<PAGE> 1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
COMMISSION FILE NUMBER 0-29204
HOMECOM COMMUNICATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 58-2153309
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
</TABLE>
BUILDING 14, SUITE 100,
3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(Address of principal executive offices and zip code)
(404) 237-4646
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) and has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
As of May 12, 1999, there were 6,625,412 outstanding shares of the
Registrant's Common Stock, par value $.0001 per share.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
HOMECOM COMMUNICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION.............................. 2
ITEM 1. FINANCIAL STATEMENTS:
(1) Balance Sheets as of March 31, 1999 and December 31,
1998...................................................... 2
(2) Statements of Operations for the three months ended
March 31, 1999 and 1998................................... 3
(3) Statements of Cash Flows for the three months ended
March 31, 1999 and 1998................................... 4
(4) Notes to Financial Statements........................... 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 7
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K................... 12
Signatures.................................................. 13
Exhibit Index...............................................
</TABLE>
1
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOMECOM COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,885,255 $ 2,291,932
Restricted cash........................................... 250,000 250,000
Accounts receivable, net of allowance for uncollectible
accounts of $228,185 and $95,384 as of March 31, 1999
and December 31, 1998, respectively.................... 1,211,805 680,790
Loans to shareholders..................................... 370,000 --
Other current assets...................................... 194,121 4,796
----------- -----------
Total current assets.............................. 4,911,181 3,227,518
FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 940,215 797,263
DEPOSITS.................................................... 107,618 80,231
DEFERRED ACQUISITION COSTS.................................. -- 109,158
INTANGIBLE ASSETS, NET...................................... 4,851,784 351,320
OTHER NON-CURRENT ASSETS.................................... 98,600 --
----------- -----------
Total assets...................................... $10,909,398 $ 4,565,490
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 906,778 $ 424,094
Accrued payroll liabilities............................... 373,834 300,927
Unearned revenue.......................................... 214,174 128,345
Current portion of obligations under capital leases....... 223,030 108,427
----------- -----------
Total current liabilities......................... 1,717,816 961,793
OTHER LIABILITIES........................................... 82,106 67,006
OBLIGATIONS UNDER CAPITAL LEASES............................ 99,156 88,242
----------- -----------
Total liabilities................................. 1,899,078 1,117,041
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 15,000,000 shares
authorized, 6,430,070 and 5,072,397 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively........................................... 643 507
Preferred stock, Series B, $.0001 par value, 1,000,000
shares authorized, 125 and 0 shares issued and
outstanding at March 31, 1999 and December 31, 1998,
respectively; participating; $2,500,000 liquidation
value at March 31, 1999................................ 1 --
Additional paid-in capital................................ 17,289,044 10,355,724
Subscriptions receivable.................................. (196,878) (196,878)
Accumulated deficit....................................... (8,082,490) (6,710,904)
----------- -----------
Total stockholders' equity........................ 9,010,320 3,448,449
----------- -----------
Total liabilities and stockholders' equity........ $10,909,398 $ 4,565,490
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
NET SALES:
Service sales............................................. $ 980,196 $ 762,746
Equipment sales........................................... 62,141 119,681
----------- -----------
Total net sales................................... 1,042,337 882,427
----------- -----------
COST OF SALES:
Cost of services.......................................... 627,549 430,163
Cost of equipment sold.................................... 49,176 82,562
----------- -----------
Total cost of sales............................... 676,725 512,725
----------- -----------
GROSS PROFIT................................................ 365,612 369,702
----------- -----------
OPERATING EXPENSES:
Sales and marketing....................................... 521,953 319,529
Product development....................................... 267,530 89,663
General and administrative................................ 803,815 782,693
Depreciation and amortization............................. 151,719 78,393
----------- -----------
Total operating expenses.......................... 1,745,017 1,270,278
----------- -----------
OPERATING LOSS.............................................. (1,379,405) (900,576)
OTHER EXPENSES (INCOME)
Interest expense.......................................... 4,709 266,029
Other expense (income), net............................... (12,528) (38,151)
----------- -----------
LOSS BEFORE INCOME TAXES.................................... (1,371,586) (1,128,454)
