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UNITED STATES
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 JUNE 30, 2000
COMMISSION FILE NUMBER 0-29204
HOMECOM COMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 58-2153309
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.
INCORPORATION OR ORGANIZATION)
BUILDING 14, SUITE 100,
3535 PIEDMONT ROAD
ATLANTA, GEORGIA 30305
(Address of principal executive offices and zip code)
(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 August 1, 2000, there were 8,925,726 outstanding shares of the
Registrant's Common Stock, par value $.0001 per share.
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HOMECOM COMMUNICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
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Page
PART I. FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS 2
1) Consolidated Balance Sheets as of June 30, 2000 (unaudited) and
December 31, 19 2
2) Consolidated Statements of Operations for the three months and six
month ended June 30, 2000 and 1999 (unaudited) 3
3) Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999 (unaudited) 4
4) Notes to Consolidated Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9
Part II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 15
SIGNATURES 16
EXHIBIT INDEX 17
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 1,030,253 $ 1,497,678
Accounts receivable, net 1,351,567 1,160,114
Employee loans 470,958 474,583
Receivable from related parties 200,000
Other current assets 177,214 189,648
------------- -------------
Total current assets 3,029,992 3,522,023
Furniture, Fixtures and Equipment, Net 899,434 1,131,204
Deposits 82,485 92,494
Intangible Assets, Net 3,477,408 4,966,822
Investment 823,175 823,175
------------- -------------
Total Assets $ 8,312,494 $ 10,535,718
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 1,328,298 $ 1,697,210
Accrued payroll liabilities 433,194 290,414
Unearned revenue 296,319
Current portion of obligations under capital leases 182,910 204,278
------------- -------------
Total Current Liabilities 1,944,402 2,488,221
Other Liabilities 109,060 127,104
Obligations Under Capital Lease 273,341 315,275
------------- -------------
Total Liabilities 2,326,803 2,930,600
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Redeemable Preferred Stock--Series B, $.01 par value, 125 shares 282,695 1,624,920
authorized, 25 and 115 shares outstanding at June 30, 2000 and
December 31, 1999, respectively; participating; $ 531,575
liquidation value at June 30, 2000.
Stockholders' Equity:
Common stock, $.0001 par value, 50,000,000 shares authorized, 879 704
8,786,247 shares 7,040,525 shares issued and outstanding at June
30, 2000 and December 31, 1999, respectively.
Preferred stock, Series C, $.01 par value, 175 shares authorized, 1 2
104.6 and 137.5 shares outstanding at June 30, 2000 and December
31, 1999, respectively, convertible, participating; $ 2,208,383
liquidation value at June 30, 2000.
Preferred stock, Series D, $.01 par value, 75 shares authorized, 1 1
1.3 and 75 shares outstanding at June 30, 2000 and December 31,
1999 respectively; convertible, participating; $ 26,991 liquidation
value at June 30, 2000.
Preferred stock, Series E, $.01 par value, 106.4 shares authorized, 1
106.4 shares issued and outstanding as June 30, 2000, convertible,
participating, $ 2,162,897 liquidation value at June 30,2000.
