- ------------------------------------------------------------------------------ --------- -------------------------
<S> <C> <C>
$1.91--2.18................................................................... 50,700 9.6
$3.69--4.72................................................................... 329,111 8.9
$6.00--8.06................................................................... 178,799 8.5
---------
558,610 8.8
---------
---------
</TABLE>
9. ACQUISITIONS AND DIVESTITURES
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' capital stock consisted of the
right to receive their pro rata share of four annual earnout payments to be paid
not later than March 31 of 1998, 1999, 2000 and 2001. In 1998, the Company
incurred approximately $45,000 in compensation expense in the form of issuing
18,959 shares of common stock to certain former holders of HISS' capital stock.
The maximum additional potential liability under the earnout agreement is
$134,800, payable in common stock or cash at the Company's option. The Company
does not expect this additional potential liability to be paid, due to HISS net
income limitations.
On April 16, 1998, the Company acquired all of the outstanding capital stock
of The Insurance Resource Center, Inc. ("IRC") for total consideration of
approximately $571,000, consisting of 351,391 shares of the Company's common
stock. IRC provides Internet development and hosting services to the insurance
industry. The Company has accounted for this acquisition as a purchase
transaction. Approximately $460,000 was recorded as an intangible asset and is
being amortized over three years. At December 31, 1998, the net unamortized
balance of this intangible asset was $351,000, net of $109,000 of accumulated
amortization.
On June 9, 1998, the Company sold substantially all of the assets of its
HostAmerica Internet network outsourcing services division to Sage Acquisition
Corp. ("Sage") for cash of $4,250,000 and Sage's assumption of approximately
$250,000 of unearned revenue. The Company recorded a gain on the sale of
approximately $4,402,000. The assets sold consisted of computer network
equipment and service contracts.
31
<PAGE>
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,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Temporary differences:
Allowance for uncollectibles................................ $ 61,009 $ 36,246
Vacation accrual............................................ 11,049 33,586
Depreciation................................................ 2,317 4,826
Deferred rent expense....................................... 45,274 25,462
Software development expenses............................... 55,599 35,138
---------- ----------
175,248 135,258
Net operating loss carryforward............................. 1,903,040 2,357,670
---------- ----------
Deferred tax asset.......................................... 2,078,288 2,492,928
Valuation allowance......................................... (2,078,288) (2,492,928)
---------- ----------
Net deferred tax asset...................................... $ 0 $ 0
---------- ----------
---------- ----------
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $6,200,000 which begin to expire in 2011.
Realization of these assets is contingent on having future taxable earnings. In
addition, certain stock transactions during 1997 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.
11. SUBSEQUENT EVENTS
On March 24, 1999, the Company acquired First Institutional Marketing, Inc.
and certain of its affiliates ("FIMI") of Houston, Texas for 1,252,174 shares of
common stock. FIMI offers insurance and investment products to banks,
broker/dealers, insurance agencies and retail consumers. FIMI markets its
products primarily to insurance agencies affiliated with commercial banks and
broker/dealers. The Company will account for this acquisition as a purchase
transaction.
On March 25, 1999, the Company issued 125 shares of its Series B Preferred
Stock for an aggregate purchase price of $2,500,000. Net proceeds to the Company
from the Series B preferred sale were approximately $2,280,000. The Series B
preferred stock is convertible at the option of the holder into a number of
shares of common stock equal to a share-based factor. The Series B conversion
price is the lesser of (i) the average closing bid price during any four (4)
consecutive trading days during the twenty-five (25) consecutive trading day
period ending one (1) trading day prior to the day the notice of conversion is
sent to the Company, or (ii) $5.23. The shares may be redeemed by the Company at
a price equal to 120% of the face amount of the shares.
32
<PAGE>
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. SUBSEQUENT EVENTS (CONTINUED)
In connection with the issuance and sale of the Series B preferred stock,
the Company granted the Series B preferred warrants to acquire an aggregate
225,000 shares of common stock at an exercise price of $5.70. The Company also
granted 25,000 warrants to a placement agent at an exercise price of $5.70. The
Series B preferred warrants will expire on March 24, 2004.
12. BASIS OF PRESENTATION--GOING CONCERN (UNAUDITED INFORMATION AS OF
JUNE 30, 1999)
The accompanying financial statements have been prepared in accordance with
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 continues to incur significant losses
resulting in an accumulated deficit of approximately $6.7 million and $11.3
million at December 31, 1998 and June 30, 1999, respectively. The Company has
experienced negative cash flows from operations totaling approximately $4.4
million during the year ended December 31, 1998 and approximately $3.5 million
during the six month period ended June 30, 1999. The Company is dependent on
continued financing from investors to sustain its activities and there is no
assurance that such financing will be available. These factors raise substantial
doubt about the Company's ability to continue as a going concern. On September
7, 1999, the Company announced a reduction of its workforce and the planned sale
of its security division in order to reduce its expenses. The Company's
continued existence as a going concern is dependent upon adequate future debt or
equity funding and successful commercialization of its products and services.
