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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 0-29204
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HOMECOM COMMUNICATIONS, INC.
(Exact name of registrant 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)
Registrant's Telephone Number, Including Area Code:
(404) 237-4646
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, par value $0.0001 per share The Nasdaq SmallCap-TM- Market
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the average of the closing bid and ask quotations for the
Common Stock on March 28, 2000 as reported by The Nasdaq Stock Market, was
approximately $24,029,000. The shares of Common Stock held by each officer and
director and by each person known to the company who owns 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 28, 2000, Registrant
had outstanding 8,131,250 shares of Common Stock.
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TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE NO.
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PART I
1. BUSINESS.................................................... 2
2. PROPERTIES.................................................. 8
3. LEGAL PROCEEDINGS........................................... 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 8
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 9
6. SELECTED FINANCIAL DATA..................................... 10
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 10
8. FINANCIAL STATEMENTS........................................ 17
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 39
PART III (Space intentionally left blank)
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 40
SIGNATURES.................................................. 46
ii
PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
and Exchange Act, including certain statements contained under "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
concerning HomeCom's expectations, beliefs, or strategies regarding increased
future revenues and operations, and certain statements contained under
"Business" concerning the development and marketing of customized internet
applications and security consulting services and the effect of market
conditions and competition. When used in this Form 10-K, the words "believes,"
"intends," "anticipates" and similar expressions are intended to identify
forward-looking statements. All forward-looking statements included in this
Form 10-K are based on information available to HomeCom on the date hereof, and
HomeCom assumes no obligation to update any such forward-looking statements.
Such statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those projected or implied by such
forward-looking statements. Such risks and uncertainties include the timing and
acceptance of new product introductions, the actions of HomeCom's competitors
and business partners, and the factors discussed below.
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 web
marketing. HomeCom derives 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 76 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, Ph.D. 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
2
October, 1999, we sold our security consulting and integration services
operations and entered into a joint marketing program with the acquiror,
Infrastructure Defense Inc.
PRODUCTS AND SERVICES
Businesses such as banks, brokerage firms, and insurance companies can use
HomeCom's Personal Internet Banker-TM- and InsureRate-TM- software to allow
customers 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, 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 will provide its
products and services through three distinct business units (due to the sale in
October, 1999 of the HomeCom Internet Security Services business unit):
1. HomeComFinancial 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. Significant 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 consumers
based on demographics and web site browsing preferences. As consumers
interact with the financial institution's web site, Harvey-TM-mines the
data they enter on application forms, adds information about what they
looked at or clicked on and then combines that information with data from
a variety of legacy systems to dramatically increase the financial
institution's cross selling and profit capability.
- Post on the Fly-TM- Conference is an online bulletin board, collaboration
and conferencing system, allowing customers to capture their most valuable
property--the living, moving body of knowledge within an organization, its
business partners and its customers. Specifically designed for the needs
of financial services companies, Conference can run unlimited numbers of
investor forums, private analyst meetings, financial planning workshops,
or customer support groups.
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,
3
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.
HomeCom employs a team of highly trained Internet/intranet software
developers and multimedia and graphics professionals who design and develop
specialized Internet/intranet software applications.
These applications enable companies to obtain and communicate vital business
information, such as sales reports, order status systems, employee directories
and client account information. The Company works closely with its customers to
analyze and design Internet-based software solutions that facilitate the
interactive exchange of business information. Through its experience in
designing custom Internet solutions for businesses, HomeCom believes that it has
developed and continues to develop in-depth knowledge concerning
industry-specific Internet applications and requirements. The Company plans to
leverage this knowledge to develop additional Internet-enabled applications
targeted for the financial services industry.
The Company's staff of 19 full-time software engineers design and develop
custom applications and software products. The Company's software engineers have
experience with various computer operating systems, including Sun Solaris, SGI's
IRIX, Windows NT, Digitars Unix on the Alpha platform, Intel's Pentium Pro on
BSDI Unix, Hewlett Packard's HP 9000 and Apple's Macintosh operating system. The
software engineers write software programs using various tools and languages,
including Perl, JAVA, CGI Programming, C and C ++. The software engineers also
have database expertise in Oracle, Informix, Sybase and SQL, and many software
development tools. The Company's multimedia artists and engineers utilize many
of the generally available software programs and tools such as Adobe Photoshop,
MacroMedia Shockwave, RealAudio and VDOLive.
ACQUISITIONS AND DIVESTITURES
On April 16, 1998, the Company acquired all of the outstanding capital stock
of The Insurance Resource Center, Inc. ("IRC") for 351,391 shares of the
Company's common stock. IRC provides Internet development and hosting services
to the insurance industry and was incorporated into the Company's FAST group.
The Company wrote off the remaining goodwill for IRC during 1999.
On June 9, 1998, the Company sold substantially all of the assets of its
HostAmerica Internet network outsourcing services division to Sage Acquisition
Corp. ("Sage") for cash of $4,250,000 and Sage's assumption of approximately
$250,000 of unearned revenue. The Company recorded a gain on the sale of
approximately $4,402,000. This transaction allowed the Company to further
consolidate its business focus on the financial services market.
On November 6, 1998 the Company signed a definitive agreement and plan of
merger (the "Merger Agreement") to acquire, among other things, all of the
outstanding shares of First Institutional Marketing, Inc. and certain of its
affiliates ("FIMI") for 1,252,174 shares of common
4
stock. In addition, the Company entered into employment agreements for an
initial term of 3 years with the three principals of FIMI, calling for them to
continue in their current roles for the acquired companies. On March 24, 1999,
the Company completed this acquisition.
On April 23, 1999, HomeCom acquired all the outstanding shares of Ganymede
Corporation for total consideration of 185,342 shares of common stock and
$100,000 cash. Ganymede is a Chicago-based web site developer for financial
institutions. 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.
On October 1, 1999 we sold our security consulting and integration service
operations for a $200,000 cash, certain security audit rights and shares of a
non-public entity valued at approximately $823,000, and entered into a joint
marketing program with the acquiror.
The Company will seek to make additional strategic and tactical acquisitions
of companies that have developed specific industry expertise or have existing
relationships with large businesses needing Internet/ intranet solutions.
However, the Company has not entered into any additional binding agreements or
commitments. Moreover, the Company has extremely limited sources of cash.
Consequently, the Company has limited resources available to complete an
acquisition and no assurance can be given that the Company will be able to
successfully complete any additional acquisitions.
SALES AND MARKETING
The Company's products and services have been developed to serve the needs
of the financial services market, including banking, insurance, and securities
brokerage. The Company markets its products and services through its direct
sales force, print advertising and its own Web site. The Company also generates
customer leads through its business partner relationships with leading
technology companies. The Company also utilizes traditional print and media
marketing strategies to enhance Company and product name recognition.
COMPETITION
The market for specialized Internet applications is highly competitive, and
the Company expects that this competition will intensify in the future. In
providing specialized software application design and development, the Company
competes with numerous businesses that also provide software design and
development services, companies that have developed and market application
specific Internet software products, companies that provide software tools that
enable customers to develop specific Internet-enabled software applications and
companies that choose to develop Internet application products internally.
Andersen Consulting L.L.P., Electronic Data Systems Corporation ("EDS"),
International Business Machines Corporation ("IBM"), Proxicom, iXL and Cap
Gemini America are significant custom software developers, integrators and
resellers whose services include a broad range of Internet and Intranet software
applications design and development services. Companies such as Broadvision,
Inc., Edify Corporation, Funds Express, Inc., Q UP Systems, Inc., Digital
Insights and S1 Network Bank have developed application specific Internet
software products that are broadly marketed and licensed and perform such
functions as interactive one-to-one marketing, human resources benefits inquiry,
enrollment and training and Internet banking. Companies such as InsWeb,
Quotesmith and Answer Financial, Inc. compete with InsureRate in the sale of
insurance and the implementation of insurance programs in financial
institutions. In addition, companies that offer and sell client/server based
Internet-enabled software products, such as Netscape and Microsoft, may in the
future bundle software capabilities and applications with existing products in a
manner which may limit the need for software capabilities and application
services such as those offered by the Company. The Company also competes with
the information technology departments of significant business enterprises
5
who may choose to design and develop their Internet applications internally. The
emergence of sophisticated software products and tools that enable companies to
build customized Internet-enabled software applications internally also may have
the effect of encouraging internal development and, thus, may materially reduce
the demand for the Company's custom software application services.
The Company believes that the rapid expansion of the market for Internet
software applications will foster the growth of many significant competitors
performing comparable services and offering comparable products to those offered
by the Company. The Company competes on the basis of creative talent, price,
reliability of services, and responsiveness. Many of the Company's current and
prospective competitors have substantially greater financial, technical,
marketing and other resources than the Company. The Company believes that it
presently competes favorably with respect to each of its various service
offerings. There can be no assurance that the Company's present and proposed
products will be able to compete successfully with current or future competitors
or that competitive pressures faced by the Company will not have a material
adverse effect on the Company's business, financial condition and operating
results.
INTELLECTUAL PROPERTY RIGHTS
In accordance with industry practice, the Company relies primarily on a
combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect its proprietary
rights. The Company seeks to protect its software, documentation and other
written materials principally under trade secret and copyright laws, which
afford only limited protection. The Company has a registered service mark for
its logo, and has applied for federal registration of the names "HomeCom-TM-,"
"Post On The Fly-TM-," "InsureRate-TM-," and "Personal Internet Banker-TM-."
Despite the Company's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy aspects of the Company's products or to obtain and
use information that the Company regards as proprietary. There can be no
assurance that the Company's means of protecting its proprietary rights will be
adequate or that the Company's competitors will not independently develop
competing products and services. In distributing its software products, the
Company intends to rely on "shrink wrap" licenses that are not signed by
licensees and, therefore, may be unenforceable under the laws of certain
jurisdictions. In addition, the laws of some foreign countries do not protect
the Company's proprietary rights to as great an extent as the laws of the United
States. The Company does not believe that any of its proposed products infringe
the proprietary rights of third parties. There can be no assurance, however,
that third parties will not claim infringement by the Company with respect to
its products. The Company expects that software product developers will
increasingly be subject to infringement claims as the number of products and
competitors in electronic commerce grows and the functionality of products in
different industry segments overlaps. Any such claims, with or without merit,
could be time-consuming, result in costly litigation, cause product shipment
delays or require the Company to enter into royalty or licensing agreements.
Such royalty or licensing agreements, if required, may not be available on terms
acceptable to the Company. In addition, Web site developers such as the Company
face potential liability for the actions of customers and others using their
services, including liability for infringement of intellectual property rights,
rights of publicity, defamation, libel fraud, misrepresentation, unauthorized
computer access, theft, tort liability and criminal activity under the laws of
the United States, various states and foreign jurisdictions. The Company
routinely enters into non-disclosure and confidentiality agreements with
employees, vendors, contractors, consultants and customers.
There can be no assurance that the Company's means of protecting its
proprietary rights will be adequate or that the Company's competitors will not
independently develop similar technology. The Company believes that, due to the
rapid pace of Internet innovation and related software industries, factors such
as the technological and creative skills of its personnel are more important in
establishing
6
and maintaining a leadership position within the industry than are the various
legal protections of its technology.
CUSTOMERS
During 1997 and 1998, no customer accounted for more than 10% of the
Company's total net sales. During 1999 two customers each accounted for more
than 10% of the Company's total revenue. During 1999 HomeCom initiated a plan to
win larger, more complex web development projects. As a result, HomeCom has won
several contracts whose revenue will be recognized over several quarters. This
focus on fewer, but larger clients has also resulted in a concentration of
credit risk. The Company's sales to its five largest customers represented
approximately 15%, 27% and 51% of the total revenues for 1997, 1998 and 1999,
respectively.