Additional paid-in capital 25,449,071 21,931,281
Subscriptions Receivable (64,687) (64,687)
Accumulated Deficit (19,682,270) (15,887,103)
------------- -------------
Total Stockholders' Equity 5,702,996 5,980,198
------------- -------------
Total Liabilities and Stockholders' Equity $ 8,312,494 $ 10,535,718
============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements
2
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HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
2000 1999 2000 1999
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Revenues $ 2,236,486 $ 1,912,052 $ 4,619,957 $ 2,819,282
Cost of Revenues 1,154,648 1,193,440 2,183,324 1,903,380
------------- ------------- ------------ -------------
Gross Profit 1,081,838 718,612 2,436,633 915,902
------------- ------------- ------------ -------------
Operating Expenses:
Sales and marketing 701,601 948,213 1,593,417 1,318,010
Product development 69,292 165,280 278,523 350,579
General and administrative 1,327,276 1,407,992 2,603,792 2,169,873
Depreciation and amortization 1,336,734 457,104 1,832,491 608,823
------------- ------------- ------------ -------------
Total operating expenses 3,434,903 2,978,589 6,308,223 4,447,285
------------- ------------- ------------ -------------
Operating loss (2,353,065) (2,259,977) (3,871,590) (3,531,383)
Other Expenses
Interest expense (income) (34,529) 11,444 (30,464) 16,153
Other income, net (14,537) (27,383) (45,959) (39,910)
------------- ------------- ------------ -------------
Loss From Continuing Operations Before Income Taxes (2,303,999) (2,244,038) (3,795,167) (3,507,626)
Income Tax Provision (Benefit) -- -- -- --
------------- ------------- ------------ -------------
Loss From Continuing Operations (2,303,999) (2,244,038) (3,795,167) (3,507,626)
Loss from Discontinued Operations (143,000) (251,000)
------------- ------------- ------------ -------------
Net Loss (2,303,999) (2,387,038) (3,795,167) (3,758,626)
Deemed Preferred Stock Dividend (871,318) (792,390) (1,182,740) (792,390)
------------- ------------- ------------ -------------
Net Loss Applicable to Common Shareholders $ (3,175,317) $ (3,179,428) $ (4,977,907) $ (4,551,016)
------------- ------------- ------------ -------------
Loss Per Share - Basic and Diluted
Continuing Operations $ (0.38) $ (0.46) $ (0.63) $ (0.73)
Discontinued Operations (0.02) (0.04)
------------- ------------- ------------ -------------
Loss Per Share - Basic and Diluted $ (0.38) $ (0.48) $ (0.63) $ (0.77)
------------- ------------- ------------ -------------
Weighted Average Common Shares Outstanding 8,353,619 6,585,603 7,891,021 5,912,072
------------- ------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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HOMECOM COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<CAPTION>
SIX MONTHS ENDED
June 30,
--------------------------------
2000 1999
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Cash Flows From Operating Activities:
Net loss $ (3,795,167) $ (3,758,626)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 1,814,449 608,823
Provision for bad debts (386) 133,500
Deferred rent expense (18,043) (21,571)
Change in operating assets and liabilities:
Accounts receivable (226,480) (406,158)
Prepaid expenses (562,382)
Accounts payable and accrued expenses (106,653) 779,516
Accrued payroll liabilities 142,780 102,157
Unearned revenue (296,319) (76,319)
Other 61,480 (270,718)
------------ ------------
Net cash used in operating activities (2,424,339) (3,471,778)
------------ ------------
Cash Flows From Investing Activities:
Purchase of furniture, fixtures and equipment (93,265) (252,793)
Cash from acquisition 136,938
Employee loans (370,000)
Payment of acquisition costs (356,285)
------------ ------------
Net cash used in investing activities (93,265) (842,140)
------------ ------------
Cash Flows From Financing Activities:
Repayment of receivable from a related party 200,000
Proceeds from issuance of preferred shares and warrants 1,898,750 2,283,750
Repayment of capital lease obligations (63,302) (146,516)
Proceeds from issuance of common shares and exercise of warrants 14,731 448,487
------------ ------------
Net cash provided by financing activities 2,050,179 2,585,721
------------ ------------
Net Decrease in cash and cash Equivalents (467,425) (1,728,197)
Cash and Cash Equivalents at Beginning of Period 1,497,678 2,541,932
------------ ------------
Cash and Cash Equivalents at End of Period $ 1,030,253 $ 813,735
------------ ------------
</TABLE>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION AND NON CASH INVESTING AND
FINANCING ACTIVITIES
During the six months ended June 30, 2000 the Company issued 59,559 shares
of common stock relating to penalties on preferred stock accrued during 1999.
During the six months ended June 30, 2000, the Company issued 15,077 shares
of common stock for legal costs incurred in 1999.
The accompanying notes are an integral part of these financial statements.