INCOME TAXES................................................ -- --
----------- -----------
NET LOSS.................................................... (1,371,586) (1,128,454)
PREFERRED STOCK DIVIDEND.................................... -- (441,176)
----------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS...................... $(1,371,586) $(1,569,630)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE............................ $ (0.26) $ (0.51)
=========== ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.................. 5,231,058 3,079,382
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------------
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,371,586) $(1,128,454)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization........................... 149,070 86,338
Amortization of debt discount........................... -- 122,778
Amortization of debt issue costs........................ -- 116,434
Provision for bad debts................................. 133,500 7,675
Deferred rent expense................................... (715) (42,405)
Change in operating assets and liabilities:
Accounts receivable................................... (479,003) (118,876)
Prepaid expenses...................................... (189,325) --
Accounts payable and accrued expenses................. 54,733 157,031
Accrued payroll liabilities........................... 54,723 65,029
Unearned revenue...................................... 85,829 44,329
Other................................................. (124,108) (44,040)
----------- -----------
Net cash used in operating activities.............. (1,686,882) (734,461)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment............. (17,960) (154,916)
Cash from acquisition..................................... 96,517 --
Loans to shareholders..................................... (370,000) --
Payment of acquisition costs.............................. (87,530) --
----------- -----------
Net cash used in investing activities.............. (378,973) (154,916)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs........................ -- (28,937)
Payment of deferred debt issue costs...................... -- (35,395)
Proceeds from issuance of preferred shares and warrants,
net of offering costs................................... 2,283,750 --
Repayment of capital lease obligations.................... (38,175) (13,239)
Proceeds from issuance of common shares and exercise of
warrants................................................ 413,603 --
----------- -----------
Net cash provided by (used in) financing
activities....................................... 2,659,178 (77,751)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 593,323 (966,948)
CASH AND CASH EQUIVALENTS at beginning of period............ 2,291,932 3,187,948
----------- -----------
CASH AND CASH EQUIVALENTS at end of period.................. $ 2,885,255 $ 2,221,000
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NON CASH INVESTING AND FINANCING ACTIVITIES:
</TABLE>
During the three month periods ended March 31, 1999 and 1998, capital lease
obligations of $69,165 and $23,900, respectively, were incurred when the Company
entered into leases on computer equipment.
During the three months ended March 31, 1999, the Company issued 1,252,174
shares of common stock for the net assets of First Institutional Marketing, Inc.
and certain of its affiliates.
During the three months ended March 31, 1998, $700,000 of convertible
debentures were converted into 329,751 shares of common stock
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Article 10 of Regulation S-X of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the financial position and results of operations of
HomeCom Communications, Inc. (the "Company") for the interim periods presented.
All such adjustments are of a normal and recurring nature. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K.
2. ACQUISITION OF FIRST INSTITUTIONAL MARKETING, INC. ("FIMI")
On March 24, 1999, the Company acquired First Institutional Marketing,
Inc., and certain of its affiliates ("FIMI") of Houston, Texas for total
consideration of $4,236,104, consisting of 1,252,174 shares of common stock. The
acquisition is accounted for as purchase transaction. The value of the shares
was determined by using the average closing stock price of the two days before
and after the definitive agreement was publicly announced. The Company will
engage an independent firm to assess the fair value of the assets purchased and
liabilities assumed. As of March 31, 1999, the Company has made the following
preliminary allocation of the purchase price:
<TABLE>
<S> <C>
Cash........................................................ $ 96,517
Accounts receivable......................................... 185,512
Furniture, fixtures and equipment........................... 169,476
Deposits.................................................... 1,879
Intangible assets........................................... 4,339,197
Accounts payable and accrued expenses....................... (427,951)
Payroll liabilities......................................... (18,184)
Obligations under capital leases............................ (94,527)
Other liabilities........................................... (15,815)
----------
Total Purchase Price.............................. $4,236,104
==========
</TABLE>
The resulting goodwill will be amortized over a period of 7 years. Results
of operations for FIMI are included with those of the Company subsequent to the
date of acquisition. The financial statements reflect approximately $67,000 of
revenue and a net loss of approximately $17,000 for the seven-day period.