EMPLOYEES
At March 15, 2000, the Company employed 76 full-time employees, of whom 28
were technical personnel engaged in maintaining or developing the Company's
products or performing related services, 7 were marketing and sales personnel,
29 were involved in the sale and production of insurance products, and 12 were
involved in administration and finance.
INSURANCE
The Company maintains liability and other insurance that it believes to be
customary and generally consistent with industry practice. The Company believes
that such insurance is adequate to cover potential claims relating to its
existing business activities.
GOVERNMENT REGULATION
Except with regard to insurance and securities sales, as discussed below,
the Company does not believe that it is currently subject to direct regulation
by any government agency, other than regulations applicable to businesses
generally, and believes that there are currently few laws or regulations
directly applicable to Web site service companies. The Federal Communications
Commission is studying the possible regulation of the Internet. Any such
regulations adopted by the Federal Communications Commission may adversely
impact the manner in which the Company conducts its business. It is possible
that a number of additional laws and regulations may be adopted with respect to
the Internet, covering issues such as user privacy, pricing, characteristics,
and quality of products and services. The adoption of any such laws or
regulations may decrease the growth of the Internet, which could in turn
decrease the demand for the Company's products and services and increase the
Company's cost of doing business or cause the Company to modify its operations,
or otherwise have an adverse effect on the Company's business, financial
condition and operating results. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel, and personal
privacy is uncertain. The Company cannot predict the impact, if any, that future
regulation or regulatory changes may have on its business. In addition, Web site
developers such as the Company face potential liability for the actions of
customers and others using their services, including liability for infringement
of intellectual property rights, rights of publicity, defamation, libel, fraud,
misrepresentation, unauthorized computer access, theft, tort liability and
criminal activity under the laws of the U.S., various states and foreign
jurisdictions. Any imposition of liability could have a material adverse effect
on the Company.
In addition, the Company's network services are transmitted to its customers
over dedicated and public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for communications. Changes
in the regulatory environment relating to the telecommunications and media
industry could have an effect on the Company's business, including regulatory
changes which
7
directly or indirectly affect use or access of the Internet or increase the
likelihood or scope of competition from regional telephone companies, could have
a material adverse effect on the Company.
HomeCom owns and operates a NASD regulated broker/dealer and is affiliated
with various insurance agencies. These subsidiaries and affiliates are subject
to federal and state regulation of their operations, including but not limited
to, the Securities Act of 1933, the Securities and Exchange Act of 1934 and
various comparable state securities and insurance laws and regulations.
Securities and insurance sales over the internet are new environments for these
industries and the regulatory bodies governing such activities are currently
promulgating new rules and regulations that may significantly affect HomeCom's
securities and insurance businesses.
ITEM 2. PROPERTIES
The Company occupies approximately 17,000 square feet in two office
buildings in Atlanta, Georgia under leases expiring in March 2001 and October
2002. These facilities serve as the Company's headquarters and computer center.
The Company also has an office in New York City occupying approximately 3,400
square feet under a lease expiring in January 2003 and an office in Chicago, IL
occupying approximately 1,000 square feet under a lease expiring in 2004. The
Company houses its InsureRate operations in Houston, TX occupying approximately
17,500 sq. ft. under a lease expiring in 2004.
The Company's computer center is maintained in its key-card access-secured,
dual Leibert air-conditioned Network Operations Center ("NOC") in Class A office
space near the Company's principal offices. Company personnel monitor server and
network functions on a 24 hour per day, 7 days per week basis. Back-up servers
replace production servers in the event of failure or down time. Tape back-ups
are performed on a daily basis and transported to secure off-site storage. Each
server is Simple Network Management Protocol ("SNMP") managed and utilizes
devices located on a separate network to notify network personnel by pager in
the event of problems that are not otherwise detected by HomeCom's own SNMP.
All power supplied to the NOC computer room is supplied by two separate
power substations through American Power Conversion Matrix UPS lines, with
back-up battery power. Telecommunications are provided to the computer room
through multiple leased T1 and T3 lines directly connected to the T3 Internet
provided by interexchange carriers. Each T1 and T3 line is provisioned on
separate local carrier fiber optics using the latest Synchronous Optical Network
("SONET") and Fiber Distributed Data Interface ("FDDI") technology.
Telecommunications lines are provided through two physically diverse entrance
facilities. The Company has acquired and installed multiple Cisco routers for
connection to the Internet, which automatically redistribute traffic load in the
event of telecommunications failure.
The Company believes that the properties which it currently has under lease
are adequate to serve the Company's business operations for the foreseeable
future. The Company believes that if it were unable to renew the lease on either
of these facilities, it could find other suitable facilities with no material
adverse effect on the Company's business.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. From time to
time, the Company is involved in various routine legal proceedings incidental to
the conduct of its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
8
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap-TM- Market under
the symbol "HCOM." The following table shows for the periods indicated the high
and low sale prices for the Common Stock as reported by the Nasdaq SmallCap-TM-
Market.
HIGH LOW
-------- --------
1997
Second quarter (since initial public offering--May 8,
1997)..................................................... $ 7.25 $6.00
Third quarter............................................... 6.50 2.13
Fourth quarter.............................................. 15.56 2.63
1998
First quarter............................................... $16.00 $2.00
Second quarter.............................................. 18.25 1.13
Third quarter............................................... 4.94 1.63
Fourth quarter.............................................. 8.88 1.38
1999:
First quarter............................................... $ 7.63 $3.50
Second quarter.............................................. 9.69 5.00
Third quarter............................................... 6.69 2.75
Fourth quarter.............................................. 5.25 3.00
2000:
First quarter (through March 28, 2000)...................... $ 5.13 $3.13
The Company has not paid any cash dividends on its capital stock to date.
The Company currently anticipates that it will retain all future earnings, if
any, to fund the development and growth of its business and does not anticipate
paying any cash dividends in the foreseeable future.
9
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of HomeCom Communications, Inc. should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and related
notes.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ----------- ------------ ------------
STATEMENT OF OPERATIONS DATA:
Revenues.......................................... 327,574 2,229,975 2,503,185 2,510,689 6,556,173
Cost of revenues.................................. 59,871 775,435 2,139,982 2,231,757 4,555,337
---------- ---------- ----------- ------------ ------------
Gross profit...................................... 267,703 1,454,540 363,203 278,932 2,000,836
---------- ---------- ----------- ------------ ------------
Operating expenses:
Sales and marketing............................. 124,253 962,220 1,440,002 1,221,908 3,953,792
Product development............................. 20,239 78,887 514,655 677,590 1,020,264
General and administrative...................... 121,313 909,230 2,538,229 3,098,095 5,082,979
Depreciation and amortization................... 3,722 85,068 238,537 542,269 1,837,647
---------- ---------- ----------- ------------ ------------
Total operating expenses.................... 269,527 2,035,405 4,731,423 5,539,862 11,894,682
---------- ---------- ----------- ------------ ------------
Operating loss.................................... (1,824) (580,865) (4,368,220) (5,260,930) (9,893,846)
Other expenses (income):
Gain on sale of division........................ -- -- -- (4,402,076) --
Interest expense................................ 3,469 51,272 543,420 445,216 32,669
Other expense (income), net..................... 147 (6,554) (93,298) (166,942) (103,551)
---------- ---------- ----------- ------------ ------------
Loss from continuing operations before income
taxes........................................... (5,440) (625,583) (4,818,342) (1,137,128) (9,822,964)
Income tax provision (benefit).................... -- -- -- -- --
---------- ---------- ----------- ------------ ------------
Loss from continuing operations................... (5,440) (625,583) (4,818,342) (1,137,128) (9,822,964)
Loss from discontinued operations................. -- -- (62,839) (67,012) (497,826)
Gain on disposal of business segment.............. -- -- -- -- 1,144,591
---------- ---------- ----------- ------------ ------------
Loss.............................................. (5,440) (625,583) (4,881,181) (1,204,140) (9,176,199)
Deemed preferred stock dividend................... -- -- -- (666,667) (2,557,466)
---------- ---------- ----------- ------------ ------------
Loss applicable to common shareholders............ $ (5,440) $ (625,583) $(4,881,181) $ (1,870,807) $(11,733,665)
========== ========== =========== ============ ============
Loss per common share--basic and diluted
Continuing operations........................... $ (0.00) $ (0.34) $ (1.86) $ (0.42) $ (1.96)
Discontinued operations......................... -- -- (0.02) (0.02) .10
---------- ---------- ----------- ------------ ------------
Total....................................... $ (0.00) $ (0.34) $ (1.88) $ (0.44) $ (1.86)
========== ========== =========== ============ ============
Weighted average common shares outstanding........ 1,850,447 1,862,223 2,602,515 4,287,183 6,324,791
========== ========== =========== ============ ============
DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ----------- ------------ ------------
BALANCE SHEET DATA:
Working capital (deficit)......................... $ 133,792 $(1,304,682) $ 2,721,930 $ 2,265,725 $ 1,033,802
Total assets...................................... 247,382 1,726,522 4,664,779 4,565,490 10,535,718
Long-term obligations............................. 160,792 147,833 1,652,009 88,242 315,275
Total liabilities................................. 242,568 2,347,191 2,708,007 1,117,041 2,930,600
Stockholders' equity (deficit).................... 4,814 (620,669) 1,956,772 3,448,449 5,980,198
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, some matters discussed
in this report constitute forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. The Company notes that a variety of
risk factors could cause the Company's actual results and experience to differ
10
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. Reference is made in particular to the
discussion set forth in the Company's Registration Statements on Forms S-1 (File
Nos. 333-12219, 333-42599, 333-45383, 333-86837, 333-88491, and 333-56795) and
S-3 (333-73123 and 333-81581).
GENERAL
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 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, we sold our security
consulting and integration services operations and entered into a joint
marketing program with the acquiror. HomeCom derives revenue from professional
web development services, software licensing, application development, insurance
and securities sales commissions, hosting fees and transactions fees.
On November 6, 1998, HomeCom signed a definitive agreement and plan of
merger to acquire, among other things, all of the outstanding shares of the
First Institutional Marketing companies, a group of insurance agencies and a
NASD broker/dealer (the "FIMI Companies"), for 1,252,174 shares of common stock.
On March 24, 1999, HomeCom completed this acquisition. Pursuant to the Merger
and Plan of Reorganization the FIMI Companies continue as separate subsidiaries
of HomeCom. On April 23, 1999, HomeCom acquired all the outstanding shares of
Ganymede Corporation for total consideration of 185,342 shares of common stock
and $100,000 cash. Ganymede was a Chicago-based web site developer for financial
institutions. Pursuant to the Merger and Plan of Reorganization of Ganymede,
Ganymede was merged into HomeCom and has ceased to exist as a separate
corporation. Its revenues have been included in the FAST group.
In August 1996, HomeCom acquired all of the outstanding capital stock of
HomeCom Internet Security Services, Inc. (HISS), a Delaware corporation formed
in July 1996 to provide internet and Intranet security system consulting
services. In October, 1999 we sold HISS for $200,000, certain security audit and
reseller rights and shares of a non-public entity valued at approximately
$823,000, and entered into a joint marketing program with the acquiror. The
Board of Directors of the Company determined to dispose of the HISS unit on
September 1, 1999. Accordingly, results of operations from the discontinued HISS
unit have been shown as a discontinued operation in the Statement of Operations
for the year ended December 31, 1999. This discontinued operations presentation
results in certain revenue and expense reclassifications for the periods
presented.