33
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
AGE AT
NAME JUNE 30, 1999 POSITION
- ----------------------------------- ------------------- ------------------------------------------------------------
<S> <C> <C>
Harvey W. Sax (2).................. 47 President, Chief Executive Officer and Director
Krishan H. Puri.................... 34 Executive Vice President and Director
Gia Bokuchava, Ph.D................ 35 Chief Technical Officer and Director
Roger J. Nebel..................... 46 Vice President and Director
Norman H. Smith.................... 36 Chief Financial Officer
William Walker (1)................. 57 Director
Claude A. Thomas (1) (2)........... 56 Director
Daniel A. Delity................... 39 Director
James Wm. Ellsworth (2)............ 43 Director
</TABLE>
- ------------------------
(1) Member of the Audit and Compensation Committees.
(2) Member of the Executive Committee.
The principal occupations for the past five years or more of the nominees
for director for the 1999 Annual Meeting of Stockholders (the "Annual Meeting")
and the six directors whose term of office will continue after the Annual
Meeting are set forth below.
Harvey W. Sax is a founder of HomeCom 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 HomeCom, 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.
Krishan H. Puri has served as Executive Vice President of HomeCom 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 HomeCom'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
34
<PAGE>
University, Tblisi, Georgia (formerly a part of the Soviet Union). Dr. Bokuchava
has taught computer science as a visiting associate professor at the
Universities of Moscow and China. Dr. Bokuchava received a doctorate in
theoretical physics from Georgia Technical University, Tblisi, in 1990. Dr.
Bokuchava has been a member of the Board of Directors since September 1996.
Roger J. Nebel has served as Vice President of HomeCom 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.
Norman H. Smith has served as Chief Financial Officer of HomeCom since May
1997. Before joining the Company, Mr. Smith was employed by First Image
Management Company, a division of First Data Corporation (NYSE: FDC), 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.
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 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.
William Walker is President and CEO of the Reassurance Company of Hanover
("RCH"). He has a 40-year career in the insurance industry, beginning with
United Family Life Insurance Company. He also served as Assistant Vice President
with American Pioneer Life, Assistant Secretary with General Reassurance
Company, and Vice President with North American Reassurance. Walker joined RCH
in 1993. Walker is a graduate of Marshall University where he also received his
L.L.B. degree. Mr. Walker has been a director of HomeCom since March, 1999.
Daniel A. Delity founded First Institutional Marketing, Inc. in 1988. Mr.
Delity is President and Director of First Institutional Marketing, Inc., Premier
Financial Services, Inc. and All Things Financial, Inc. Mr. Delity also serves
as Vice President and General Securities Representative for FIMI Securities,
Inc. Mr. Delity received his Bachelors degree in education and political science
from the State University of New York at Geneseo. Mr. Delity earned his Group I
and IV Insurance licenses and Series 7 & 63 securities licenses in 1984, and has
subsequently concentrated his career in the financial services industry. Mr.
Delity has been a director of HomeCom since March, 1999.
James Wm. Ellsworth serves as Executive Vice President of First
Institutional Marketing, Inc., Premier Financial Services, Inc., All Things
Financial and FIMI Securities, Inc. Mr. Ellsworth also serves as the Financial
and Operations Principal of FIMI Securities, Inc. Prior to joining First
Institutional Marketing, Inc. in August of 1997, Mr. Ellsworth served as Vice
President--Finance of QuickQuote Insurance Agency, Inc., an internet direct
insurance agency from October of 1996 until July of1997.
35
<PAGE>
Mr. Ellsworth also served as a partner in the investment firm of LEF&C Partners
from September 1986 to December 1993. Mr. Ellsworth served as a Certified Public
Accountant with what is now KPMG Peat Marwick from September 1983 to July 1986.
Mr. Ellsworth graduated in May 1983 from San Francisco State University with a
Bachelor of Science degree in Business Administration, Accounting. Mr. Ellsworth
has been a director of HomeCom since March, 1999.
HomeCom's Board of Directors is divided into three classes. The Class III
directors (Messrs. Sax and Ellsworth) serve until the 2000 Annual Meeting of
Stockholders, the Class I directors (Mr. Thomas, Mr. Walker and Mr. Delity)
serve until the 2001 Annual Meeting of Stockholders, and the Class II directors
(Dr. Bokuchava and Messrs. Puri and Nebel) will serve until the 1999 Annual
Meeting of Stockholders. Upon election, each class serves a three-year term. The
classification of the Board of Directors could have the effect of making it more
difficult for a third party to acquire control of the Company. Officers are
elected at the first Board of Directors meeting following the stockholders
meeting at which directors are elected, and officers serve at the discretion of
the Board of Directors. Each executive officer of the Company was chosen by the
Board of Directors and serves at the pleasure of the Board of Directors until
his or her successor is appointed or until his or her earlier resignation or
removal. There are no family relationships between any of the directors or
executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and Directors, and persons who own more than 10% of a registered class
of the Company's equities securities, to file reports of ownership and changes
in ownership with the SEC and the NASD. Officers, directors and greater than 10%
stockholders are also required by SEC regulations to furnish the company with
copies of all Section 16(a) forms they file.