5
<PAGE> 7
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following represents pro-forma results for the Company for the three
months ended March 31, 1999 and 1998 as if the FIMI acquisition had occurred as
of January 1, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------- ----------------------------------------------------
PRO-FORMA PRO-FORMA PRO-FORMA PRO-FORMA
HOMECOM FIMI ADJUSTMENTS AS ADJUSTED HOMECOM FIMI ADJUSTMENTS AS ADJUSTED
----------- ---------- ----------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Sales............ 1,042,337 682,933 -- 1,725,270 882,427 828,278 -- 1,710,705
Cost of Sales........ 676,725 498,350 -- 1,175,075 512,725 670,093 -- 1,182,818
----------- ---------- ---------- ---------- ----------- ---------- -----------
Gross Profit......... 365,612 184,583 -- 550,195 369,702 158,185 -- 527,887
Operating Expenses... 1,745,017 332,329 154,971 2,232,317 1,270,278 161,254 154,971 1,586,503
----------- ---------- ---------- ---------- ----------- ---------- -----------
Operating income
(Loss)............. (1,379,405) (147,746) (154,971) (1,682,122) (900,576) (3,069) (154,971) (1,058,616)
Other Expenses
(income), Net...... (7,819) -- -- (7,819) 227,878 -- -- 227,878
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Income (Loss) Before
Income Taxes....... (1,371,586) (147,746) (154,971) (1,674,303) (1,128,454) (3,069) (154,971) (1,286,494)
Income Taxes......... -- -- -- -- -- -- -- --
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Net Income (Loss).... (1,371,586) (147,746) (154,971) (1,674,303) (1,128,454) (3,069) (154,971) (1,286,494)
Preferred Stock
Dividend........... -- -- -- -- 441,176 -- -- 441,176
----------- ---------- ---------- ---------- ----------- ---------- ---------- -----------
Income (Loss)
Applicable to
Common
Shareholders....... (1,371,586) -- (154,971) (1,526,557) (1,569,630) -- (154,971) (1,724,601)
=========== ========== ========== ========== =========== ========== ========== ===========
Basic and Diluted
Loss per Share..... $ (0.26) $ -- $ -- (0.24) $ (0.51) $ -- $ -- $ (0.40)
=========== ========== ========== ========== =========== ========== ========== ===========
Weighted Average
Common Shares
Outstanding........ 5,231,058 1,252,174 -- 6,483,232 3,079,382 1,252,174 -- 4,331,556
=========== ========== ========== ========== =========== ========== ========== ===========
</TABLE>
Pro-forma adjustment assumes amortization of $4,339,197 intangible asset
over a period of 7 years.
Prior to the closing of the acquisition, the Company loaned the
shareholders of FIMI $370,000. The note is due January 29, 2000 and bears
interest of 9%. The loan may be repaid in cash or common stock.
In connection with the acquisition, the principal shareholders of FIMI were
granted 300,000 warrants to acquire HomeCom common stock at an exercise price of
$3.74 per share. Vesting of the warrants is contingent upon FIMI meeting certain
operating goals as defined in the agreement. If the operating results are
obtained, the warrants vest ratably over a three year period on the anniversary
date of the acquisition.
3. ACQUISITION OF GANYMEDE CORPORATION
On April 23, 1999, the Company acquired all of the outstanding shares of
Ganymede Corporation ("Ganymede") for total consideration of $1,132,339,
consisting of 185,342 shares of common stock and $100,000 cash. The number of
shares was determined by dividing the total non-cash consideration by the
average closing price of the Company's stock for the 20 trading days prior to
April 9, 1999. In addition, the Company entered into employment agreements with
the three principals of Ganymede, calling for them to continue in their current
roles for the acquired company.
6
<PAGE> 8
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition will be accounted for as a purchase. The purchase price
will be allocated to assets acquired and liabilities assumed based on their
estimated fair values. Results of operations for Ganymede will be included with
those of the Company for periods subsequent to the date of acquisition. The
Company will file a Registration Statement on Form S-3 with respect to the
resale of a portion of the shares of HomeCom Communications, Inc. Common Stock
issued in the acquisition.