The Company's revenues and operating results have varied substantially from
period to period, and should not be relied upon as an indication of future
results. The Company historically has operated with no significant backlog
because its services are provided as requested by customers. As a result,
revenues in any period are substantially affected by the amount of services
requested by its customers. An unanticipated termination of a major project, a
client's decision not to pursue a new project or proceed to succeeding stages of
a current project, or the completion during a quarter of several major client
projects, could require the Company to pay underutilized employees and could
therefore have a material adverse effect on the Company's results of operations,
financial condition, and cash flows.
11
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Revenues increased 161.1% from $2,510,689 in 1998 to $6,556,173
in 1999. This increase of $4,045,484 is primarily attributable to the
contribution of FIMI ($2,438,168 in 1999) and an increase in high-end website
development revenue of $1,562,408.
COST OF REVENUES. Cost of revenues includes commissions for financial
institutions and agents, salaries for programmers, technical staff, sales staff
and customer support, as well as a pro-rata allocation of telecommunications,
facilities and data center costs. Cost of revenues increased from $2,231,757, or
88.9% of revenues in 1998 to $4,555,337, or 69.5% of revenues in 1999. This
increase reflects increased costs associated with its insurance operations. The
decrease in cost of revenues as a percentage of revenues is due to increased
margins in its FAST Group and the margin economies brought by the acquisition of
the FIMI Companies.
GROSS PROFIT. Gross profit increased by $1,721,904 from $278,932 in 1998 to
$2,000,836 in 1999. Gross profit margins also increased from 11.1% during 1998
to 30.5% during 1999. This increase as a percentage of net sales is due to an
increase in billing rates associated with the higher margin web development
projects and the acquisition of the FIMI Companies.
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 $2,731,884 from $1,221,908 in 1998 to $3,953,792 in 1999.
This increase was primarily attributable to the addition of the FIMI Companies
and higher advertising and promotional marketing costs. As a percentage of net
sales, these expenses increased from 48.7% in 1998 to 60.3% in 1999 as a result
of the ramp up of PIB and InsurRate sales efforts and the significant
implementation time required to generate revenues from these initiatives.
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 $1,020,264, or 15.6% of net sales in 1999. This compares to
total product development expenditures of $677,590, or 27.0% of net sales in
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
$3,098,095 in 1998 to $5,082,979 in 1999. This increase is due to the
acquisition of the FIMI companies and the increased administrative burden
associated with financings, mergers, acquisitions and divestitures. As a
percentage of net sales, these expenses decreased from 123.4% in 1998 to 77.5%
in 1999. The percentage decline is a result of operating efficiencies.
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 $542,269, or 21.6% of net sales in 1998 to
$1,837,647, or 28.0% in 1999, reflecting the amortization of intangible assets
associated with the IRC, FIMI and Ganymede acquisitions.
OTHER INCOME. In 1999 and 1998 the Company recorded other income of
$103,551 and $166,942, respectively; due primarily to lower balances in interest
bearing cash accounts.
12
INTEREST EXPENSE. Interest expense decreased from $445,216 in 1998 to
$32,669 during 1999, due to the absence of the amortization of the discount on a
convertible debenture converted to common stock during 1998.
DISCONTINUED OPERATIONS. The Company recorded a gain of $1,144,591 on the
sale of its HomeCom, Internet Security Services ("HISS") division in 1999. In
addition, HISS recorded losses of approximately $498,000 and $67,000 in 1999 and
1998, respectively. During 1998, the Company recorded a gain on the sale of its
HostAmerica division of $4,402,076 (see Note 12).
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased 0.3% from $2,503,185 in 1997 to $2,510,689
in 1998. Revenues from service sales decreased 0.8% from $2,484,459 in 1997 to
$2,463,490 in 1998. Revenues from equipment sales increased from $18,726 in 1997
to $47,199 during 1998.
COST OF SALES. Cost of sales includes salaries for programmers, technical
staff and customer support, as well as a pro-rata allocation of
telecommunications, facilities and data center costs. Cost of sales for services
increased from $2,129,968, or 85.1% of revenues in 1997 to $2,208,820, or 88.0%
of revenues in 1998. This increase reflects increased costs for technical
personnel hired in advance of anticipated revenue growth, offset by costs
eliminated due to the sale of HostAmerica in June 1998. The increase in cost of
sales as a percentage of revenue is due to the mix of products and services
sold.
GROSS PROFIT. Gross profit decreased by $84,271 from $363,203 in 1997 to
$278,932 in 1998. Gross profit margins also decreased from 14.5% during 1997 to
11.1% during 1998. This decrease as a percentage of net sales is due to the mix
of products and services sold.
SALES AND MARKETING. Sales and marketing expenses include salaries,
variable commissions, and bonuses for the sales force, advertising and
promotional marketing materials, and a pro-rata allocation of
telecommunications, facilities and data center costs. Sales and marketing
expenses decreased 15.1% from $1,440,002 in 1997 to $1,221,908 in 1998. This
decrease was primarily attributable to a decrease in advertising and promotional
marketing materials. As a percentage of net sales, these expenses decreased from
57.5% in 1997 to 48.7% in 1998.
PRODUCT DEVELOPMENT. Product development costs consist of personnel costs
required to conduct HomeCom'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 HomeCom's industry. Total expenditures for product
development were $677,590, or 27.0% of net sales in 1998, of which none were
capitalized. This compares to total product development expenditures of
$683,488, or 27.3% of net sales in 1997, of which $168,833 were capitalized.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as a pro-rata allocation of telecommuncations, and facilities
and data center costs. General and administrative expenses increased from
$2,538,229 in 1997 to $3,098,095 in 1998. As a percentage of net sales, these
expenses increased from 101.4% in 1997 to 123.4% in 1998. These increases
reflect additional expenditures for operational and administrative support
personnel incurred to support anticipated growth, professional services for
public and investor relations, and accounting and legal support for HomeCom's
securities filings and divestiture activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases, and goodwill increased from $238,537, or 9.5% of
net sales in 1997 to $542,269, or 21.6% in 1998, reflecting
13
increased expenditures on capital equipment and the amortization of goodwill
associated with The Insurance resource Center acquisition.
OTHER INCOME. During 1998, HomeCom recorded a gain on the sale of its
HostAmerica division of $4,402,076 (see Note 11 to the Financial Statements).
INTEREST EXPENSE. Interest expense decreased from $543,420 in 1997 to
$445,216 during 1998, due to lower amortization of the discount associated with
the convertible debentures issued in September 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1,
2001 for the Company). FAS 133 requires that all derivative instruments be
recorded on the balance sheet at their fair value. Changes in the fair value of
derivatives are recorded each period in current earnings or other comprehensive
income, depending on whether a derivative is designated as part of a hedge
transaction and, if it is, the type of hedge transaction. Management of the
Company anticipates that, due to its limited use of derivative instruments, the
adoption of FAS 133 will not have a significant effect on the Company's results
of operations or its financial position.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 101, Revenue Recognition in financial statements
("SAB 101"). This bulletin summarizes certain of the staff's views in apply
generally accepted accounting principles to revenue recognition in financial
statements. Management of the Company does not believe that SAB 101 will have a
significant effect on the Company's results of operations.
14
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company has substantially limited sources of capital. As of
December 31, 1999, the Company had net working capital of approximately
$1,033,802. Management has undertaken steps to address the Company's ongoing
cash requirements including concentrating the Company's market focus,
identifying additional operational and administrative efficiencies, and actively
managing working capital. The Company intends to continue to raise additional
capital through additional debt and equity offerings.
Because the Company expects to continue to incur substantial operating
losses, the Company will continue to use substantial sums of cash in its
operations for an indefinite period. Accordingly, the Company will be required
to obtain additional capital. No assurance can be given that the Company will be
successful in its efforts to obtain additional capital, or that capital will be
available on terms acceptable to the Company or on terms that will not
significantly dilute the interests of existing stockholders.
On September 7, 1999, we announced a restructuring of our business
consistent with our core internet banking, insurance offerings, and professional
services operations. This restructuring resulted in a reduction of expenses in
1999 of approximately $750,000 and a reduction in our personnel by about 60
employees.
If the Company were to exhaust its current sources of capital and is not
able to obtain additional capital, the Company would be required to undertake
additional steps to continue its operations. Such steps might include further
reduction of the Company's operating costs and other expenditures, including
reductions of personnel and suspension of salary increases and capital
expenditures. If such measures were 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 might limit
the Company's opportunities to realize continued increases in sales and the
Company might not be able to reduce its costs in amounts sufficient to achieve
break-even or profitable operations. If the Company were to exhaust its sources
of capital, and subsequent cost reduction measures are not sufficient to allow
the Company to achieve positive cash flows, the Company would be forced to seek
protection from its creditors. The aforementioned factors raise substantial
doubt about the Company's ability to continue as a going concern. The financial
statements included herein have been prepared assuming the Company is a going
concern and do not include any adjustments that might result should the Company
be unable to continue as a going concern.
Net cash used in operating activities was $7.7 million for the year ended
December 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. On
July 28, 1999, the Company sold 175 shares of its Series C Preferred Stock for
net proceeds of approximately $3.3 million. On
15
September 28, 1999, HomeCom sold 75 shares of its series D preferred stock for
net proceeds of approximately $1.4 million.
The Company spent $507,117 and $362,689 during 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, 1999 consist primarily
of leases on its Atlanta, Georgia; Houston, Texas; Chicago, Illinois; and New
York City facilities and equipment leases.
Accounts receivable, net of allowance for doubtful accounts, totaled
$1,160,114 as of December 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.