Based solely on its review of copies of such forms received by it, the
Company believes that, during the period January 1, 1998, to December 31, 1998
all filing requirements applicable to its officers, directors and greater than
10% beneficial owners were complied with.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Previously, directors did not receive any cash compensation for their
services as members of the Board of Directors, but were reimbursed for their
reasonable travel expenses in attending Board of Directors and committee
meetings. Effective July 1999, the Board of Directors unanimously approved
compensation to the two outside directors of $1,000 per month and $1,000 per
Board meeting attended. Directors who are not employees of HomeCom are eligible
to receive automatic grants of stock options under HomeCom'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 Plans-- NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN"
below.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1995, compensation of executive officers of HomeCom was determined by
Harvey W. Sax, HomeCom's President and Chief Executive Officer. In September
1996, HomeCom 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
HomeCom. No member of the Compensation Committee is or will be an executive
officer of HomeCom.
36
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
HomeCom in 1998 for its Chief Executive Officer and each executive officer of
HomeCom whose total annual salary and bonuses determined at December 31, 1998
exceeded $100,000 (each, a "Named Executive Officer"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
-----------------------------
ANNUAL COMPENSATION NUMBER OF
---------------------------------- SECURITIES
NAME AND PRINCIPAL POSITION SALARY BONUS UNDERLYING OPTIONS
- ---------------------------------------------- ------------- ------------------- -----------------------------
<S> <C> <C> <C>
Harvey W. Sax................................. $ 147,192 $ 0 0
President, Chief Executive Officer
Krishan Puri.................................. $ 157,508 $ 0 0
Executive Vice-President
Roger Nebel................................... $ 99,113 $ 0 0
Vice-President
Gia Bokuchava, Ph.D........................... $ 174,651 $ 0 0
Chief Technical Officer And Director
Norman H. Smith............................... $ 99,115 $ 0 0
Chief Financial Officer
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION
- ---------------------------------------------- ---------------------
<S> <C>
Harvey W. Sax................................. $ 0
President, Chief Executive Officer
Krishan Puri.................................. $ 0
Executive Vice-President
Roger Nebel................................... $ 0
Vice-President
Gia Bokuchava, Ph.D........................... $ 0
Chief Technical Officer And Director
Norman H. Smith............................... $ 0
Chief Financial Officer
</TABLE>
As of December 31, 1998, the annual salaries for HomeCom's executive
officers were as follows: Harvey W. Sax, President and Chief Executive Officer
($150,000); Norm Smith, Chief Financial Officer ($100,000); Krishan Puri,
Executive Vice President ($110,100); Gia Bokuchava, Ph.D., Chief Technical
Officer ($100,000); and Roger Nebel, Vice President ($100,000). 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 HomeCom
in connection with their purchase of shares of Common Stock from HomeCom in
August 1996. See "Certain Transactions." Each of HomeCom'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 Officers during the year ended December 31, 1998:
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
--------------------------------------------------------------- RATES
NUMBER OF EXERCISE OF STOCK PRICE
SECURITIES PERCENT OF OR BASE APPRECIATION
UNDERLYING TOTAL GRANTED PRICE FOR OPTION
OPTIONS TO EMPLOYEES FOR ------------------------
EXECUTIVE OFFICER GRANTED FISCAL YEAR SHARE EXPIRATION DATE 5% 10%
- ----------------------------------------- ----------- --------------- ----------- -------------------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Krishan Puri............................. 10,000 3.24% $ 4.38 December 9, 2008 27,546 9,806
</TABLE>
37
<PAGE>
OPTION EXERCISES IN LAST FISCAL YEAR 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,
1998 by the Named Executive Officer:
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY
UNDERLYING UNEXERCISED OPTIONS AT
OPTIONS AT DECEMBER 31,
ACQUIRED DECEMBER 31, 1998 1998
ON VALUE ---------------------------- ---------------
EXECUTIVE OFFICER EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------------------------------- --------------- --------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Harvey Sax....................................... 0 0 2,500 7,500 $ 0
Krishan Puri..................................... 0 0 6,250 18,750 $ 0
Roger Nebel...................................... 0 0 5,000 15,000 $ 0
Gia Bokuchava, Ph.D.............................. 0 0 6,250 18,750 $ 0
Norman H. Smith.................................. 0 0 6,250 18,750 $ 0
<CAPTION>
EXECUTIVE OFFICER UNEXERCISABLE
- ------------------------------------------------- -----------------
<S> <C>
Harvey Sax....................................... $ 0
Krishan Puri..................................... $ 0
Roger Nebel...................................... $ 0
Gia Bokuchava, Ph.D.............................. $ 0
Norman H. Smith.................................. $ 0
</TABLE>
EMPLOYMENT AGREEMENTS
HomeCom has entered into an employment agreement with Harvey W. Sax, its
President and Chief Executive Officer, which provides a five year term
commencing on January 1, 1996, subject to automatic extension for an additional
one year on each one-year anniversary of the agreement. This employment
agreement is subject to early termination as provided therein, including
termination by HomeCom "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. HomeCom's stock option plan was adopted by
HomeCom's stockholders in September 1996. A total of 2,000,000 shares of common
stock have been reserved for issuance under the stock option plan, and the plan
provides that the number of shares authorized for issuance under the plan will
not exceed 20% of the total issued and outstanding shares of HomeCom's common
stock. The purpose of the stock option plan is to provide incentives for
officers and key employees to promote the success of HomeCom, and to enhance
HomeCom's ability to attract and retain the services of such persons. HomeCom
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 HomeCom, or of any present or future
subsidiary or parent of HomeCom. 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
HomeCom or a subsidiary or parent of HomeCom). 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.