4
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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. GOING CONCERN MATTERS
The company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplate the
realization of assets and liquidations of liabilities in the normal course of
business. The Company has incurred significant losses since its incorporation,
resulting in an accumulated deficit at June 30, 2000 of approximately $19.7
million. The Company continues to experience negative cash flows from operations
and has been dependent on continued financing from investors to sustain its
activities. There is no assurance that such financing will be available in the
future. These factors raise substantial doubt about the Company's ability to
continue as a going concern. During 1999 the Company completed a workforce
reduction and the sale of its security division in order to reduce expenses.
Additionally, the Company has taken measures to reduce its corporate overhead.
The Company's continued existence as a going concern is dependent upon its
ability to generate cash flows sufficient to cover its corporate overhead or to
secure adequate debt or equity funding.
3. SEGMENT INFORMATION
During 1999, HomeCom was organized into four separate business units,
organized on the basis of products and services. 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 security services (HISS), software products, and
InsureRate/FIMI. On October 1, 1999 the Company sold all of the assets of its
HISS unit to Infrastructure Defense, Inc and discontinued operations for this
business. On August 4, 2000, the Company announced that it had entered into an
agreement to sell the InsureRate division and the FIMI companies. The
transaction is subject to the execution of a definitive purchase agreement and
is subject to a number of conditions, not limited to the completion of financing
satisfactory to complete the transaction.
5
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3. SEGMENT INFORMATION (CONTINUED)
The table below presents information about the reported business unit
revenues, income (loss) for HomeCom Communications, Inc. for the three months
and six months ended June 30, 2000 and 1999 (in thousands):
<TABLE>
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Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ----------------------------
2000 1999 2000 1999
----------- ------------ ------------ -----------
<S> <C> <C> <C> <C>
Revenues
FAST $ 1,488 $ 1,071 $ 2,655 $ 1,846
InsureRate/FIMI 744 826 1,500 893
Software Products 4 15 465 80
------------ ------------ ------------ -----------
Totals 2,236 1,912 4,620 2,819
HISS (Discontinued Operation) 93 228
============ ============ ============ ===========
Total Revenue 2,236 2,005 4,620 3,047
============ ============ ============ ===========
Business Unit Net Income (Loss)
FAST 942 153 1,464 267
InsureRate/FIMI (561) (820) (1,168) (959)
Software Products (80) (109) 286 (249)
------------ ------------ ------------ -----------
Business Unit Net Income (Loss) 301 (776) 582 (941)
Adjustments to reconcile Business unit net income
(loss) with consolidated net income (loss):
Corporate Expenses (2,588) (1,461) (4,359) (2,265)
Interest expense (11) (4) (16)
Net Other (17) 4 (14) (286)
------------ ------------ ------------ -----------
Loss from Continuing Operations (2,304) (2,244) (3,795) (3,508)
HISS (Discontinued Operation) (143) (251)
============ ============ ============ ===========
Net Loss $ (2,304) $ (2,387) $ (3,795) $ (3,759)
============ ============ ============ ===========
</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.
6
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4. BASIC AND DILUTED LOSS PER SHARE
Earnings (loss) per common share ("EPS") is computed by dividing net income
(loss) available to common shareholders by the weighted average number of shares
of common stock outstanding for the period then ended. The effect of the
Company's stock options and convertible securities is excluded from the
computations for the six months ended June 30, 2000 and 1999, as it is
antidilutive.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- ---------------------------------
2000 1999 2000 1999
------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Loss from continuing operations $(2,303,999) $ (2,244,038) $ (3,795,167) $ (3,507,626
Less: Deemed preferred stock dividend (871,318) (792,390) (1,182,740) (792,390)
------------- --------------- -------------- ---------------
Loss from continuing operations applicable to common $(3,175,317) $ (3,036,428) $ (4,977,907) $ (4,300,016)
shareholders ------------- --------------- -------------- ---------------
Loss from discontinued operations (143,000) (251,000)
Net loss applicable to common shareholders $(3,175,317) $ (3,179,428) $ (4,977,907) $ (4,551,016)
------------- --------------- -------------- ---------------
Loss per share-continuing operations $ (0.38) $ (0.46) $ (0.63) $ (0.73)
Loss per share-discontinued operations (0.02) (0.04)
------------- --------------- -------------- ---------------
$ (0.38) $ (0.48) $ (0.63) $ (0.77)
============= =============== ============== ===============
Weighted average common shares outstanding-basic and 8,353,619 6,585,603 7,891,021 5,912,072
diluted ============= =============== ============== ===============
</TABLE>
5. ISSUANCE OF SERIES E PREFERRED STOCK
On April 14, 2000, the Company completed a private placement of $2,127,000
principal amount of the Company's Series E Convertible Preferred Stock, par
value $.01 per share (the "Series E Preferred Stock") and warrants to acquire
66,667 shares of common stock (the "Series E Preferred Warrants"). The Series E
Preferred Stock has an initial stated value of $20,000 per share, which stated
value increases at the rate of 8% per year. Each Series E Preferred Share is
convertible 120 days following the date of issuance, at the option of the
holder, into such number of shares of common stock as is determined by dividing
the Series E Stated Value by the lesser of (a) $3.53, or (b) 82.5% of the
average of the closing bid prices for the five trading days preceding the date
of conversion. Any Series E Preferred Stock issued and outstanding on April 14,
2003 will automatically be converted into common stock at the conversion price
then in effect.