16
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... 18
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... 19
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 1999............... 20
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for Each of the Three Years in the Period Ended
December 31, 1999......................................... 21
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 1999............... 22
Notes to Consolidated Financial Statements.................. 24
17
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
HomeCom Communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity
(deficit) and of cash flows present fairly, in all material respects, the
financial position of HomeCom Communications, Inc. and its subsidiaries at
December 31, 1999 and 1998, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring losses and negative
cash flows since its inception and has an accumulated deficit. The Company is
dependent on continued financing from investors to sustain its activities and
there is no assurance that such financing will be available. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
PricewaterhouseCoopers LLP
Atlanta, Georgia
March 29, 2000
18
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,291,932 $ 1,497,678
Restricted cash........................................... 250,000 --
Accounts receivable, net.................................. 680,790 1,160,114
Employee loans............................................ -- 474,583
Receivable from related party............................. -- 200,000
Other current assets...................................... 4,796 189,648
----------- ------------
Total current assets.................................. 3,227,518 3,522,023
Furniture, fixtures and equipment, net...................... 797,263 1,131,204
Deposits.................................................... 80,231 92,494
Intangible assets, net...................................... 351,320 4,966,822
Investment.................................................. -- 823,175
Other assets................................................ 109,158 --
----------- ------------
Total assets................................................ $ 4,565,490 $ 10,535,718
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses..................... $ 424,094 $ 1,697,210
Accrued payroll liabilities............................... 300,927 290,414
Unearned revenue.......................................... 128,345 296,319
Current portion of obligations under capital leases....... 108,427 204,278
----------- ------------
Total current liabilities............................. 961,793 2,488,221
Obligations under capital leases............................ 88,242 315,275
Other liabilities........................................... 67,006 127,104
----------- ------------
Total liabilities..................................... 1,117,041 2,930,600
----------- ------------
Redeemable Preferred stock, Series B $.01 par value, 125
shares authorized, 0 and 125 shares issued at
December 31, 1998 and 1999, respectively and 0 and 115
shares outstanding at December 31, 1998 and 1999,
respectively, convertible, participating, $2,388,219
liquidation value as of December 31, 1999............... -- 1,624,920
Comments and contingencies (Note 5)
----------- ------------
STOCKHOLDERS' EQUITY:
Common stock, $.0001 par value, 15,000,000 shares
authorized, 5,072,397 and 7,040,525 shares issued and
outstanding at December 31, 1998 and 1999,
respectively............................................ 507 704
Preferred stock, Series C, $.01 par value, 175 shares
authorized, 0 and 175 shares issued at December 31, 1998
and 1999, respectively and 0 and 137.5 shares
outstanding at December 31, 1998 and 1999, respectively,
convertible, participating; $2,810,264 liquidation value
at December 31, 1999.................................... -- 2
Preferred stock, Series D, $.01 par value, 75 shares
authorized, 0 and 75 shares issued at December 31, 1998
and 1999, respectively and 0 and 75 shares outstanding
at December 31, 1998 and 1999, respectively;
convertible, participating; $1,522,685 liquidation value
at December 31, 1999.................................... -- 1
Additional paid-in capital................................ 10,355,724 21,931,281
Subscriptions receivable.................................. (196,878) (64,687)
Accumulated deficit....................................... (6,710,904) (15,887,103)
----------- ------------
Total stockholders' equity............................ 3,448,449 5,980,198
----------- ------------
Total liabilities and stockholders' equity............ $ 4,565,490 $ 10,535,718
=========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
19
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
Revenues.................................................... 2,503,185 2,510,689 6,556,173
Cost of revenues............................................ 2,139,982 2,231,757 4,555,337
----------- ----------- ------------
GROSS PROFIT................................................ 363,203 278,932 2,000,836
----------- ----------- ------------
OPERATING EXPENSES:
Sales and marketing....................................... 1,440,002 1,221,908 3,953,792
Product development....................................... 514,655 677,590 1,020,264
General and administrative................................ 2,538,229 3,098,095 5,082,979
Depreciation and amortization............................. 238,537 542,269 1,837,647
----------- ----------- ------------
Total operating expenses.............................. 4,731,423 5,539,862 11,894,682
----------- ----------- ------------
OPERATING LOSS.............................................. (4,368,220) (5,260,930) (9,893,846)
OTHER EXPENSES (INCOME)
Gain on sale of division.................................. -- (4,402,076) --
Interest expense.......................................... 543,420 445,216 32,669
Other expense (income), net............................... (93,298) (166,942) (103,551)
----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES......... (4,818,342) (1,137,128) (9,822,964)
INCOME TAX PROVISION (BENEFIT).............................. -- -- --
----------- ----------- ------------
LOSS FROM CONTINUING OPERATIONS............................. (4,818,342) (1,137,128) (9,822,964)
LOSS FROM DISCONTINUED OPERATIONS........................... (62,839) (67,012) (497,826)
GAIN ON DISPOSAL OF DISCONTINUED BUSINESS SEGMENT........... -- -- 1,144,591
----------- ----------- ------------
NET LOSS.................................................... (4,881,181) (1,204,140) (9,176,199)
----------- ----------- ------------
DEEMED PREFERRED STOCK DIVIDEND............................. -- (666,667) (2,557,466)
LOSS APPLICABLE TO COMMON SHAREHOLDERS...................... $(4,881,181) $(1,870,807) $(11,733,665)
=========== =========== ============
LOSS PER SHARE--BASIC AND DILUTED...........................
CONTINUING OPERATIONS..................................... $ (1.86) $ (0.42) $ (1.96)
DISCONTINUED OPERATIONS................................... (0.02) (0.02) .10
----------- ----------- ------------
TOTAL................................................. $ (1.88) $ (0.44) $ (1.86)
=========== =========== ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED......................................... 2,602,515 4,287,183 6,324,791
=========== =========== ============
The accompanying notes are an integral part of these consolidated financial
statements.
20
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------- --------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT
-------- -------- --------- --------- ----------- ------------- ------------
BALANCE, December 31, 1996.............. -- -- 1,923,063 $ 192 $ 472,726 $(468,004) $ (625,583)
Conversion of note payable to common
shares................................ 33,333 3 199,997
Issuance of common shares, net of
offering costs........................ 1,000,000 100 4,672,489
Issuance of preferred shares, net of
offering costs........................ 20,000 $ 200 1,799,052
Issuance of warrants and compensatory
stock options......................... 89,611
Cancellation of subscriptions receivable
under employment agreements........... 130,503
Beneficial conversion feature of
convertible debentures................ 566,667
Net loss................................ -- -- -- -- -- -- (4,881,181)
------- ----- --------- --------- ----------- --------- ------------
BALANCE, December 31, 1997.............. 20,000 200 2,956,396 295 7,800,542 (337,501) (5,506,764)
Issuance of stock....................... 443,085 45 884,086
Conversion of convertible debentures to
common shares......................... 961,460 96 1,699,904
Conversion of preferred stock to common
shares................................ (20,000) (200) 711,456 71 129
Cancellation of subscriptions receivable
under employment agreements........... 140,623
Other................................... (28,937)
Net loss................................ -- -- -- -- -- -- (1,204,140)
------- ----- --------- --------- ----------- --------- ------------
BALANCE, December 31, 1998.............. -- -- 5,072,397 507 10,355,724 (196,878) (6,710,904)
Issuance of preferred stock and
warrants, net of offering costs....... 250 3 5,265,031
Common stock issued in conjunction with
the acquisition of FIMI............... 1,252,174 125 4,235,979
Common stock issued in conjunction with
the acquisition of Ganymede........... 185,342 19 1,248,167
Warrant exercises....................... 106,875 11 427,489
Conversion of preferred stock to common
shares................................ (37) 344,777 34 141,263
Stock option exercises.................. 53,278 5 209,450
Cancellation of subscription receivable
under employment agreements........... 132,191
Other................................... 25,682 3 48,178
Net loss................................ (9,176,199)
------- ----- --------- --------- ----------- --------- ------------
BALANCE, December 31, 1999.............. 213 $ 3 7,040,525 $ 704 $21,931,281 $ (64,687) $(15,887,103)
======= ===== ========= ========= =========== ========= ============
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
BALANCE, December 31, 1996.............. $ (620,669)
Conversion of note payable to common
shares................................ 200,000
Issuance of common shares, net of
offering costs........................ 4,672,589
Issuance of preferred shares, net of
offering costs........................ 1,799,252
Issuance of warrants and compensatory
stock options......................... 89,611
Cancellation of subscriptions receivable
under employment agreements........... 130,503
Beneficial conversion feature of
convertible debentures................ 566,667
Net loss................................ (4,881,181)
-----------
BALANCE, December 31, 1997.............. 1,956,772
Issuance of stock....................... 884,131
Conversion of convertible debentures to
common shares......................... 1,700,000
Conversion of preferred stock to common
shares................................ --
Cancellation of subscriptions receivable
under employment agreements........... 140,623
Other................................... (28,937)
Net loss................................ (1,204,140)
-----------
BALANCE, December 31, 1998.............. 3,448,449
Issuance of preferred stock and
warrants, net of offering costs....... 5,265,034
Common stock issued in conjunction with
the acquisition of FIMI............... 4,236,104
Common stock issued in conjunction with
the acquisition of Ganymede........... 1,248,186
Warrant exercises....................... 427,500
Conversion of preferred stock to common
shares................................ 141,297
Stock option exercises.................. 209,455
Cancellation of subscription receivable
under employment agreements........... 132,191
Other................................... 48,181
Net loss................................ (9,176,199)
-----------
BALANCE, December 31, 1999.............. $ 5,980,198
===========
The accompanying notes are an integral part of these consolidated financial
statements.
21
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................................. $(4,881,181) $(1,204,140) $(9,176,199)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization...................... 457,113 542,269 1,916,170
Amortization of debt discount...................... 443,889 122,778 --
Amortization of debt issue costs................... 22,578 283,754 --
Forgiveness of subscriptions receivable............ 130,501 140,623 132,189
Expense recorded for issuance of warrants.......... -- 36,093 11,797
Non-cash compensation expense...................... -- 44,933 68,071
Gain on sale of division........................... -- (4,402,076) (1,144,591)
Provision for bad debts............................ 244,893 167,675 228,000
Deferred rent expense.............................. 45,717 (52,135) (31,532)
Change in operating assets and liabilities:
Accounts receivable.............................. (227,478) (309,248) (499,466)
Accounts payable and accrued expenses............ (221,908) (3,793) 542,947
Accrued payroll liabilities...................... (74,274) 36,747 (45,700)
Unearned revenue................................. 57,808 187,367 167,974
Other............................................ (21,674) 4,963 128,054
----------- ----------- -----------
Net cash used in operating activities.............. (4,024,016) (4,404,190) (7,702,286)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment........ (387,209) (362,689) (507,117)
Cash from acquisition................................ -- -- 136,938
Loans to related parties............................. -- -- (474,583)
Proceeds from sale of division, net of restricted
cash of $250,000................................... -- 4,000,000 --
Payment of acquisition costs......................... -- (152,407) --
Software development costs........................... (168,834) -- --
Release of Restricted cash........................... 250,000
----------- ----------- -----------
Net cash provided by (used in) investing
activities....................................... (556,043) 3,484,904 (594,762)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of deferred offering costs................... (415,448) (28,937) --
Payment of deferred debt issue costs................. (220,937) (35,395) --
Repayment of capital lease obligations............... (51,010) (144,492) (133,691)
Proceeds from issuance of common shares and exercise
of warrants........................................ -- 232,094 648,682
Payment of preferred stock issue costs............... (190,748) -- --
Proceeds from issuance of convertible debentures and
warrants........................................... 1,700,000 -- --
Proceeds from issuance of preferred shares and
warrants........................................... 2,000,000 -- 6,987,801
Proceeds from notes payable to stockholders.......... 490,000 -- --
Repayment of notes payable to stockholders........... (1,335,581) -- --
Proceeds from note payable........................... -- -- --
Repayment of note payable............................ (60,646) -- --
Proceeds from sale of stock, net of underwriting
discounts and commissions.......................... 5,520,000 -- --
----------- ----------- -----------
Net cash provided by financing activities............ 7,435,630 23,270 7,502,792
22
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS... 2,855,571 (896,016) 794,256
CASH AND CASH EQUIVALENTS at beginning of period....... 332,377 3,187,948 2,291,932
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of period............. $ 3,187,948 $ 2,291,932 $ 1,497,676
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND
NON CASH INVESTING AND FINANCING ACTIVITIES:
Interest paid........................................ $ 56,365 $ 16,277 $ 32,400
=========== =========== ===========
Capital lease obligations incurred during year on
lease of computer equipment........................ $ 119,346 $ 208,065 $ 308,093
=========== =========== ===========
Conversion of notes payable to affiliate to common
stock.............................................. $ 200,000 $ -- $ --
=========== =========== ===========
Issuance of warrants and compensatory stock
options............................................ $ 89,611 $ -- $ --
=========== =========== ===========
During 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 1999, the Company issued 185,342 shares of common stock for the net
assets of Ganymede Corporation.
During 1999, 47 shares of preferred stock were converted into 344,777 shares
of common stock.
During 1998, the Company issued 351,391 shares of common stock for the net
assets of The Insurance Resource Center, Inc.
During 1998, 1,700,000 of convertible debentures were converted into 961,460
shares of common stock.
The accompanying notes are an integral part of these consolidated financial
statements.
23
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
HomeCom Communications, Inc. (the "Company") 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 derives revenue from
professional web development services, software licensing, application
development, insurance and securities sales commissions, hosting fees and
transactions fees. 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.
HomeCom's Software Products Group provides cost effective, one-stop web-based
financial service applications to the banking, credit union and brokerage
industries that allow its clientele to deploy competitive e-commerce platforms
at far less cost than custom application development. HomeCom's InsureRate-TM-
provides turnkey online insurance programs to financial institutions,
particularly banks, credit unions, brokerage houses and financial web portals.