38
<PAGE>
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 HomeCom or a subsidiary or parent of HomeCom) and shall lapse upon expiration
of such period, or earlier upon termination of the recipient's employment with
HomeCom, or as determined by the compensation committee.
As of June 30, 1999, options to purchase 892,069 shares of common stock were
outstanding under the stock option plan at exercise prices ranging from $1.91 to
$8.06 per share and at a weighted average exercise price of $4.91 per share. All
outstanding options vest 25% per year from their date of grant.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN. HomeCom's non-employee directors
stock option plan was adopted by HomeCom's stockholders in September 1996 and
amended in October 1996. HomeCom 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
HomeCom. 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
HomeCom's stockholders. The non-employee directors plan also allows the
compensation committee of the Board to make extraordinary grants of options to
non-employee directors. All options granted under the non-employee directors
plan vest 50% per year of service by the non-employee director on the Board of
Directors. No option is transferable by the optionee other than by will or laws
of descent and distribution, and each option is exercisable, during the lifetime
of the optionee, only by such optionee. The exercise price of all options will
be the fair market value of the shares of common stock on the date of grant, and
the term of each option may not exceed seven years. The non-employee directors
plan will continue in effect for a period of ten years unless sooner terminated
by the Board of Directors.
During 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. In March, 1999 Mr. Thomas was granted an
option to purchase 5,000 shares of common stock at an exercise price of $4.8125.
During March 1999, Mr. Walker was granted an option to purchase 10,000 shares of
common stock at an exercise price of $6.00.
EMPLOYEE STOCK PURCHASE PLAN. HomeCom's employee 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 Internal Revenue Code. The purpose
of the stock purchase plan is to encourage and enable employees of HomeCom to
acquire a proprietary interest in HomeCom through ownership of shares of common
stock. Eligible employees of HomeCom will purchase shares of common stock at 85%
of fair market value and HomeCom 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 HomeCom from the employee's pay during each of four quarterly
payroll deduction periods. Those payroll deduction 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. HomeCom is deemed on the last day of each payroll
deduction period to have granted a purchase right to each participant as of the
first day of the payroll deduction 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 payroll deduction period, the
participant will be deemed to have exercised this option, at the option price,
to the extent of the 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 payroll deduction period, of greater
than $25,000 during a calendar year. The option price under the stock
39
<PAGE>
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 payroll
deduction period, whichever is lower.
Employees of HomeCom who have completed six full months of service with
HomeCom 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
HomeCom. As of July 31, 1999, approximately 72 employees are eligible to
participate in the stock purchase plan, and as of such date, 10 employees are
participating in the 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, HomeCom will refund the
employee's payroll deductions or contributions made during the payroll deduction
period.
An employee may not sell shares of common stock purchased under the stock
purchase plan until the first day of the second payroll deduction period
following the payroll deduction period in which the option for such shares was
granted.
The stock purchase plan is administered by the compensation committee. No
member of the Board of Directors will be eligible to participate in the stock
purchase plan during the period he or she serves as a member of the compensation
committee. The compensation committee may terminate or amend the stock purchase
plan at any time. However, any termination or amendment may not affect or change
purchase rights previously granted under the stock purchase plan without the
consent of the affected participants. Also, any amendment that materially
increases the benefits or number of shares under the stock purchase plan, except
for adjustments due to changes in HomeCom'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. HomeCom's Board of Directors has approved the
adoption of a 401(k) profit sharing plan, which is intended to be a
tax-qualified defined contribution plan under Section 401(k) of the Internal
Revenue Code. This plan was implemented in March 1998. In general, all employees
of HomeCom are 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,
HomeCom 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. HomeCom 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 HomeCom contributions, including matching contributions, will vest after 5
years of service with HomeCom. 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 HomeCom, including executive officers, are required
to sign an agreement with HomeCom restricting the ability of the employee to
compete with HomeCom during his or her employment and for a period of eighteen
months thereafter, restricting solicitation of customers and employees following
employment with HomeCom, and providing for ownership and assignment of
intellectual property rights to HomeCom.
