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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003.
/ / TRANSITION REPORT PURSUANT TO 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ___________ to ___________
Commission File Number 0-29204
HOMECOM COMMUNICATIONS, INC
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(Exact name of small business issuer as specified in its charter)
DELAWARE 58-2153309
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
3495 Piedmont Road
Building 12, Suite 110
Atlanta, Georgia 30305
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(Address of principal executive offices)
(404) 237-4646
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(Issuer's Telephone Number)
Indicate by check whether the registrant (1) has filed all reports required
to be filed by Section 13 of 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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X].
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of May 8, 2003, there
were 14,999,156 shares of the registrant's Common Stock, par value $0.0001 per
share.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
HOMECOM COMMUNICATIONS, INC.
Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002
March 31, 2003 December 31, 2002
(unaudited)
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 138,248 $ 160,342
Accounts receivable, net 251,051 243,159
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Total current assets 389,299 403,501
Prepaid expenses 5,451 20,358
Furniture, fixtures and equipment held for sale 104,860 83,695
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Total assets $ 499,610 $ 507,554
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,120,999 $ 2,109,069
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Total liabilities 2,120,999 2,109,069
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Redeemable Preferred stock, Series B, $.01 par value, 125 shares
authorized, 125 shares issued at March 31, 2003 and December 31,
2002 and 17.8 shares outstanding at March 31, 2003 and December
31, 2002, convertible, participating; $427,500 liquidation value
as of March 31, 2003 251,750 251,750
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 15,000,000 shares authorized,
14,999,156 shares issued and outstanding at March 31, 2003 and
December 31, 2002 1,500 1,500
Preferred stock, Series C, $.01 par value, 175 shares issued and
authorized, 90.5 shares outstanding at March 31, 2003 and
December 31, 2002, convertible, participating; $2,208,765
liquidation value at March 31, 2003 1 1
Preferred stock, Series D, $.01 par value, 75 shares issued and
authorized, 1.3 shares outstanding at March 31, 2003 and
December 31, 2002, convertible, participating; $31,253
liquidation value at March 31, 2003 1 1
Preferred stock, Series E, $.01 par value, 106.4 shares issued and
authorized, 106.4 shares outstanding at March 31, 2003 and
December 31, 2002, convertible, participating; $2,630,953
liquidation value at March 31, 2003 1 1
Treasury stock, 123,695 shares at March 31, 2003 and December 31,
2002 (8,659) (8,659)
Additional paid-in capital 23,789,980 23,949,577
Accumulated deficit (25,655,963) (25,795,686)
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Total stockholder's deficit (1,873,139) (1,853,265)
------------ ------------
Total liabilities and stockholder's deficit $ 499,610 $ 507,554
============ ============
The accompanying notes are an integral part of these financial statements.
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HOMECOM COMMUNICATIONS, INC.
Consolidated Statements of Operations for the
three months ended March 31, 2003 and 2002
Three Months Ended
March 31,
(unaudited)
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2003 2002
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Revenues $ 406,522 $ 371,264
Cost of Revenues 250,775 236,017
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GROSS PROFIT 155,747 135,247
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OPERATING EXPENSES:
Sales and marketing
Product development
General and administrative 86,215 105,001
Depreciation and amortization
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Total operating expenses 86,215 105,001
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OPERATING INCOME 69,352 30,246
OTHER INCOME
Other income, net (70,191) (1,465)
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 139,723 31,711
INCOME TAX PROVISION (BENEFIT)
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NET INCOME 139,723 31,711
DEEMED PREFERRED STOCK DIVIDEND (176,764) (176,684)
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LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (37,041) $ (144,973)
============ ============
LOSS PER SHARE - BASIC AND DILUTED
CONTINUING OPERATIONS $ (0.002) $ (0.010)
------------ ------------
$ (0.002) $ (0.010)
============ ============
WEIGHTED NUMBER OF SHARES OUTSTANDING 14,999,156 14,999,156
============ ============
The accompanying notes are an integral part of these financial statements.
2
HOMECOM COMMUNICATIONS, INC.