4. ISSUANCE OF SERIES B PREFERRED STOCK
The Company issued Series B Preferred Stock totaling $2,500,000 on March
25, 1999 (the "Issuance Date"). The Series B Preferred Stock investors were
issued 125 shares of preferred stock, having a stated value of $20,000 per
share, and 225,000 warrants to purchase common stock at $5.70 per share. The
Company paid offering costs of $216,250 cash plus 25,000 warrants to purchase
common stock at $5.70 per share, resulting in net proceeds the Company of
$2,283,750 for the preferred shares and warrants.
The Series B Preferred Stock bears no dividends and are convertible at the
option of the holder at the earlier of 90 days after issuance or the effective
date of a registration statement covering the shares. The warrants are
exercisable at any time and expire five years from the date of issuance.
The Series B Preferred Stock is convertible into common stock at a
conversion price equal to the lower of (a) the average of the closing price for
four consecutive trading days in the twenty-five consecutive trading days ending
one day prior to the conversion date ($4.86 at the Issuance date) and (b) $5.23.
The number of common shares into which the Series B Preferred Stock is
convertible is determined by dividing the stated value of the Series B Preferred
Stock, increased by 5% annually, by the conversion price. As the Series B
Preferred Stock is automatically convertible on March 24, 2002, the most
beneficial conversion ratio was determined to include the additional common
shares attributable to the 5% for the three year period ending in 2002. After
adjustment for this additional benefit the $4.86 conversion price is reduced to
$4.23, the most beneficial conversion price at the Issuance Date.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $2,283,750 to the preferred stock
and the warrants based on their relative fair values at the Issuance Date,
resulting in $1,766,217 assigned to the preferred stock and $517,533 assigned to
the warrants as of March 24, 1999. The Company then allocated $1,635,450 of the
Series B net proceeds to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return. Approximately $1,250,000 of
the beneficial conversion is expected to be amortized in the second quarter of
1999. The balance of the beneficial conversion feature is being recognized from
the Issuance Date through June, 2002.
The Company has the option to redeem the Series B Preferred Stock after 110
days for 120% of face value. Additionally, if the Company has issued common
stock upon conversion of the Series B Preferred Stock such that 19.99% of the
common stock outstanding is held by the preferred shareholders, the Company must
obtain approval of the shareholders before any more preferred shares can be
converted. If such approval is not obtained within 60 days shares of notice, the
preferred shareholders may require the Company to repurchase the remaining
Series B Preferred Stock at 120% of face value. At the Issuance Date, the
Company had obtained irrevocable proxies from shareholders representing
approximately 40% of the common shareholders to vote in favor of increasing the
number of shares should such vote be required.
5. BASIC AND DILUTED LOSS PER SHARE
The Company adopted Statement of Financial Accounting Standards ("SFAS")
No. 128, "Earnings Per Share", effective December 31, 1997. Earnings (loss) per
common share ("EPS") was computed by dividing net loss available to common
shareholders by the weighted average number of shares of common stock
7
<PAGE> 9
HOMECOM COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
outstanding for the period then ended. The effect of the Company's stock options
and convertible securities was excluded from the computations for the three
months ended March 31, 1999 and 1998, as it is antidilutive.