40
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table provides information as of June 30, 1999, concerning
beneficial ownership of Common Stock by (1) each person or entity known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (2)
each director and nominee for director of the Company, (3) each Named Executive
Officer, and (4) all directors and executive officers of the Company as a group.
The information as to beneficial ownership has been furnished by the respective
stockholders, directors and executive officers of the Company and, unless
otherwise indicated, each of the stockholders has indicated that they have sole
voting and investment power with respect to the shares beneficially owned.
<TABLE>
<CAPTION>
COMMON STOCK
BENEFICIALLY PERCENTAGE
NAME OF BENEFICIAL OWNER(1) OWNED(2) OF CLASS
- -------------------------------------------------------------------------------------- -------------- -------------
<S> <C> <C>
Harvey W. Sax(3)...................................................................... 806,629 12.1%
Krishan H. Puri(4).................................................................... 52,752 *
Gia Bokuchava, Ph.D.(5)............................................................... 47,559 *
Roger J. Nebel(6)..................................................................... 18,616 *
Claude A. Thomas(7)................................................................... 5,000 *
Norman H. Smith(8).................................................................... 5,000 *
Mark Germain(9)....................................................................... 350,885 5.3
Margery Germain(10)................................................................... 350,885 5.3
Daniel A. Delity(11).................................................................. 737,840 11.1
James Wm. Ellsworth(11)............................................................... 162,917 2.4
David B. Frank(11).................................................................... 351,417 5.3
William Walker(12).................................................................... -- *
CPR (USA), Inc.(13)................................................................... 333,348 5.0
All executive officers and directors as a group (9 persons)........................... 2,187,730 32.9%
</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 December 31, 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) Includes 2,500 shares of Common Stock issuable upon the exercise of an
option outstanding as of June 30, 1999 at an exercise price of $4.47 per
share. Excludes 57,500 shares of Common Stock issuable upon the exercise of
options outstanding as of June 30, 1999 at a weighted average exercise price
of $5.61 which are not currently exercisable and which become exercisable
more than 60 days following the date of this Prospectus.
(4) Includes 7,500 shares of Common Stock issuable upon the exercise of options
outstanding as of June 30, 1999 at a weighted average exercise price of
$4.71 per share. Excludes 17,500 shares of Common Stock issuable upon the
exercise of options outstanding as of June 30, 1999 at a weighted average
exercise price of $4.33 which are not currently exercisable and which become
exercisable more than 60 days following the date of this Prospectus.
41
<PAGE>
(5) Includes 7,500 shares of Common Stock issuable upon the exercise of options
outstanding as of June 30, 1999 at a weighted average exercise price of
$4.71 per share. Excludes 17,500 shares of Common Stock issuable upon the
exercise of options outstanding as of June 30, 1999 at a weighted average
exercise price of $4.33 which are not currently exercisable and which become
exercisable more than 60 days following the date of this Prospectus.
(6) Includes 7,500 shares of Common Stock issuable upon the exercise of options
outstanding as of June 30, 1999 at a weighted average exercise price of
$5.35 per share and 9,479 shares issued in connection with the Company's
acquisition of HISS. See "Certain Transactions". Excludes 12,500 shares of
Common Stock issuable upon the exercise of options outstanding as of June
30, 1999 at a weighted average exercise price of $4.84 which are not
currently exercisable and which become exercisable more than 60 days
following the date of this Prospectus. Also excludes an indeterminate
additional number of shares of Common Stock that may be issued in connection
with the Company's acquisition of HISS. See "Certain Transactions."
(7) Includes 5,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of June 30, 1999 at an exercise price of $3.22 per
share which is currently exercisable. Excludes 10,000 shares of Common Stock
issuable upon the exercise of options outstanding as of June 30, 1999 at a
weighted average exercise price of $4.24 per share which is not currently
exercisable and which becomes exercisable more than 60 days following the
date of the date of this Prospectus.
(8) Includes 5,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of June 30, 1999 at an exercise price of $6.00 per
share. Excludes 41,250 shares of Common Stock issuable upon the exercise of
options outstanding as of June 30, 1999 at a weighted average exercise price
of $5.02 which are not currently exercisable and which become exercisable
more than 60 days following the date of this Prospectus.
(9) 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.
(10) The address of this stockholder is 6 Olmstead Road Scarsdale, NY 10583.
Includes 15,833 shares of Common Stock owned by Mark Germain.
(11) Excludes 100,000 shares of Common Stock issuable upon the exercise of a
warrant outstanding as of June 30, 1999 at an exercise price of $3.74 which
are not currently exercisable and which become exercisable more than 60 days
following the date of this Prospectus.
(12) Excludes 10,000 shares of Common Stock issuable upon the exercise of an
option outstanding as of June 30, 1999 at an exercise price of $5.06 which
is not currently exercisable and which become exercisable more than 60 days
following the date of this Prospectus.