BASIS OF PRESENTATION--GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplate the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has incurred significant losses since its incorporation,
resulting in an accumulated deficit at December 31, 1999 of approximately
$15.9 million. The Company continues to experience negative cash flows from
operations and is dependent on continued financing from investors to sustain its
activities. There is no assurance that such financing will be available. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. During 1999, the Company completed a workforce reduction and the
sale of its security division in order to reduce its expenses. The Company's
continued existence as a going concern is dependant upon adequate future debt or
equity funding and successful commercialization of its products and services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, subsequent to acquisition, after the
elimination of all significant intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, management considers all highly
liquid investments with a maturity of three months or less when purchased to be
cash equivalents.
24
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RESTRICTED CASH
Under the terms of the sale of the Company's HostAmerica division in June,
1998, $250,000 of the proceeds of the sale were to be held in escrow until
May 1, 1999 for the purpose of indemnifying the Purchaser for representations
and warranties made by the Company under the Asset Purchase Agreement. During
the year ended December 31, 1999 these restricted funds were released from
escrow to the Company.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are shown net of the allowance for doubtful accounts.
The allowance was approximately $95,000 and $215,000 at December 31, 1998 and
1999, respectively. Write-offs were approximately $233,000 and $108,000 for the
year ended December 31, 1998 and 1999, respectively.
Concentration of credit risk with respect to trade accounts receivable is
generally diversified due to the large number of entities comprising and the
quality of its customer base. The Company provides an allowance for accounts
which are estimated to be uncollectible. The Company's sales to its five largest
customers represented approximately 15%, 27% and 51% of total revenues for the
years ended December 31, 1997, 1998 and 1999, respectively. During 1999, two
customers each accounted for more than 10% of the revenues of the Company. No
customer accounted for more than 10% of the revenues of the Company in 1998 or
1997.
FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation, which is computed using the straight-line method over the
estimated useful lives of the related assets. Furniture and fixtures are
depreciated over a 5 year life; computer equipment is depreciated over a 3 year
life. Assets recorded under capital leases are amortized over the shorter of
their useful lives or the term of the related leases using the straight-line
method. Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income.
SOFTWARE DEVELOPMENT COSTS, NET
The Company capitalizes internal software development costs in accordance
with Statement of Financial Accounting Standards No. 86, "Accounting For Costs
of Computer Software To Be Sold, Leased, or Otherwise Marketed". The
capitalization of these costs begins when a product's technological feasibility
has been established and ends when the product is available for general release
to customers. Amortization is computed on an individual product basis and is the
greater of (a) the ratio of current gross revenues for a product to the total
current and anticipated future growth revenues for the product or (b) the
straight-line method over the estimated economic life of the product.
Amortization of capitalized software development costs totaled approximately
$219,000 and $32,000 in 1997 and 1998, respectively. These expenses are included
in cost of sales. At December 31, 1998, capitalized software development costs
had been fully amortized.
25
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INTANGIBLE ASSETS
Intangible assets represent identifiable and unidentifiable intangible
assets relating to acquired businesses. Amounts assigned to certain
relationships and licenses are amortized on a straight-line basis over three
years; amounts assigned to retail insurance operations are amortized on a
straight-line basis over seven years costs in excess of net tangible and
identifiable intangible assets acquired are recorded as goodwill and are
amortized on a straight-line basis over periods ranging from three to five
years. The lives established for these assets are a composite of many factors
which are subject to change because of the nature of the Company's operations.
This is particularly true for costs in excess of net assets acquired which
reflect value attributable to the going concern nature of the acquired
businesses, the stability of their operations, market presence and reputation.
Accordingly, at each balance sheet date, a determination is made by management
to ascertain whether the intangible assets have been impaired based on several
criteria, including, but not limited to, sales trends and undiscounted cash
flows.
Impairment of value, if any, is recognized in the period in which it is
determined. The Company does not believe there are any facts or circumstances
indicating impairment of intangible assets at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximates
fair value.
REVENUE RECOGNITION
The Company recognizes revenues on web site development and specialized
software application contracts using the percentage-of-completion method. Earned
revenue is based on the percentage that incurred hours to date bear to total
estimated hours after giving effect to the most recent estimates of total hours.
Earned revenue reflects the original contract price adjusted for agreed upon
claim and change order revenue, if any. If estimated total costs on any of these
contracts indicate a loss, the entire amount of the estimated loss is recognized
immediately. Revenues related to other services are recognized as the services
are performed. Revenues related to insurance product commissions are recognized
upon receipt. Revenues from equipment sales and related costs are recognized
when products are shipped to the customer. Unearned revenue, as reflected on the
accompanying balance sheet, represents the amount of billings recorded on
contracts in advance of services being performed.
ADVERTISING EXPENSES
Advertising costs are expensed when incurred. Advertising expenses were
approximately $724,000, $263,000, and $1,147,000 for the years ended
December 31, 1997, 1998 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method
as described by Statement of Financial Accounting Standards No. 109, ACCOUNTING
FOR INCOME TAXES ("SFAS No. 109").
Under SFAS 109 the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and
26
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax bases of assets and liabilities and are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
The Company provides a valuation allowance for deferred tax assets which are
determined by management to be below the threshold for realization established
by SFAS 109.
BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share are calculated according to the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128"). Due to the net loss position of the Company for each of the three
years in the period ending December 31, 1999, the numerator and denominator are
the same for both basic and diluted loss per share.
The table below illustrates the calculation of the loss per share amounts
attributable to continuing and discontinued operations applicable to common
shareholders.
YEAR ENDED DECEMBER 31
----------------------------------------
1997 1998 1999
----------- ----------- ------------
Loss from continuing operations....................... $(4,818,342) $(1,137,128) $ (9,822,964)
Less: Deemed Preferred stock dividend................. -- (666,667) (2,557,466)
----------- ----------- ------------
Loss from continuing operations applicable to common
shareholders........................................ (4,818,342) (1,803,795) (12,380,430)
Discontinued operations............................... (62,839) (67,012) 646,765
----------- ----------- ------------
Net loss applicable to common shareholders............ $(4,881,181) $(1,870,807) $(11,733,665)
=========== =========== ============
Weighted average common shares outstanding--
Basic and diluted................................... 2,602,515 4,287,183 6,324,791
----------- ----------- ------------
Loss per share--continuing operations................. $ (1.86) $ (0.42) $ (1.96)
Loss per share--discontinued operations............... (0.02) (0.02) .10
----------- ----------- ------------
$ (1.88) $ (0.44) $ (1.86)
=========== =========== ============
The Company has not declared or paid any dividends to the shareholders of
the Preferred Stock. However, the Preferred Stock possess conversion rights (the
"Beneficial Conversion Feature") that are analogous to dividends. Accordingly,
the Beneficial Conversion Feature is accounted for as a Deemed Preferred Stock
Dividend. (See footnotes 7, 8, and 9.)
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current year
presentation.
27
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net, are comprised of the following as
of:
DECEMBER 31,
----------------------
1998 1999
--------- ----------
Furniture and fixtures................................ $ 257,424 $ 399,845
Computer equipment.................................... 861,400 1,195,234
Computer equipment under capital leases............... 382,055 810,917
--------- ----------
1,500,879 2,405,996
Less: accumulated depreciation and amortization....... (703,616) (1,274,792)
--------- ----------
$ 797,263 1,131,204
========= ==========
3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and 1999:
1998 1999
--------- ----------
Licenses and training programs........................ -- $ 172,269
Bank and carrier relationships........................ -- 450,000
Retail insurance operations........................... -- 1,500,000
Goodwill.............................................. 459,510 3,830,888
--------- ----------
459,510 5,953,157
Less: Accumulated amortization........................ (108,190) (986,335)
--------- ----------
$ 351,320 $4,966,822
========= ==========
Amortization expense relating to intangible assets was $0, $108,190 and
$1,337,655 for the years ended December 31, 1997, 1998 and 1999, respectively.
4. SEGMENT INFORMATION
During 1998, HomeCom reorganized into five separate business units,
organized on the basis of products and services. Prior to that time, the Company
operated in a single business segment. The Company has determined that its
reportable segments are those that are based on the Company's method of internal
reporting, which disaggregates its business by product and service category into
business units. HomeCom's reportable segments are: custom Web development
(FAST), Internet outsourcing services (HostAmerica), Internet security services
(HISS), software products, and InsureRate/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. On October 1, 1999 the Company
sold all of the assets of its HISS unit to Infrastructure Defense, Inc.
28
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION (CONTINUED)
The table below presents information about the reported business unit income
for HomeCom Communications, Inc. for the years ended December 31, 1998 and 1999
(in thousands):
YEAR ENDED
DECEMBER 31,
-------------------
1998 1999
(IN THOUSANDS) -------- --------
Revenues:
FAST...................................................... $ 1,950 $ 3,903
HostAmerica............................................... 531 --
InsureRate/FIMI........................................... -- 2,467
Software Products......................................... 29 186
------- -------
Totals.................................................. $ 2,510 $ 6,556
======= =======
HISS (Discontinued Operation)............................. $ 782 $ 257
======= =======
Business Unit Net Income (Loss):
FAST...................................................... (363) (458)
HostAmerica............................................... 256 --
InsureRate/FIMI........................................... (357) (2,737)
Software Products......................................... (443) (1,396)
------- -------
Business Unit Net Income (Loss):............................ $ (907) $(4,591)
======= =======
HISS (Discontinued Operation)............................. $ (67) $ (498)
======= =======
Adjustments to reconcile Business unit net income (loss)
with consolidated net income (loss):
Corporate Expenses........................................ (4,354) (5,303)
Gain on Sale of Division.................................. 4,402
Interest expense.......................................... (445) (33)
Other Income, Net......................................... 167 104
------- -------
Loss From Continuing Operations............................. $(1,137) $(9,823)
======= =======
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.
Revenues for the years ended December 31, 1997 were as follows:
HISS
SOFTWARE CONSOLIDATED (DISCONTINUED
FAST HOSTAMERICA PRODUCTS INSURERATE TOTALS OPERATIONS)
(IN THOUSANDS) -------- ----------- -------- ---------- ------------ -------------
Revenues--1997....................... $1,792 $691 $ 20 $ -- $2,503 $375
For the year 1997, operating income (loss) by segment is not presented as
the information is not available.
29
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION (CONTINUED)
Asset information by reportable segment is not reported since the Company
does not produce such information internally.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2004. The Company has entered into capital
leases of computer equipment.
Future minimum lease payments under capital and operating leases are as
follows as of December 31, 1999:
CAPITAL
LEASES OPERATING LEASES
--------- ----------------
2000.............................................. $ 264,685 $ 625,050
2001.............................................. 170,271 426,895
2002.............................................. 98,255 363,357
2003.............................................. 44,358 235,550
2004.............................................. 16,358 161,715
--------- ----------
Total minimum lease payments...................... 593,927 $1,812,567
==========
Less: amount representing interest................ (74,374)
---------
Present value of minimum lease payments........... 519,553
Less: current portion............................. (204,278)
---------
$ 315,275
=========
The Company leases office space in New York City, Chicago, Houston, and
Atlanta. The total amount of the base rent payments is being charged to expense
on a straight-line method over the term of these leases. The Company has
recorded a deferred credit to reflect the excess of rent expense over cash
payments since inception of the leases.
Rental expense under operating leases was approximately $507,000, $440,000
and $588,000 for the years ended December 31, 1997, 1998, 1999 respectively.
30
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Various legal proceedings may arise in the normal course of business.