Pursuant to certain registration rights granted to the investors in the
private placement, we are obligated to file a registration statement under the
Securities Act of 1933 with respect to a minimum of 1,808,293 shares of common
stock issuable upon conversion of the Series E Preferred Stock and exercise of
the Series E Preferred Warrants. The Company is obligated to pay penalties if
the Registration Statement is not filed and/or declared effective within the
specified time periods. The Company may at its option at any time after the 90th
day following the issuance of the Series E Preferred Stock through April 14,
2002, prohibit holders of the Series E Preferred Stock from exercising any
conversion rights for up to 90 days, provided that certain conditions are met.
If the Company exercises that right, the Company is required to compensate the
holders of the Series E Preferred Stock in cash in an amount equal to 3% of the
principal amount of the Series E Preferred Stock held by each holder for each
thirty days that prohibition is in effect (pro rated for partial months) or, at
the Company's option, deliver common stock in payment of such amount (based on
the average closing bid prices for the common stock for the twenty trading days
preceding the end of each calendar month during the period conversion is so
prohibited).
7
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5. ISSUANCE OF SERIES E PREFERRED STOCK (CONTINUED)
At any time after the issuance date, the Company shall have the right, in
its sole discretion, to redeem, from time to time, any or all of the Series E
Preferred Stock; provided that certain conditions are met, including the
availability of cash, credit or standby underwriting facilities available to
fund the redemption. The redemption price will be calculated as (i) 105% of the
original purchase price for the first 30 days following the issuance date; (ii)
110% of the original purchase price for the next 90 days thereafter and (iii)
120% of the original purchase price after 120 days from the issuance date.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $1,855,426 to the Series E Preferred
Stock and the Series E Preferred Warrants based on their relative fair values at
the issuance date, resulting in $1,791,211 assigned to the Series E Preferred
Stock and $64,215 assigned to the Series E Preferred Warrants as of April 14,
2000. The Company then allocated $1,059,347 of the Series E Preferred Stock 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 $854,000 of the beneficial
conversion was amortized in the second quarter of 2000. The balance of the
beneficial conversion feature is being recognized from the issuance date through
April 14, 2003.
The Series E Preferred Warrants expire on April 14, 2005 and have an
exercise price of $3.35 per share, subject to adjustment under certain
circumstances.
6. INTANGIBLE IMPAIRMENT
Management of the Company evaluates the recoverability of its long-lived
assets at each balance sheet date. Among other factors considered in such
evaluation is the historical and projected operating performance of business
operations. In June 2000, the company recognized a goodwill impairment charge
of approximately $831,000 with no associated tax benefit, related to the 1999
acquisition of Ganymede Corporation ("Ganymede"). The review for impairment
at these operations was triggered by recent cash flow losses and forecasted
operating cash flows below those expected at the time that Ganymede was
acquired. Accordingly, management has concluded that intangible assets in the
amount of approximately $831,000 are no longer recoverable through future
operations and such amount has been written off in the Company's financial
statements for the quarter ended June 30, 2000.