(13) The address of this stockholder is 101 Hudson Street, Suite 3700, Jersey
City, New Jersey 07302. Includes 112,500 shares of Common Stock issuable
upon exercise of a warrant outstanding as of June 30, 1999 at an exercise
price of $5.70 per share. Also includes 220,848 shares of Common Stock
issuable upon conversion of the Company's Series B Preferred Stock, assuming
conversion into Common Stock as of June 30, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
During the period December 1994 through December 1995, Harvey W. Sax,
HomeCom's President and Chief Executive Officer, loaned a total of approximately
$63,497 to HomeCom pursuant to a promissory note payable by HomeCom on September
12, 2000, which accrues interest at the prime rate
42
<PAGE>
plus 1% per annum. HomeCom 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,
HomeCom 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, HomeCom granted Nat Stricklen, a co-founder and former
director of HomeCom, 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, HomeCom (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 HomeCom issued Mr. Germain 33,333
shares of common stock in repayment of the $200,000 outstanding principal
balance of this note.
Mr. David A. Blech, Mrs. Esther Blech and the Edward A. Blech Trust
(collectively the "Blech Interests") have agreed in writing with the Nasdaq
Stock Market, Inc. that, for a period of three years from the date of their
original purchases of securities from HomeCom, 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 HomeCom, 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 HomeCom. To the best of
HomeCom's knowledge and belief, the Blech Interests beneficially own less than
5% of the common stock.
In August 1996, Harvey W. Sax, HomeCom's President and Chief Executive
Officer, contributed 3,956 shares of common stock to HomeCom.
In August 1996, HomeCom 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, HomeCom entered into employment agreements with
such persons which provide that for each of the first four years of employment,
HomeCom 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, HomeCom 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,
HomeCom 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. HomeCom 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
HomeCom. HomeCom 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.
43
<PAGE>
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 HomeCom'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
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, (ii) amounts not paid in a year as a result of the
profit limit will be carried forward to the subsequent year, and (iii) amounts
not paid in the fourth year as a result of the profit limit will be forfeited.
Each annual earnout can be paid in whole or in part in cash or, at HomeCom's
option, in shares of common stock based upon the average trading price of the
common stock for the ten trading days immediately preceding payment of the
annual earnout. An annual earnout will not be paid if the recipient is then in
violation of the non-solicitation and non-competition provisions contained in
the Stock Purchase Agreement to which the former holders of HISS's capital stock
are subject. Roger Nebel, Vice President and a director of HomeCom, 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 HomeCom on September 11, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A)1. Financial Statements
The consolidated financial statements, notes thereto and report of
independent accountants thereon, filed as part hereof, are listed in Item 8.
2. Financial Statement Schedules
Financial Statement scheduled have been omitted as the required information
is not applicable or the required information has been incorporated in the
consolidated financial statements and related notes incorporated by reference
herein.
3. Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------------------------------------------------
<C> <S> <C>
3.1 -- Restated Certificate of Incorporation of the Registrant.*
3.2 -- Restated Bylaws of the Registrant.*
3.3 -- Certificate of Designation of Series A Convertible Preferred Stock.***
4.1 -- See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate of Incorporation and Bylaws of the
Registrant defining rights of the holders of Common Stock of the Registrant.*
4.3 -- Form of Warrant.*
10.1 -- HomeCom Communications, Inc. Stock Option Plan and form of Stock Option Certificate.*
10.2 -- HomeCom Communications, Inc. Non-Employee Directors Stock Option Plan and form of Stock Option
Certificate.*
10.3 -- Employment Agreement between the Registrant and Harvey W. Sax, dated January 1, 1996.*
10.4 -- Form of Employment Agreement entered into between the Registrant and each of its executive officers
except Harvey W. Sax.*
10.5 -- Lease Agreement between Property Georgia OBJLW One Corporation and the Registrant dated January 22,
1996.*
</TABLE>
44
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.6 -- Lease and Services Agreement between Alliance Greensboro, L.P. and the Registrant, dated June 25,
1996.*
10.7 -- Business Alliance Program Agreement between Oracle Corporation and the Registrant, dated May 30, 1996,
together with the Sublicense Addendum, Application Specific Sublicense Addendum, Full Use and
Deployment Sublicense Addendum and License Transfer Policy, each dated May 30, 1996.*
10.8 -- Network Enrollment Agreement between Apple Computer, Inc. and the Registrant, effective May 1996.*
10.9 -- Member Level Agreement between Microsoft Corporation and the Registrant, effective May 1996.*
10.10 -- Master Agreement for Internet Services and Products between BBN Planet Corporation and the Registrant,
dated February 1, 1996.*
10.11 -- Authorized Business Partners Agreement between BBN Planet Corporation and the Registrant, dated May 14,
1996.*
10.12 -- Stock Purchase Agreement between the Registrant and the stockholders of Homecom Internet Security
Services, Inc., dated August 31, 1996.*