Additionally, the Company's software and equipment are vulnerable to computer
viruses or similar disruptive problems caused by customers or other Internet
users. Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. The Company does maintain errors and omissions to
protect it from malfunctions or nonmerchantability of its software products and
from potential market conduct liabilities relating to its insurance and
securities operations. Although the Company attempts to limit its liability to
customers for these types of risks through contractual provisions, there can be
no assurance that these provisions will be enforceable. Management does not
believe that there are currently any asserted or unasserted claims that will
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS
In May 1997, the Company completed an initial public offering of its common
stock. The Company issued 1,000,000 shares at an initial public offering price
of $6.00 per share. The total proceeds of the offering, net of underwriting
discounts, commissions and offering expenses, were approximately $4,700,000. The
Company used a portion of the proceeds from the initial public offering to repay
outstanding principal amounts of approximately $1,300,000 loaned to the Company
by stockholders and affiliates plus accrued interest of approximately $65,000.
The Company issued 33,333 shares of common stock as payment in full of the
outstanding principal balance of a $200,000 loan from an investor.
In connection with the completion with the Company's initial public
offering, the Company granted its underwriter warrants to acquire 100,000 shares
of the Company's common stock at an exercise price of $7.20 per share. The
exercise price is subject to adjustment under certain circumstances. These
warrants expire on May 12, 2002 if not earlier exercised.
In September 1997, the Company issued $1,700,000 of 5% convertible
debentures due September 22, 2000. Net proceeds to the Company from the issuance
of the debentures totaled approximately $1,500,000. During 1998, the full
principal amount of the debentures was fully converted into 961,460 shares of
common stock. As of December 31, 1999, $44,596 of interest has been accrued for
the debentures, and is payable on September 22, 2000. Due to the beneficial
conversion feature of the debentures, a portion of the proceeds ($566,667) was
allocated to additional paid-in capital. The corresponding discount on the
debentures was amortized in 1998 as a non-cash charge to interest expense.
In connection with the issuance of the debentures, the Company issued to a
broker designated by the purchaser of the debentures three-year warrants to
acquire an aggregate 400,000 shares of common stock. These warrants were issued
in October 1997. Of these warrants, 43,125 and 200,000 at exercise
31
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS (CONTINUED)
prices of $4.00 and $6.00 per share, respectively, are outstanding at
December 31, 1999. If not earlier exercised, the warrants expire on October 27,
2000.
In December 1997, the Company issued 20,000 shares of its Series A preferred
stock for an aggregate purchase price of $2,000,000. Net proceeds to the Company
from the Series A preferred stock issuance were approximately $1,800,000. As of
December 31, 1998, the preferred stock had been fully converted into 711,456
shares of common stock. A discount of $666,667 results from an allocation of the
proceeds to the beneficial conversion feature. This discount is analogous to a
dividend and was recognized as a return to the Series A preferred holders over
the period the preferred stock was outstanding.
In connection with the issuance and sale of the Series A preferred stock,
the Company granted the Series A preferred warrants to acquire an aggregate of
75,000 shares of Common Stock, with warrants to purchase 62,500 shares of common
stock having an exercise price per share equal to $14.50625 and warrants to
purchase 12,500 shares of common stock having an exercise price per share equal
to $15.825. The Company also granted 50,000 warrants to a placement agent at an
exercise price of $15.825 per share. The Series A preferred stock warrants will
expire on December 31, 2000.
At December 31, 1998, 600,000 warrants were outstanding at a weighted
average exercise price of $7.51. At December 31, 1999, 1,261,960 warrants are
outstanding at a weighted average exercise price of $6.30.
On April 16, 1998, the Company issued 351,391 shares of common stock to
acquire all of the outstanding capital stock of The Insurance Resource Center,
Inc.
On October 7, 1998, the Company issued 18,959 shares of common stock to the
former holders of HISS's capital stock as an earnout payment, which was recorded
as compensation expense. In October, 1999, in connection with the sale of the
HISS business unit, the Company issued 18,959 shares of common stock to the
former shareholders of HISS as an earnout payment. In addition, the Company
committed to issue another 18,959 shares of common stock to the former
shareholders of HISS in the event that the Company's equity stake in the
acquiring entity becomes worth over $5 million and is freely tradable.
During 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 1999, the Company issued 185,342 shares of common stock for the net
assets of Ganymede Corporation.
7. 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 to the Company of
$2,283,750 for the preferred shares and warrants.
The Series B Preferred Stock bears no dividends and is 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.
32
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ISSUANCE OF SERIES B PREFERRED STOCK (CONTINUED)
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% annual increase 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 $899,284 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 $792,000 of
the beneficial conversion was amortized in 1999. The balance of the beneficial
conversion feature will be recognized through March, 2002. During 1999, 10
shares of Series B Preferred Stock were converted into 63,317 shares of common
stock.
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 of notice, the
preferred shareholders may require the Company to repurchase the remaining
Series B Preferred Stock at 120% of face value. The Series B Preferred Stock is
presented outside of permanent equity as the outcome of the shareholder vote,
and possible redemption, is outside of the control of the Company.
8. ISSUANCE OF SERIES C PREFERRED STOCK
On July 28, 1999, the Company completed a private placement of $3,500,000
principal amount of the Company's Series C Convertible Preferred Stock, par
value $.01 per share (the "Series C Preferred Stock") and warrants to acquire up
to 59,574 shares of Common Stock (the "Series C Preferred Warrants"). The
Series C Preferred Stock has an initial stated value of $20,000 per share, which
stated value increases at the rate of 6% per year (such stated value, as
increased from time to time, is referred to as the "Series C Stated Value").
Each Series C Preferred Share is convertible, from and after 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 C Stated Value by the
lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for
the five trading days preceding the date of conversion. Any Series C Preferred
Stock issued and outstanding on July 22, 2002 will automatically be converted
into Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $3,323,748 to the preferred stock
and the warrants based on their relative fair values at the Issuance Date,
resulting in $3,170,904 assigned to the preferred stock and $152,844
33
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ISSUANCE OF SERIES C PREFERRED STOCK (CONTINUED)
assigned to the warrants as of July 27, 1999. The Company then allocated
$1,678,505 of the Series C 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 $1,485,000 of the beneficial conversion was amortized in 1999. The
balance of the beneficial conversion feature will be recognized through July,
2002. During 1999, 37 shares of Series C Preferred Stock were converted into
281,460 shares of common stock.
The Company has the right, in its sole discretion, to redeem, from time to
time, any or all of the Series C Preferred Stock; provided that certain
conditions are met, including the availability of cash, credit or standby
underwriting facilities available to fund the redemption at 120% of the original
purchase price.
The Series C Preferred Warrants expire on July 27, 2004 and have an exercise
price of $7.34 per share, subject to adjustment under certain circumstances.
9. ISSUANCE OF SERIES D PREFERRED STOCK
On September 28, 1999, the Company completed a private placement of
$1,500,000 principal amount of the Company's Series D Convertible Preferred
Stock, par value $.01 per share (the "Series D Preferred Stock") and warrants to
acquire up to 25,000 shares of Common Stock (the "Series D Preferred Warrants").
The Series D Preferred Stock has an initial stated value of $20,000 per share,
which stated value increases at the rate of 6% per year (such stated value, as
increased from time to time, is referred to as the "Series D Stated Value").
Each Series D Preferred Share is convertible, from and after 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 D Stated Value by the
lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for
the five trading days preceding the date of conversion. Any Series D Preferred
Stock issued and outstanding on September 22, 2002 will automatically be
converted into Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $1,423,750 to the preferred stock
and the warrants based on their relative fair values at the Issuance Date,
resulting in $1,387,477 assigned to the preferred stock and $36,273 assigned to
the warrants as of September 28, 1999. The Company then allocated $642,084 of
the Series D 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 $280,000 of
the beneficial conversion was amortized in 1999. The balance of the beneficial
conversion feature will be recognized through September, 2002.
The right of the holders of the Series D Preferred Stock to convert their
shares is also subject to the following restrictions: (i) during the period
beginning on the issuance date through the following 90 days, each holder may
not convert more than 25% of the Series D Preferred Stock purchased by such
holder; (ii) during the period beginning on the issuance date through the
following 120 days, each holder may not convert more than 50% of the Series D
Preferred Stock purchased by such holder; and (iii) during the period beginning
on the issuance date through the following 150 days, each holder may not convert
more than 75% of the Series D Preferred Stock purchased by such holder. At any
time after the issuance date, the Company shall have the right, in its sole
discretion, to redeem, from time
34
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ISSUANCE OF SERIES D PREFERRED STOCK (CONTINUED)
to time, any or all of the Series D 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.
The Series D Preferred Warrants expire on September 27, 2004 and have an
exercise price of $7.34 per share, subject to adjustment under certain
circumstances.
10. STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996. Shares of common stock
may be sold or awarded to officers, key employees and consultants. On March 3,
1999 at a Special Meeting of Stockholders, the Company's stockholders approved
an amendment to the Stock Option Plan which increased the number of shares
reserved for issuance under the Stock Option Plan to 2,000,000. Options granted
under the Stock Option Plan may be either (i) options intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code or (ii)
non-qualified stock options.
The options granted to purchase shares under the Stock Option Plan. The
options vest 25% per year and expire ten years after the grant date. The
exercise price of the options was at or above the fair market value of the stock
on the grant date.
The Company's Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") was adopted by the Company's stockholders in September 1996. Shares of
common stock may be sold or awarded to directors who are not officers or
employees of the Company ("Non-Employee Directors"). The Company has reserved
300,000 shares of common stock for issuance under the Directors' Plan.
The Directors' Plan provides for the automatic granting of an option to
purchase 10,000 shares of common stock to each Non-Employee Director who is
first appointed or elected to the Board of Directors. Also, each Non-Employee
Director is automatically granted an option to purchase 5,000 shares of common
stock on the date of each annual meeting of the Company's stockholders.
Furthermore, the Directors' Plan allows the Board of Directors to make
extraordinary grants of options to Non-Employee Directors.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") requires that companies with stock-based
compensation plans either recognize compensation expense based on new fair value
accounting method or continue to apply the provisions of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and
disclose pro forma net income and earnings per share assuming the fair value
method had been applied.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options. The Company has recognized no
compensation expense for options issued to employees and non-employee directors.
For the years ended December 31, 1998 and 1999, the Company recognized
approximately $5,000, $36,000, and $0, respectively, in expense for stock issued
to non-employees.
Pro forma information regarding loss per share is required by FAS 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement.
35
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
DECEMBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
Risk-free interest rate........................... 5.93% 5.11% 5.58%
Volatility factors of the expected market price of
the Company's common stock...................... 90% 110% 85%
Weighted average expected life of the options..... 5 years 5 years 5 years
Expected dividend yield........................... 0% 0% 0%
Had compensation cost for the Company's stock-based compensation plans been
determined under the provisions consistent with FAS 123, the Company's net loss
and loss per share for the years ended December 31, 1997, 1998 and 1999 would
have been the pro forma amounts listed below:
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
Loss applicable to common
shareholders:
As reported......................... $(4,881,181) $(1,870,807) $(11,733,665)
Pro forma........................... (5,012,634) (2,351,259) (12,591,580)
Basic and diluted loss per share:
As reported......................... (1.88) (0.44) (1.86)
Pro forma........................... (1.93) (0.55) (1.99)
Option activity under all of the stock option plans is summarized as
follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1997 1998 1999
--------------------------- --------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------- ---------------- -------- ---------------- --------- ----------------
Outstanding at beginning of
year.......................... 220,543 $6.30 421,160 $4.95 558,610 $4.59
Granted......................... 599,555 5.26 312,700 3.35 1,067,958 4.31
Exercised....................... 0 -- (4,375) 4.06 (53,278) 3.93
Forfeited....................... (398,938) 5.80 (170,875) 3.34 (418,031) 4.25
-------- -------- ---------
Outstanding at end of year...... 421,160 4.95 558,610 4.59 1,155,259 4.49
======== ======== ===== =========
Options exercisable at year
end........................... 3,090 4.95 127,791 4.98 251,112 4.85
======== ======== =========
Shares available for future
grant......................... 178,840 41,390 912,912
======== ======== =========
Weighted-average fair value of
options granted during the
year at the shares' fair
value......................... $ 3.71 $ 2.79 $ 3.10
======== ======== =========
36
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED)
The following table summarizes information about fixed options outstanding
at December 31, 1999.