7. TAXES
There was no provision for or cash payment of income taxes for the six
months ended June 30, 2000 and 1999, respectively, as the Company anticipates a
net taxable loss for the year ended December 31, 2000.
8. CAPITAL STRUCTURE
On June 29, 2000, our shareholders voted to amend our articles of
incorporation to increase the number of authorized shares of common stock from
15,000,000 to 50,000,000.
For the quarter ended June 30, 2000, 32.89 shares of Series C Preferred
Stock were converted into 386,698 shares of common stock and 73.71 shares of
Series D Preferred Stock were converted into 262,596 shares of common stock.
9. OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
8
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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 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
and S-3.
GENERAL
HomeCom Communications, Inc. is a Delaware corporation organized in 1994 to
provide complex web-based 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
Web design, financial applications and solutions provider to the financial
services market, including banking, insurance, securities brokerage firms and
other financially oriented web portals.
HomeCom Communications, Inc. develops and markets specialized software
applications, products and services that enable financial institutions and their
customers 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 electronic channels to consumers and conduct business
by providing secure, innovative, Internet-based applications to the banking,
insurance and brokerage industries. As a B2B (business to business) technology
provider to this electronic channel, HomeCom intends to continually enrich the
content of its proprietary applications; host and maintain its own as well as
third party software applications; and to provide strategic design, consulting,
and development services to financial institutions on e-commerce and
webmarketing. Historically, HomeCom has derived its revenue from professional
web development services, software licensing, application development, insurance
and securities sales commissions, and hosting and transactions fees. HomeCom has
grown to approximately 78 full-time employees and occupies approximately 38,900
square feet of office space with offices in Atlanta, Houston, New York City, and
the Chicago area.
HomeCom's proprietary web 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, computer programmers, 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 applications,
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. In October, 1999, the Company sold its security consulting
and integration services operations and entered into a joint marketing program
with the acquirer, Infrastructure Defense Inc.
Businesses such as banks, brokerage firms, and insurance companies can use
HomeCom's Personal Internet Banker-TM- and InsureRate-TM- software to allow
customers and professionals within these organizations to access and manage
accounts and to transact insurance sales and quotes. Its Harvey-TM- software
collects demographic information from users for personally tailored marketing
efforts. Financial Institutions that integrate their legacy systems, the
Personal Internet Banker or InsureRate applications with the Harvey application
can create multiple, focused marketing campaigns for client cross-selling
initiatives. HomeCom also designs and creates Web sites as well as custom
complex web applications for interactive Web sites, intranets/extranets, sells
third party Internet security software, and provides server hosting and
outsourcing facilities.
In 1999, HomeCom provided its product and service offerings through four
distinct but integrated business units. In 2000, HomeCom provides its products
and services through three distinct business units (due to the sale in October,
1999 of the HomeCom Internet Security Services business unit):
9
<PAGE>
ITEM 2. (CONTINUED)
1. 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. FAST revenue is generated from the installation,
integration and customization of Personal Internet Banker, Harvey and InsureRate
within a client's website and e-commerce operations. HomeCom also provides
turnkey hosting services for these applications.
2. HomeCom's Financial Solutions (Software Product Group) provides cost
effective, one-stop web-based financial service applications to the banking,
credit union and brokerage industries that allow its clientele to rapidly deploy
competitive e-commerce platforms at far less cost than custom application
development. 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 to
consumers based on demographics and web site browsing preferences. As consumers
interact with the financial institution's web site, Harvey-TM- mines the data
entered on application forms, adds information about what was 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-Registered Trademark- 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.
3. HomeCom's InsureRate-TM- provides turnkey online insurance programs to
financial institutions, particularly banks, credit unions, brokerage houses and
financial web portals. InsureRate's bundled or unbundled modular approach to
insurance programs within a financial institution allows InsureRate's clients to
choose appropriate insurance programs for their clientele. Broadly, InsureRate
offers financial institutions the opportunity to use the InsureRate term life,
property and casualty or annuity modules at the institution's website and/or for
its own agency force within the institution or to outsource these functions to
InsureRate's fully licensed agencies and call centers. InsureRate derives its
revenues from participation in the sales commissions paid by insurance carriers,
website and extranet setup fees, and insurance carrier enrollment fees.