10.13 -- Form of Promissory Notes issued by the Registrant and held by Mark Germain.*
10.14 -- Form of Promissory Notes issued by the Registrant and held by Esther Blech and the Edward A. Blech
Trust.*
10.15 -- Marketing Associate Solution Alliance Agreement dated February 6, 1997 between the Registrant and
Unisys Corporation.*
10.16 -- Marketing Associate Agreement dated February 6, 1997 between the Registrant and Unisys Corporation.**
10.17 -- Letter agreement dated January 16, 1997 between the Registrant, David A. Blech, Esther Blech and the
Edward A. Blech Trust.*
10.18 -- HomeCom Communications, Inc. Employee Stock Purchase Plan.*
10.19 -- 5% Convertible Debenture Purchase Agreement dated effective September 19, 1997 between the Registrant,
Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.***
10.20 -- Form of 5% Convertible Debenture issued by the Registrant and held by Euro Factors International, Inc.,
Beauchamp Finance, FTS Worldwide Corporation and COLBO.***
10.21 -- Registration Rights Agreement dated effective September 19, 1997 between the Registrant, Euro Factors
International, Inc., Beauchamp Finance, FTS Worldwide Corporation and COLBO.***
10.22 -- Letter agreement dated September 23, 1997 between the Registrant, Euro Factors International, Inc.,
Beauchamp Finance, FTS Worldwide Corporation and COLBO.***
10.23 -- Letter agreement dated September 27, 1997 between the Registrant, Euro Factors International, Inc.,
Beauchamp Finance, FTS Worldwide Corporation and COLBO.***
10.24 -- Form of Warrant to purchase 200,000 shares of Common Stock at an exercise price of $4.00 per share
issued by the Registrant to First Granite Securities, Inc.***
10.25 -- Form of Warrant to purchase 200,000 shares of Common Stock at an exercise price of $6.00 per share
issued by the Registrant to First Granite Securities, Inc.***
10.26 -- Form of Securities Purchase Agreement between the Registrant, Sovereign Partners, L.P. and Dominion
Capital Fund, LTD. dated as of December 23, 1997.***
10.27 -- Form of Registration Rights Agreement between the Registrant, Sovereign Partners, L.P. and Dominion
Capital Fund, LTD. dated as of December 23, 1997***
10.28 -- Form of Warrant to purchase 18,750 shares of Common Stock issued by the Registrant to Sovereign
Partners, L.P.***
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.29 -- Form of Warrant to purchase 56,250 shares of Common Stock issued by the Registrant to Dominion Capital
Fund, LTD.***
10.30 -- Common Stock Purchase Agreement dated January 23, 1998 by and among InsureRate, Inc., the Registrant,
Jerome R. Corsi and Hamilton Dorsey Alston Company.***
10.31 -- Escrow Agreement dated as of January 23, 1998 by and among InsureRate, Inc., Hamilton Dorsey Alston
Company, the Registrant, Jerome R. Corsi and SunTrust Bank, Atlanta.***
10.32 -- Shareholders Agreement dated January 23, 1998 by and among Hamilton Dorsey Alston Company, the
Registrant and InsureRate, Inc.***
10.33 -- Web Development and Hosting Services Agreement dated January 23, 1998, by and among InsureRate, Inc.
and Hamilton Dorsey Alston Company.***
10.34 -- Form of Warrant to purchase 25,000 shares of Common Stock for an aggregate purchase price of $92,500 by
the Registrant to Hamilton Dorsey Alston Company.***
10.35 -- Loan Agreement dated January 23, 1998 by and between InsureRate, Inc. and the Registrant.***
10.36 -- Form of Master Note issued by the Registrant to InsureRate, Inc.***
10.37 -- Form of Warrant to purchase 50,000 shares of Common Stock issued by the Registrant to the Malachi
Group, Inc.****
10.38 -- Letter Agreement, dated April 8, 1998 by and among the Company, Eurofactors International Inc.,
Beauchamp France, FTS Worldwide Corporation and COLBO.****
10.39 -- Letter Agreement, dated April 8, 1998 by and between First Granite Securities, Inc. and the
Company.****
10.40 -- Letter Agreement, dated April 17, 1998 by and among Sovereign Partners, L.P., Dominion Capital Fund and
the Company.****
10.41 -- Agreement and Plan of Reorganization by and among The Insurance Resource Center, Inc., Tim Strong,
James Higham, Cameron M. Harris & Company and the Company, dated as of April 15, 1998.+
10.42 -- Employment Agreement by and between the Company and Tim Higham, dated as of April 16, 1998.+
10.44 -- Asset Purchase Agreement by and between the Company and Sage Networks Acquisition Corp. dated as of
June 10, 1998.++
10.45 -- Escrow Agreement by and between the Company and Sage Networks Acquisition Corp. dated as of June 10,
1998.++
10.46 -- Transitional Services Agreement by and between the Company and Sage Networks Acquisition Corp. dated as
of June 10, 1998.++
10.47 -- Co-Location Agreement by and between the Company and Sage Networks, Inc. dated as of June 10, 1998.++
10.48 -- Agreement and Plan of Merger by and among HomeCom Communications, Inc., FIMI Securities Acquisition
Corp., Inc., ATF Acquisition Corp., and Daniel A. Delity, James Wm. Ellsworth, and David B. Frank dated
as of November 6, 1998, together with exhibits.+++
10.49 -- Certificate of Designations, Preferences and Rights of Series B Convertible Preferred Stock HomeCom
Communications, Inc. dated as of March 24, 1999.++++
10.50 -- Securities Purchase Agreement dated as of March 25, 1999 by and among HomeCom Communications, Inc. and
CPR (USA), Inc., Liberty View Funds, L.P., and Liberty View Fund, L.L.C.++++
10.51 -- Registration Rights Agreement dated as of March 25, 1999 by and among HomeCom Communications, Inc. and
CPR (USA), Inc., Liberty View Funds, L.P., and Liberty View Fund, L.L.C.++++
10.52 -- Transfer Agent Instructions dated as of March 25, 1999.++++
10.53 -- Transfer Agent Legal Opinion dated as of March 25, 1999.++++
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- --------- -------------------------------------------------------------------------------------------------------
<C> <S> <C>
10.54 -- Placement Agency Agreement dated as of March 25, 1999 by and between HomeCom Communications, Inc. and
J.P. Turner & Company, L.L.C.++++
21.1 -- List of Subsidiaries.***
23.1 -- Consent of PricewaterhouseCoopers LLP.