6. 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/FIMI. 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 three months ended March 31,
1999 and 1998:
<TABLE>
<CAPTION>
SOFTWARE INSURERATE/ CONSOLIDATED
FAST HOSTAMERICA HISS PRODUCTS FIMI RECONCILING ITEMS TOTALS
---- ----------- ----- -------- ----------- ----------------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
1999:
Revenues............ $775 $ 0 $ 135 $ 65 $ 67 $ 0 $ 1,042
Net Income (Loss)... $114 $ 0 $(108) $(140) $(139) $(1,135)(1) $(1,372)
1998:
Revenues............ $392 $318 $ 172 $ 0 $ 0 $ 0 $ 882
Net Income (Loss)... $(29) $176 $ 2 $ (2) $ 0 $(1,275)(1) $(1,128)
</TABLE>
- ---------------
(1) Represents consolidated pretax income. Adjustments that are made to the
total of the segments' operating income in order to arrive at consolidated
pretax income include the following: ($ in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Depreciation and amortization........................ $ (152) $ (78)
Interest expense, net................................ (5) (266)
Corporate sales and marketing and product development
expenses........................................... (174) (148)
General and administrative expenses.................. (804) (783)
------- -------
$(1,135) $(1,275)
======= =======
</TABLE>
7. INCOME TAXES
There was no provision for or cash payment of income taxes for the three
months ended March 31, 1999 and 1998, respectively, as the Company anticipates a
net taxable loss for the year ended December 31, 1999.
8. OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, some matters discussed
in this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
8
<PAGE> 10
Section 21E of the Securities Exchange Act of 1934, as amended. The Company
notes that a variety of risk factors could cause the Company's actual results
and experience to differ materially from the anticipated results or other
expectations expressed in the Company's forward-looking statements. Reference is
made in particular to the discussion set forth below in this report and set
forth in the Company's Annual Report on Form 10-K and to the Company's
Registration Statements on Forms S-1 (File Nos. 333-12219, 333-42599, 333-45383,
and 333-56795) and S-3 (333-73123).
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.
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.
- HomeCom's Software Products 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
9
<PAGE> 11
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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Net Sales. Net sales increased 18.1% from $882,427 in the first quarter of
1998 to $1,042,337 in the first quarter of 1999. Revenues from service sales
increased 28.5% from $762,746 in the first quarter of 1998 to $980,196 in the
first quarter of 1999. This increase of $217,450 is primarily attributable to
increases in custom application development revenues of approximately $267,000,
software product sales of approximately $65,000, and insurance sales of
approximately $67,000 from the FIMI acquisition, offset by lower hosting
revenues of approximately $181,000 due to the sale of HostAmerica in June 1998
offset by higher hosting revenues from FAST development clients. Revenue from
equipment sales decreased from $119,681 in the first quarter of 1998 to $62,141
in the first quarter of 1999. This decrease of $57,540 was attributable to
decreased 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 $430,163, or 48.7% of revenues in the first quarter of 1998 to
$627,549, or 60.2% of revenues in the first quarter of 1999. This increase
reflects increased costs for technical personnel hired in advance of
10
<PAGE> 12
anticipated revenue growth, offset by costs eliminated due to the sale of
HostAmerica in June 1998. The increase in cost of sales as a percentage of
revenues is due to the mix of products and services sold.
Gross Profit. Gross profit decreased by $4,090 from $369,702 in the first
quarter of 1998 to $365,612 in the first quarter of 1999. Gross profit margins
decreased from 41.9% during the first quarter of 1998 to 35.1% during the first
quarter of 1999. These decreases primarily reflect 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 increased 63.4% from $319,529 in 1998 to $521,953 in 1999. This
increase was primarily attributable to increased advertising, public relations,
and marketing costs. As a percentage of net sales, these expenses increased from
36.2% in 1998 to 50.1% in 1999.
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 $366,130, or 35.1% of net sales in the first quarter of 1999,
of which $98,600 were capitalized. This compares to total product development
expenditures of $89,663, or 10.9% of sales in the first quarter of 1998.
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
$782,693 in the first quarter of 1998 to $803,815 in the first quarter of 1999.
As a percentage of net sales, these expenses decreased from 88.7% in the first
quarter of 1998 to 77.1% in the first quarter of 1999, due primarily to
increases in revenues without corresponding increases in general and
administrative expenses.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases, and intangible assets. Depreciation and
amortization increased from $78,393, or 8.9% of revenues in the first quarter of
1998 to $151,719, or 14.6% of revenues in the first quarter of 1999, reflecting
increased expenditures on capital equipment and amortization of intangible
assets associated with the acquisition of IRC.