InsureRate operates within the regulated environment of securities and insurance
sales. In order to participate in this regulated industry, on March 24, 1999,
HomeCom acquired First Institutional Marketing, Inc. ("FIMI") and its affiliated
insurance agencies and NASD broker dealer and integrated their operations with
InsureRate. As a result of this combination of technology and industry
expertise, InsureRate brings a state-of-the-art internet platform to financial
institutions which (i) provides innovative web-based insurance products and
marketing programs for the banking and brokerage industries, (ii) introduces
financial institutions 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. InsureRate maintains a public website at
(www.insurerate.com and www.insurate.com)
On August 4, 2000, the Company announced that it had entered into an
agreement to sell the InsureRate division and the FIMI Companies. The
transaction is subject to the execution of a definitive purchase agreement and
is subject to a number of conditions, including but not limited to the
completion of financing satisfactory to complete the transaction.
With the sale of InsureRate, the Company will focus on its core offerings
of FAST and the solutions sets offered by the Software Products Group.
Additionally, the Company is developing relationships with successful third
party product companies whose products lend themselves to a high degree of
customization and integration within the financial community.
10
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30,
1999
Revenues: Revenues increased 17.0% from $1,912,052 in the second quarter of
1999 to $2,236,486 in the second quarter of 2000. This increase of $324,434 is
primarily attributable to increases in custom application development revenues
of approximately $590,000 and increases in hosting revenues of approximately
$51,000. Increases were offset by lower revenues from web site maintenance of
$75,889, insurance sales of $82,198 and software applications consulting and
integrations services of approximately $147,000.
Cost of Revenues: Cost of revenues 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 revenues decreased
from $1,193,440,or 62% of revenues in the second quarter of 1999 to $1,154,648,
or 52% of revenues in the second quarter of 2000. The decline in cost of
revenues as a percentage of revenues is due to more efficient utilization of
technical staff resources related to web development projects. The improvement
in margin for web development services was partially offset by increased costs
for staff in the insurance businesses in anticipation of increased revenues.
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 26% from $948,213 in 1999 to $701,601 in 2000. This decrease
was primarily attributable to lower advertising, public relations, and marketing
costs. As a percentage of net sales, these expenses declined from 50% in 1999 to
31% in 2000.
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. Total
expenditures decreased from $165,280, or 9% of revenues in the second quarter of
1999 to $69,292, or 3% of net sales in the second quarter of 2000. This decrease
was primarily attributable to fewer personnel resources required to support the
product development group.
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 decreased from
$1,407,992 in the second quarter of 1999 to $1,327,276 in the second quarter of
2000. As a percentage of net sales, these expenses decreased from 74% in the
second quarter of 1999 to 59% in the second quarter of 2000, due primarily to
increases in revenues without corresponding increases in general and
administrative expense.
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 $457,104, or 24% of revenues in the second quarter
of 1999 to $1,336,734, or 60% of revenues in the second quarter of 2000,
primarily due to the write off of approximately $830 thousand of goodwill
associated with the Ganymede acquisition.
Loss from Discontinued Operations: The HISS Business Unit of the Company
was sold on October 1, 1999. The loss attributable to HISS operations for the
second quarter of 1999 through June 30, 1999, was approximately $143,000.
11
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Revenues: Revenues increased 64% from $2,819,282 in the first six months of
1999 to $4,619,957 in the first six months of 2000. This increase of $1,800,675
is primarily attributable to increases in custom application development
revenues of approximately $897,000 and increases in product revenues of
approximately $280,000 and increases in insurance revenues of approximately
$603,000. The insurance revenues reflect a full six months of reporting in 2000
and only three months in 1999.
Cost of Revenues: Cost of revenues 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 revenues decreased
from $1,903,380,or 68% of revenues in the first six months of 1999 to
$2,183,324, or 47% of revenues in the first six months of 2000. The decline in
cost of revenues as a percentage of revenues is due to more efficient
utilization of technical staff resources related to web development projects.