27.1 -- Financial Data Schedules (for SEC use only).
</TABLE>
- ------------------------
*Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant (Registration No. 333-12219).
**Incorporated herein by reference to exhibit of the same number in the Form
10-Q/A of the Registrant filed with the Commission on December 18, 1997.
***Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant (Registration No. 333-42599).
****Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant filed with the Commission on
February 2, 1998.
+ Incorporated herein by reference to exhibit of the same number in the Form
S-1 Registration Statement of the Registrant (Registration No. 333-45383).
++ Incorporated herein by reference to exhibit of the same number in Form 8-K
of the Registrant filed with the Commission on June 25, 1998.
+++ Incorporated herein by reference to exhibit of the same number in Form 8-K
of the Registrant filed with the Commission on November 18, 1998.
++++Incorporated herein by reference to exhibit of the same number in Form 10-K
of the Registrant filed with the Commission on March 31, 1999.
(B) Reports on Form 8-K
On April 28, 1998, the Company filed a report on Form 8-K under Item 5 with
respect to its renegotiation of certain terms and conditions of the Series A
Convertible Preferred Stock private placement which was consummated in December
1997, and 5% Convertible Debentures private placement which was consummated in
September 1997.
On June 25, 1998, the Company filed a report on Form 8-K under Item 2 with
respect to its sale of substantially all of the assets of its HostAmerica
Internet network outsourcing services division to Sage Acquisition Corp. for
$4,500,000.
On November 18, 1998, the Company filed a report on Form 8-K under Item 5
with respect to its signing a definitive agreement and plan of merger to
acquire, among other things, all of the outstanding shares of First
Institutional Marketing, Inc. and certain of its affiliates ("FIMI") for
1,252,174 shares of common stock. In addition, the Company entered into
employment agreements for an initial term of 3 years with the three principals
of FIMI, calling for them to continue in their current roles for the acquired
companies.
47
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOMECOM COMMUNICATIONS, INC.
By: /s/ HARVEY W. SAX
-----------------------------------------
Harvey W. Sax
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
/s/ HARVEY W. SAX President; Chief Executive
- ------------------------------ Officer; Director September 14, 1999
Harvey W. Sax
/s/ NORMAN H. SMITH Vice President--Chief
- ------------------------------ Financial Officer September 14, 1999
Norman H. Smith
/s/ DANIEL A. DELITY President, First
- ------------------------------ Institutional Marketing, September 14, 1999
Daniel A. Delity Inc.; Director
/s/ JAMES WM. ELLSWORTH Vice President, First
- ------------------------------ Institutional Marketing, September 14, 1999
James Wm. Ellsworth Inc.; Director
/s/ KRISHAN PURI Executive Vice President;
- ------------------------------ Director September 14, 1999
Krishan Puri
/s/ GIA BOKUCHAVA, PH.D. Chief Technical Officer;
- ------------------------------ Director September 14, 1999
Gia Bokuchava, Ph.d.
/s/ CLAUDE A. THOMAS Director
- ------------------------------ September 14, 1999
Claude A. Thomas
48
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EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
HomeCom Communications, Inc. on Forms S-8 (File Nos. 333-68187, 333-60435,
333-60437) of our report, which contains an explanatory paragraph relating to
the Company's ability to continue as a going concern, dated March 29, 1999,
except as to Note 12, which is as of September 7, 1999, on our audits of the
financial statements of HomeCom Communications, Inc. as of December 31, 1998 and
1997, and for each of the three years in the period ended December 31, 1998,
which report is included in this Annual Report on Form 10-K/A.
PricewaterhouseCoopers LLP
Atlanta, Georgia
September 15, 1999