WEIGHTED AVERAGE
REMAINING CONTRACTUAL
EXERCISE PRICES SHARES LIFE
- - --------------- --------- ---------------------
$1.91-2.81.................................................. 392,900 9.6
$3.22-4.55.................................................. 246,550 7.8
$5.06-6.50.................................................. 505,809 8.8
$8.06....................................................... 10,000 8.0
---------
1,155,259
=========
11. ACQUISITIONS AND DIVESTITURES
On April 16, 1998, the Company acquired all of the outstanding capital stock
of The Insurance Resource Center, Inc. ("IRC") for total consideration of
approximately $571,000, consisting of 351,391 shares of the Company's common
stock. IRC provides Internet development and hosting services to the insurance
industry. The Company accounted for this acquisition as a purchase transaction.
Approximately $460,000 was recorded as an intangible asset. At December 31,
1998, the net unamortized balance of this intangible asset was $351,000, net of
$109,000 of accumulated amortization. As of December 31, 1999, the intangible
assets related to IRC had been fully amortized.
On June 9, 1998, the Company sold substantially all of the assets of its
HostAmerica Internet network outsourcing services division to Sage Acquisition
Corp. ("Sage") for cash of $4,250,000 and Sage's assumption of approximately
$250,000 of unearned revenue. The Company recorded a gain on the sale of
approximately $4,402,000. The assets sold consisted of computer network
equipment and service contracts.
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
has been accounted for as a 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 resulting intangible
assets will be amortized over a period of approximately 3 to 7 years. Results of
operations for FIMI are included with those of the Company subsequent to the
date of acquisition. Prior to the closing of the acquisition, the Company loaned
the shareholders of FIMI $370,000. The note is due in 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.
On April 23, 1999, the Company acquired all of the outstanding shares of
Ganymede Corporation ("Ganymede") for total consideration of $1,348,186,
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. 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. In addition, the Company entered into employment
agreements with the three principals of Ganymede, calling for them to continue
in their
37
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS AND DIVESTITURES (CONTINUED)
current roles for the acquired company. The acquisition has been accounted for
as a purchase transaction. The purchase price has been allocated to assets
acquired and liabilities assumed based on their estimated fair values. The
resulting intangible assets will be amortized over a period of approximately 3
to 5 years. Results of operations for Ganymede have been included with those of
the Company for periods subsequent to the date of acquisition.
The following unaudited pro forma information for the years ended
December 31, 1998 and 1999 have been prepared to reflect adjustments to the
Company's historical results of operations to give effect to the acquisition of
FIMI and Ganymede and the divestiture of HostAmerica and HISS as if each
transaction had occurred on January 1, 1998.
This pro forma information is not necessarily indicative of the results of
operations which would have been attained had each of the aforementioned
transactions been consummated on the dates indicated or which may be attained in
the future.
1998 1999
------------ ------------
(UNAUDITED) (UNAUDITED)
Net revenue................................................. $ 7,113,162 $ 7,277,164
Gross profit................................................ 1,292,832 2,232,059
Loss from continuing operations............................. (1,366,197) (9,439,054)
12. DISPOSITION OF INTERNET SECURITY SERVICES DIVISION
On October 1, 1999, the Company sold substantially all of the assets of its
HomeCom Internet Security Services ("HISS") division to Infrastructure Defense,
Inc. ("iDefense") for $823,175 in common stock of the non-public acquiror,
certain security audit rights and $200,000 cash, paid in January, 2000. The
purchase price was established through arms' length negotiations between the
Company and iDefense.
The Company has removed the results of this discontinued operation from the
continuing operations of the Company for all periods presented. The Company
recorded a gain of approximately $1.14 million on the sale of the HISS unit in
1999.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax
38
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED)
purposes. Significant components of the Company's deferred tax assets and
liabilities are as follows, as of:
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
Temporary differences:
Allowance for uncollectibles....................... $ 36,246 $ 82,052
Vacation accrual................................... 33,586 29,812
Depreciation....................................... 4,826 113,930
Deferred rent expense.............................. 25,462 19,490
Cash to accrual adjustment......................... -- 100,278
Other accruals..................................... -- 160,000
Software development expenses...................... 35,138 32,620
Net operating loss carryforward.................... 2,357,670 5,043,323
----------- -----------
Deferred tax asset................................. 2,492,928 5,581,505
Valuation allowance................................ (2,492,928) (4,896,133)
----------- -----------
Net deferred tax asset............................. -- 685,372
Acquired intangibles............................... -- (685,372)
----------- -----------
Deferred tax liability............................. -- (685,372)
----------- -----------
Net deferred tax asset (liability)................. -- --
=========== ===========
At December 31, 1999, the Company had net operating loss carryforwards for
income tax purposes of approximately $13,300,000 which begin to expire in 2011.
Realization of these assets is contingent on having future taxable earnings. In
addition, certain stock transactions during 1997 resulted in the Company
incurring an ownership change as defined in Internal Revenue Code Section 382.
The result of this ownership change is to substantially limit the future
utilization of the Company's net operating loss carryforwards as of the change
date. Certain stock transactions occurring in 1998 and 1999 may have resulted in
the Company incurring an ownership change, which may result in a limitation on
the Company's future utilization of net operating loss carryforwards generated
in 1998 and 1999. Based on the cumulative losses in recent years and the
limitation and the use of the company's net operating losses management believes
that a full valuation allowance should be recorded against the deferred tax
asset.
The income tax benefit differs from the amounts computed by applying the
Federal statutory rate of 34% to loss before taxes principally as a result of
the recording of the valuation allowance.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements, notes thereto and report of
independent accountants thereon, filed as part hereof, are listed in Item 8.
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement scheduled have been omitted as the required information
is not applicable or the required information has been incorporated in the
consolidated financial statements and related notes incorporated by reference
herein.
3. Exhibits
EXHIBIT DESCRIPTION
- - ------- ------------------------------------------------------------
1.1 --Form of Underwriting Agreement.*
3.1 --Restated Certificate of Incorporation of the Registrant.*
3.2 --Restated Bylaws of the Registrant.*
3.3 --Certificate of Designation of Series A Convertible
preferred stock.***
3.4 --Certificate of Designation of Series B Convertible
Preferred Stock.**
3.5 --Certificate of Designation of Series C Convertible
Preferred Stock (previously filed).
3.6 --Certificate of Designation of Series D Convertible
Preferred Stock (previously filed).
4.1 --See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Bylaws of the Registrant
defining rights of the holders of Common Stock of the
Registrant.*
4.2 --Specimen Stock Certificate.*
4.3 --Form of Warrant.*
5.1 --Opinion of Sims Moss Kline & Davis LLP, Counsel to the
Registrant, as to the legality of the shares being
registered (previously filed).
10.1 --HomeCom Communications, Inc. Stock Option Plan and form of
Stock Option Certificate.*
10.2 --HomeCom Communications, Inc. Non-Employee Directors Stock
Option Plan and form of Stock Option Certificate.*
10.3 --Employment Agreement between the Registrant and Harvey W.
Sax, dated January 1, 1996.*
10.4 --Form of Employment Agreement entered into between the
Registrant and each of its executive officers except
Harvey W. Sax.*
10.5 --Lease Agreement between Property Georgia OBJLW One
Corporation and the Registrant dated January 22, 1996.*
10.6 --Lease and Services Agreement between Alliance Greensboro,
L.P. and the Registrant, dated June 25, 1996.*
40
EXHIBIT DESCRIPTION
- - ------- ------------------------------------------------------------
10.7 --Business Alliance Program Agreement between Oracle
Corporation and the Registrant, dated May 30, 1996,
together with the Sublicense Addendum, Application
Specific Sublicense Addendum, Full Use and Deployment
Sublicense Addendum and License Transfer Policy, each
dated May 30, 1996.*
10.8 --Network Enrollment Agreement between Apple Computer, Inc.
and the Registrant, effective May 1996.*
10.9 --Member Level Agreement between Microsoft Corporation and
the Registrant, effective May 1996.*
10.10 Master Agreement for internet Services and Products between
BBN Planet Corporation and the Registrant, dated February
1, 1996.*
10.11 --Authorized Business Partners Agreement between BBN Planet
Corporation and the Registrant, dated May 14, 1996.*
10.12 --Stock Purchase Agreement between the Registrant and the
stockholders of HomeCom internet Security Services, Inc.,
dated August 31, 1996.*
10.13 --Form of Promissory Notes issued by the Registrant and held
by Mark Germain.*
10.14 --Form of Promissory Notes issued by the Registrant and held
by Esther Blech and the Edward A. Blech Trust.*
10.15 --Marketing Associate Solution Alliance Agreement dated
February 6, 1997 between the Registrant and Unisys
Corporation.*
10.16 --Marketing Associate Agreement dated February 6, 1997
between the Registrant and Unisys Corporation.**
10.17 --Letter agreement dated January 16, 1997 between the
Registrant, David A. Blech, Esther Blech and the Edward A.
Blech Trust.*
10.18 --HomeCom Communications, Inc. Employee Stock Purchase
Plan.*
10.19 --5% Convertible Debenture Purchase Agreement dated
effective September 19, 1997 between the Registrant, Euro
Factors International, Inc., Beauchamp Finance, FTS
Worldwide Corporation and COLBO.***
10.20 --Form of 5% Convertible Debenture issued by the Registrant
and held by Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.21 --Registration Rights Agreement dated effective September
19, 1997 between the Registrant, Euro Factors
International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.22 --Letter agreement dated September 23, 1997 between the
Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.23 --Letter agreement dated September 27, 1997 between the
Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.24 --Form of Warrant to purchase 200,000 shares of Common Stock
at an exercise price of $4.00 per share issued by the
Registrant to First Granite Securities, Inc.***
10.25 --Form of Warrant to purchase 200,000 shares of Common Stock
at an exercise price of $6.00 per share issued by the
Registrant to First Granite Securities, Inc.***
41
EXHIBIT DESCRIPTION
- - ------- ------------------------------------------------------------
10.26 --Form of Securities Purchase Agreement between the
Registrant, Sovereign Partners, L.P. and Dominion Capital
Fund, LTD. dated as of December 23, 1997.***
10.27 --Form of Registration Rights Agreement between the
Registrant, Sovereign Partners, L.P. and Dominion Capital
Fund, LTD. dated as of December 23, 1997.***
10.28 --Form of Warrant to purchase 18,750 shares of Common Stock
issued by the Registrant to Sovereign Partners, L.P.***
10.29 --Form of Warrant to purchase 56,250 shares of Common Stock
issued by the Registrant to Dominion Capital Fund, LTD.***
10.30 --Common Stock Purchase Agreement dated January 23, 1998 by
and among InsureRate, Inc., the Registrant, Jerome R.