The improvement in margin for web development was partially offset by increased
costs for staff in the insurance businesses in anticipation of increased
revenues.
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 21% from $1,318,010 in 1999 to $1,593,417 in 2000. This
increase was primarily attributable to higher sales and marketing costs in the
insurance businesses compared to other business segments of the Company. As a
percentage of revenues, these expenses declined from 47% in 1999 to 34% in 2000.
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. Total
expenditures decreased from $350,579, or 12% of revenues in the first six months
of 1999, to $278,523, or 6.0% of revenues for the first six months of 2000. This
decrease was primarily attributable to fewer personnel resources being required
to support the product development group.
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
$2,169,873 for the first six months of 1999 to $2,603,792 for the first six
months of 2000. As a percentage of revenues, these expenses decreased from 77%
for the first six months of 1999 to 56% for the first six months of 2000. The
increase in expense was due primarily to an increased cost for outside
consulting and professional services for the first six months of 2000.
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 $608,823, or 22% of revenues for the first six
months of 1999 to $1,832,491, or 40% of revenues for the first six months of
2000, The increase as a percentage of revenues is primarily due to the write off
of approximately $830 thousand of goodwill associated with the Ganymede
acquisition.
Loss From Discontinued Operations: The HISS Business Unit was sold on
October 1, 1999. The loss attributable to HISS operations for the six months of
operations in 1999 through June 30, 1999, was approximately $251,000.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company has limited unused sources of capital. As of June 30, 2000, the
Company had net working capital of approximately $1.1million. On April 14, 2000,
the Company completed an equity offering of approximately $2 million to address
its immediate liquidity needs (see footnote 5). 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 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. 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 $2,424,339 for six months ended
June 30, 2000. 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. 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. On
September 28, 1999, HomeCom sold 75 shares of its Series D Preferred Stock for
net proceeds of approximately $1.4 million. On April 14, 2000, the Company sold
106.35 shares of its Series E Preferred Stock for net proceeds of approximately
$1.9 million
The Company spent $93,265 and $252,793 during the six months ended June 30,
2000 and 1999, 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 June 30,
2000 consist primarily of leases on its Atlanta, Houston, Chicago and New York
City facilities.
Accounts receivable, net of allowance for doubtful accounts, totaled
$1,066,567 as of June 30, 2000. Trade receivables are monitored by the Company
through continued credit evaluations of its customers' financial condition. 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.
On August 4, 2000, the Company announced that it had entered into an
agreement to sell the InsureRate division and the FIMI companies. The
transaction is subject to the execution of a definitive purchase agreement and
is subject to a number of conditions, not limited to the completion of financing
satisfactory to complete the transaction. If the InsureRate sale is consummated,
the Company expects to receive enough cash to fund operations for the
foreseeable future.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NOT APPLICABLE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The sales and issuance of shares listed below were exempt from
registration under the Securities Act by virtue of Sections 4(2) and 3(b)
thereof and in reliance on Rule 501 and Regulation D promulgated thereunder.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate restrictive legends were affixed to stock
certificates and warrants issued in such transactions.
In April 2000, the Registrant issued 106.35 shares of its series E
convertible preferred stock (the "Series E Preferred Stock") to a private
investor for an aggregate purchase price of $2,000,000. Net proceeds to the
Registrant were approximately $1.9 million. In connection with the issuance
and sale of the Series E Preferred Stock, the Registrant issued to the
investor warrants to acquire an aggregate of 66,667 shares of common stock
having an exercise price per share equal to $3.35. These warrants will expire
on April 14, 2005.
The Series E Preferred Stock has an initial stated value of $20,000 per
share, which increases at the rate of 8% per year. Each Series E Preferred
share is convertible, at the option of the holder, into the number of shares
of common stock determined by dividing the stated value by the lower of (a)
$3.53, and (b) 82.5% of the average of the closing bid prices for the five
trading days prior to the date of conversion. Any Series E Preferred Stock
outstanding on April 14, 2003 will automatically be converted into common
stock at the conversion price then in effect.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES - NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of the Company's stockholder's was held on June 29, 2000. The
following matters were submitted to a vote of the stockholders as was described
in the Company's Proxy Statement, which was filed on May 15, 2000:
1. To elect two directors to serve on the Board of Directors for a
three-year term and until their successors are duly elected and qualified;
As to the election of Class II directors, out of 7,710,836 votes at the
meeting, 7,655,181 were cast for the election of the directors, 55,655
votes were against or abstained.