Interest Expense. Interest expense decreased from $266,029 in the first
quarter of 1998 to $4,709 during the first quarter of 1999, principally
reflecting amortization of the discount ($122,778) and debt issue costs
($116,434) incurred in 1998 for the Company's 5% convertible debentures issued
in September 1997.
LIQUIDITY AND CAPITAL RESOURCES
General
The Company has substantially limited unused sources of capital. As of
March 31, 1999, the Company had net working capital of approximately $3.2
million. Management has undertaken steps to address the Company's ongoing cash
requirements including concentrating the Company's market focus, identifying
additional operational and administrative efficiencies, and actively managing
working capital. The Company also may consider raising additional capital
through additional debt and equity offerings.
Because the Company expects to continue to incur substantial operating
losses, the Company will continue to use substantial sums of cash in its
operations for an indefinite period. Accordingly, the Company will be required
to obtain additional capital. No assurance can be given that the Company will be
successful in its efforts to obtain additional capital, or that capital will be
available on terms acceptable to the Company or on terms that will not
significantly dilute the interests of existing stockholders. If the Company
exhausts its current sources of capital and is not able to obtain additional
capital, the Company will be required to undertake certain steps to continue its
operations. Such steps may include immediate reduction of the Company's
operating costs and other expenditures, including potential reductions of
personnel and suspension of salary increases and capital expenditures. If such
measures are not sufficient, the Company may elect to implement other cost
reduction actions as the Company may determine are necessary and in the
Company's
11
<PAGE> 13
best interests, including the possible sale of certain of the Company's business
lines. Any such actions undertaken may limit the Company's opportunities to
realize continued increases in sales and the Company may not be able to reduce
its costs in amounts sufficient to achieve break-even or profitable operations.
If the Company exhausts its sources of capital, and subsequent cost reduction
measures are not sufficient to allow the Company to achieve break-even or
profitable operations, the Company will be forced to seek protection from its
creditors.
Net cash used in operating activities was $1,588,282 for three months ended
March 31, 1999. 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 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.
The Company spent $17,960 and $154,916 during the three months ended March
31, 1999 and 1998, 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 and New York City facilities.
Accounts receivable, net of allowance for doubtful accounts, totaled
$1,211,805 as of March 31, 1999. 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.
12
<PAGE> 14
PART II. OTHER INFORMATION
ITEMS 1-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 -- Financial Data Schedule (For SEC use only)
(b) Reports on Form 8-K
None.
13
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
<S> <C>
HomeCom Communications, Inc.
Date: May 14, 1999 /s/ HARVEY W. SAX
--------------------------------------------------------
Harvey W. Sax
President and Chief Executive Officer
Date: May 14, 1999 /s/ NORMAN H. SMITH
--------------------------------------------------------
Norman H. Smith
Chief Financial Officer
(Principal Financial Officer)
</TABLE>
14
<PAGE> 16
HOMECOM COMMUNICATIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- ------- ----------- ----
<S> <C> <C> <C>
27.1 -- Financial Data Schedule (For SEC Use only).................. 16
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HOMECOM COMMUNICATIONS, INC. FOR THE THREE MONTH PERIOD
ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 3,135,255
<SECURITIES> 0
<RECEIVABLES> 1,211,805
<ALLOWANCES> 228,185
<INVENTORY> 0
<CURRENT-ASSETS> 4,911,181
<PP&E> 2,049,565
<DEPRECIATION> 1,109,349
<TOTAL-ASSETS> 10,909,398
<CURRENT-LIABILITIES> 1,717,816
<BONDS> 0
0
0
<COMMON> 643
<OTHER-SE> 9,009,677
<TOTAL-LIABILITY-AND-EQUITY> 10,909,398
<SALES> 62,141
<TOTAL-REVENUES> 1,042,337
<CGS> 49,176
<TOTAL-COSTS> 676,725
<OTHER-EXPENSES> 1,611,517
<LOSS-PROVISION> 133,500
<INTEREST-EXPENSE> 4,709
<INCOME-PRETAX> (1,371,587)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,371,587)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,371,587)
<EPS-PRIMARY> (0.26)
<EPS-DILUTED> (0.26)
</TABLE>