Corsi and Hamilton Dorsey Alston HomeCom.***
10.31 --Escrow Agreement dated as of January 23, 1998 by and among
InsureRate, Inc., Hamilton Dorsey Alston HomeCom, the
Registrant, Jerome R. Corsi and SunTrust Bank, Atlanta.***
10.32 --Shareholders Agreement dated January 23, 1998 by and among
Hamilton Dorsey Alston HomeCom, the Registrant and
InsureRate, Inc.***
10.33 --Web Development and Hosting Services Agreement dated
January 23, 1998, by and among InsureRate, Inc. and
Hamilton Dorsey Alston HomeCom.***
10.34 --Form of Warrant to purchase 25,000 shares of Common Stock
for an aggregate purchase price of $92,500 by the
Registrant to Hamilton Dorsey Alston HomeCom.***
10.35 --Loan Agreement dated January 23, 1998 by and between
InsureRate, Inc. and the Registrant.***
10.36 --Form of Master Note issued by the Registrant to
InsureRate, Inc.***
10.37 --Form of Warrant to purchase 50,000 shares of Common Stock
issued by the Registrant to The Malachi Group, Inc.+
10.38 --Letter Agreement, dated April 8, 1998 by and among
HomeCom, Eurofactors International Inc., Blauchamp France,
FTS Worldwide Corporation and COLBO.****
10.39 --Letter Agreement, dated April 8, 1998 by and between First
Granite Securities, Inc. and HomeCom.****
10.40 --Letter Agreement, dated April 17, 1998 by and among
Sovereign Partners, L.P., Dominion Capital Fund and
HomeCom.****
10.41 --Agreement and Plan of Reorganization by and among The
Insurance Resource Center, Inc., Tim Strong, James Higham,
Cameron M. Harris & HomeCom and HomeCom, dated as of April
15, 1998.***
10.42 --Employment Agreement by and between HomeCom and Tim
Higham, dated as of April 16, 1998.***
10.44 --Asset Purchase Agreement by and between HomeCom and Sage
Networks Acquisition Corp. dated as of June 10, 1998.+
10.45 --Escrow Agreement by and between HomeCom and Sage Networks
Acquisition Corp. dated as of June 10, 1998.+
10.46 --Transitional Services Agreement by and between HomeCom and
Sage Networks Acquisition Corp. dated as of June 10,
1998.+
42
EXHIBIT DESCRIPTION
- - ------- ------------------------------------------------------------
10.47 --Co-Location Agreement by and between HomeCom and Sage
Networks, Inc. dated as of June 10, 1998.+
10.48 --Agreement and Plan of Merger by and among HomeCom
Communications, Inc, FIMI Securities Acquisitions Corp.,
Inc., ATF Acquisition Corp., Inc. and Daniel A. Delity,
James Wm. Ellsworth, and David B. Frank dated as of
November 6, 1998, together with exhibits.++
10.50 --Securities Purchase Agreement dated as of March 25, 1999
by and among HomeCom Communications, Inc. and CPR (USA),
Inc., Liberty View Funds, L.P., and Liberty View Fund,
L.L.C.++
10.51 --Registration Rights Agreement dated as of March 25, 1999
by and among HomeCom Communications, Inc. and CPR (USA),
Inc., Liberty View Funds, L.P., and Liberty View Fund,
L.L.C.++
10.52 --Transfer Agent Instructions dated as of March 25, 1999.++
10.53 --Transfer Agent Legal Opinion dated as of March 25, 1999.++
10.54 --Placement Agency Agreement dated as of March 25, 1999 by
and between HomeCom Communications, Inc. and J.P. Turner &
Company, L.L.C.++
10.55 --Stock Purchase Agreement by and among HomeCom
Communications, Inc. and Richard L. Chu, Joseph G.
Rickard, John R. Winans, Mario D'Agostino, Karen Moore,
and John Kokinis, dated as of April 23, 1999.+++
10.56 --Employment Agreement Between Ganymede Corporation and
Richard L. Chu, dated as of April 23, 1999.+++
10.57 --Employment Agreement between Ganymede Corporation and John
Winans, dated as of April 23, 1999.+++
10.58 --Employment Agreement between Ganymede Corporation and
Joseph G. Rickard, dated as of April 23, 1999.+++
10.59 --Escrow Agreement by and among HomeCom Communications, Inc.
and Richard L. Chu, Joseph G. Rickard, John R. Winans,
Mario D'Agostino, Karen Moore, and John Kokinis, dated as
of April 23, 1999.+++
10.60 --Pledge and Security Agreement by and between HomeCom
Communications, Inc. and Richard L. Chu, Joseph G.
Rickard, John R. Winans, Mario D'Agostino, Karen Moore,
and John Kokinis, dated as of April 23, 1999.+++
10.61 --Warrant Agreement, dated as of March 25, 1999, by and
among CPR (USA), Inc. and HomeCom Communications, Inc.++++
10.62 --Warrant Agreement, dated as of March 25, 1999, by and
among Liberty View Fund, L.L.C. and HomeCom
Communications, Inc.++++
10.63 --Warrant Agreement, dated as of March 25, 1999, by and
among Liberty View, Funds, L.P. and HomeCom
Communications, Inc.++++
10.64 --Warrant Agreement, dated as of March 25, 1999, by and
among J.P. Turner & Company, L.L.C and HomeCom
Communications, Inc.++++
10.65 --Securities Purchase Agreement dated as of July 23, 1999 by
and among HomeCom Communications, Inc. and MacNab LLC
(previously filed).
43
EXHIBIT DESCRIPTION
- - ------- ------------------------------------------------------------
10.66 --Registration Rights Agreement dated as of July 23, 1999 by
and among HomeCom Communications, Inc. and MacNab LLC
(previously filed).
10.67 --Transfer Agent Instructions dated as of September 28, 1999
(previously filed).
10.68 --Transfer Agent Legal Opinion dated as of July 23, 1999
(previously filed).
10.69 --Placement Agency Agreement dated as of July 23, 1999 by
and between HomeCom Communications, Inc. and Greenfield
Capital Partners (previously filed).
10.70 --Warrant Agreement, dated as of July 23, 1999, by and
between HomeCom Communications, Inc. and MacNab LLC
(previously filed).
10.71 --Securities Purchase Agreement dated as of September 27,
1999 by and among HomeCom Communications, Inc. and Jackson
LLC (previously filed).
10.72 --Registration Rights Agreement dated as of September 27,
1999 by and among HomeCom Communications, Inc. and Jackson
LLC (previously filed).
10.73 --Transfer Agent Instructions dated as of September 28, 1999
(previously filed).
10.74 --Transfer Agent Legal Opinion dated as of September 28,
1999 (previously filed).
10.75 --Placement Agency Agreement dated as of September 27, 1999
by and between HomeCom Communications, Inc. and Greenfield
Capital Partners (previously filed).
10.76 --Warrant Agreement, dated as of September 27, 1999, by and
between HomeCom Communications, Inc. and Jackson LLC
(previously filed).
10.77 --Asset Purchase Agreement, dated October 1, 1999, by and
between HomeCom Communications, Inc. and Infrastructure
Defense, Inc.+++++
10.78 --Bill of Sale and Assignment, dated October 1, 1999, by and
between HomeCom Communications, Inc. and Infrastructure
Defense, Inc.+++++
10.79 --Non-solicitation and Non-compete Agreement, Dated October
1, 1999, by and between HomeCom Communications, Inc. and
Infrastructure Defense, Inc.+++++
10.80 --Registration Rights Agreement, October 1, 1999, by and
between HomeCom Communications, Inc. and Infrastructure
Defense, Inc.+++++
10.81 --Form of Opinion of Purchaser's Counsel.+++++
10.82 --Form of Opinion of Seller's Counsel.+++++
10.83 --Referral and Service Agreement, dated October 1, 1999, by
and between HomeCom Communications, Inc. and
Infrastructure Defense, Inc.+++++
10.84 --Value Added Distributor Agreement, dated October 1, 1999
by and between HomeCom Communications, Inc. and
Infrastructure Defense, Inc.+++++
10.85 --Resignation Letter of Krishan Puri, dated November 1,
1999.++++++
21.1 --List of Subsidiaries.***
23.1 --Consent of PricewaterhouseCoopers LLP
23.2 --Consent of Andrew Shebay & Company, PLLC
23.3 --Consent of Andrew Shebay & Company, PLLC
23.4 --Consent of Ostrow Reisin Berk & Abrams, Ltd.
44
EXHIBIT DESCRIPTION
- - ------- ------------------------------------------------------------
23.5 --Consent of Sims Moss Kline & Davis LLP (included in
Exhibit 5.1) (previously filed).
24.1 --Powers of Attorney (previously filed).
27.1 --Financial Data Schedule (for SEC use only).
- - ------------------------
* Incorporated herein by reference to exhibit of the same
number in the Form S-1 Registration Statement of the
Registrant (Registration No. 333-12219).
** Incorporated herein by reference to exhibit of the same
number in the Form 10-K of the Registrant filed with the
Commission on March 31, 1998.
*** Incorporated herein by reference to exhibit of the same
number in the Form S-1 Registration Statement of the
Registrant (Registration No. 333-42599).
**** Incorporated herein by reference to exhibit of the same
number in Form 8-K of the Registrant filed with the
Commission on April 28, 1998.
+ Incorporated herein by reference to exhibit of the same
number in Form 8-K of the Registrant filed with the
Commission on June 25, 1998.
++ Incorporated herein by reference to exhibit of the same
number in Form 8-K of the Registrant filed with the
Commission on November 18, 1998.
+++ Incorporated herein by reference to exhibit of the same
number in Form 10-Q/A of the Registrant filed with the
Commission on November 17, 1999.
+ Incorporated herein by reference to exhibit of the same
number in Form S-1 Registration Statement of the Registrant
(Registration No. 333-45383).
++ Incorporated herein by reference to exhibit of the same
number in Form 10-K of the Registrant filed with the
Commission on March 31, 1999.
+++ Incorporated herein by reference to exhibit of the same
number in Form 8-K of the Registrant filed with the
Commission on May 10, 1999.
++++ Incorporated herein by reference to Registration Statement
on Form S-3 of the Registrant (Registration No. 333-79761)
+++++ Incorporated herein by reference to exhibit of the same
number on Form 8-K of the Registrant filed with the
Commission on October 18, 1999.
++++++ Incorporated herein by reference to exhibit of the same
number on Form 8-K of the Registrant filed with the
Commission on November 5, 1999.
(B) REPORTS ON FORM 8-K
On October 18, 1999, the Company filed a report on Form 8-K under Item 2
with respect to the sale of HISS.
On November 5, 1999 the Company filed a report on Form 8-K under Item 6 with
respect to the resignation of Kris Puri from the Company's Board of Directors.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOMECOM COMMUNICATIONS, INC.
BY: /S/ HARVEY W. SAX
-----------------------------------------
Harvey W. Sax
PRESIDENT AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ HARVEY W. SAX President; Chief Executive
------------------------------------------- Officer; Director March 30, 2000
Harvey W. Sax
/s/ JAMES WM. ELLSWORTH Vice President--Chief James
------------------------------------------- Wm. Elsworth Financial March 30, 2000
James Wm. Ellsworth Officer; Director
/s/ DANIEL A. DELITY President, First Institutional
------------------------------------------- Marketing, Inc.; Director March 30, 2000
Daniel A. Delity
/s/ GIA BOKUCHAVA, PH.D. Chief Technical Officer;
------------------------------------------- Director March 30, 2000
Gia Bokuchava, Ph.d.
/s/ CLAUDE A. THOMAS Director
------------------------------------------- March 30, 2000
Claude A. Thomas
/s/ ROGER J. NEBEL Director
------------------------------------------- March 30, 2000
Roger J. Nebel
/s/ WILLIAM WALKER Director
------------------------------------------- March 30, 2000
William Walker
46