2. To consider and to act upon a proposal to amend Article IV of the
Company's Amended and Restated Certificate of Incorporation to increase the
number of authorized shares of the Company's Common Stock, par value
$0.0001 per share (the "Common Stock"), from 15,000,000 to 50,000,000; out
of 7,710,836 votes at the meeting, 7,491,128 votes were for adoption of the
proposal, 205,330 votes were against the proposal and 14,378 votes
abstained.
3. To ratify the issuance of shares of the Company's Series B Convertible
Preferred Stock and certain related warrants to purchase shares of Common
Stock, and to approve the issuance of shares of Common Stock of the Company
in excess of 19.99 percent of the outstanding shares, if required in
connection with the conversion of the Series B Convertible Preferred Stock
and the exercise of such warrants; out of 7,710,836 votes at the meeting,
7,523,866 votes were for adoption of the proposal, 163,380 votes were
against the proposal and 23,590 votes abstained.
4. To ratify the issuance of shares of the Company's Series C Convertible
Preferred Stock and certain related warrants to purchase shares of Common
Stock, and to approve the issuance of shares of Common Stock of the Company
in excess of 19.99 percent of the outstanding shares, if required in
connection with the conversion of the Series C Convertible Preferred Stock
and the exercise of such warrants; out of 7,710,836 votes at the meeting,
7,511,466 votes were for adoption of the proposal, 180,885 votes were
against the proposal and 18,485 votes abstained.
5. To ratify the issuance of shares of the Company's Series D Convertible
Preferred Stock and certain related warrants to purchase shares of Common
Stock, and to approve the issuance of shares of Common Stock of the Company
in excess of 19.99 percent of the outstanding shares, if required in
connection with the conversion of the Series D Convertible Preferred Stock
and the exercise of such warrants; out of 7,710,836 votes at the meeting,
7,511,608 votes were for adoption of the proposal, 180,685 votes were
against the proposal and 18,543 votes abstained.
6. To ratify the issuance of shares of the Company's Series E Convertible
Preferred Stock and certain related warrants to purchase shares of Common
Stock, and to approve the issuance of shares of Common Stock of the Company
in excess of 19.99 percent of the outstanding shares, if required in
connection with the conversion of the Series E Convertible Preferred Stock
and the exercise of such warrants; out of 7,710,836 votes at the meeting,
7,515,161 votes were for adoption of the proposal, 176,885 votes were
against the proposal and 18,793 votes abstained.
7. To ratify the appointment of PricewaterhouseCoopers LLP as the
Company's independent accountants for the fiscal year ending December 31,
1999; out of 7,710,836 votes at the meeting, 7,648,416 votes were for
adoption of the proposal, 44,270 votes were against the proposal and 18,150
votes abstained.
8. To consider and vote upon an amendment to the Company's Employee Stock
Purchase Plan to increase the number of shares of Common Stock authorized
for issuance thereunder from 150,000 shares to 300,000; out of 7,710,836
votes at the meeting, 7,521,598 votes were for adoption of the proposal,
171,580 votes were against the proposal and 17,658 votes abstained.
14
<PAGE>
ITEM 5. OTHER INFORMATION - 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.
15
<PAGE>
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.
HOMECOM COMMUNICATIONS, INC.
Date: August 14, 2000 /s/ HARVEY SAX
-----------------------------------------
PRESIDENT AND CHIEF EXECUTIVE OFFICER
Date: August 14, 2000 /s/ Timothy R. Robinson
-----------------------------------------
Timothy R. Robinson
CHIEF FINANCIAL OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
16
<PAGE>
HOMECOM COMMUNICATIONS, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------------ ----------- ----
<S> <C> <C>
27 Financial Data Schedule (For SEC Use only)......... 18
</TABLE>
17