Consolidate Statements of Cash Flows for the
three months ended March 31, 2003 and 2002
Three Months Ended
March 31,
(unaudited)
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2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 139,723 $ 31,711
Adjustments to reconcile net income to cash used in
operating activities:
Provision for bad debts 15,495 (7,608)
Deferred rent expense (1,644)
Change in operating assets and liabilities:
Accounts receivable (23,387) (205,806)
Prepaid expenses 14,907
Accounts payable and accrued expenses (147,667) 2,181
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Net cash used in operating activities (929) (181,166)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, and equipment (21,165) (12,183)
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Net cash used in investing activities (21,165) (12,183)
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CASH FLOW FROM FINANCING ACTIVITIES:
--------- ---------
Net cash provided by (used in) financing activities
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NET DECREASE IN CASH AND CASH EQUIVALENTS (22,094) (193,349)
CASH AND CASH EQUIVALENTS at beginning of period 160,342 413,346
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CASH AND CASH EQUIVALENTS at end of period $ 138,248 $ 219,997
========= =========
The accompanying notes are an integral part of these financial statements.
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HOMECOM COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Article 10 of Regulation S-X of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the financial position and results of operations of
HomeCom Communications, Inc. (the "Company," "we" or "us") for the interim
periods presented. All such adjustments are of a normal and recurring nature.
These financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended December 31, 2002, as filed with the Commission on April
15, 2003.
2. GOING CONCERN MATTERS AND RECENT EVENTS
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplate the
realization of assets and liquidations of liabilities in the normal course of
business. The Company has incurred significant losses since its incorporation
resulting in an accumulated deficit as of March 31, 2003 of approximately $25.7
million. The Company continues to experience negative cash flows from operations
and is dependent on one client that accounts for 97% of revenue. These factors
raise doubt about the Company's ability to continue as a going concern.
Recent Events
On March 27, 2003, we entered into an Asset Purchase Agreement (the
"Agreement") with Tulix Systems, Inc. ("Tulix"), a company in which Gia
Bokuchava, Nino Doijashvili and Timothy R. Robinson, who are officers and
directors of the Company, are officers, directors and founding shareholders.
Under the Agreement, Tulix will purchase the assets used in the operation
of our hosting and web site maintenance business, including intellectual
property, equipment, contracts, certain accounts receivable in an aggregate
amount of approximately $70,000, and cash of $50,000 (the "Asset Sale"). As
consideration for these assets, Tulix will: issue to us shares of Tulix common
stock that will represent 15% of the outstanding shares of Tulix; issue to us a
secured promissory note (the "Note") for a principal amount of $70,000 (subject
to adjustment as described below) that will bear interest at an annual rate of
7%, will be secured by certain assets of Tulix that are transferred to Tulix as
part of the Asset Sale, and will become due one year after the closing of the
Asset Sale (the principal amount of the note may be increased at closing
pursuant to the terms of the Agreement); and, assume certain obligations of
ours, including certain accounts payable related to ongoing operations.
The note to be issued by Tulix to the Company will be for a principal
amount of $70,000, subject to adjustment as described below. If the sum of the
cash and accounts receivable of the Company (as determined in accordance with
GAAP in a manner consistent with the Company's past practices) on the day that
we complete the Asset Sale is less than $325,053, the principal amount of the
Note will be increased by an amount equal to the difference between $325,053 and
the sum of the Company's cash and accounts receivable on the closing date (to
the extent that the sum of cash and accounts receivable on the day that we
complete the Asset Sale is more than $325,053, we will divide the excess evenly
between the Company and Tulix). The Note will bear interest at a rate of 7% per
year and will mature on the one year anniversary of the Closing of the Asset
Sale. Interest will be due and payable at maturity. The Note will be secured by
certain assets transferred to Tulix in the Asset Sale.
In connection with the Asset Sale, the Agreement provides that we will
enter into a Shareholders' Agreement with Tulix, Mr. Robinson, Mr. Bokuchava and
Ms. Doijashvili. The Shareholders' Agreement would give the Company certain
rights as a holder of Tulix stock for a period of five years. These rights
include rights of co-sale, rights of first refusal, anti-dilution rights and
rights to inspect the books and records of Tulix. The co-sale rights will give
us (and the other Tulix shareholders) the right to participate in any sales,
subject to certain exclusions, of Tulix stock by other Tulix shareholders. The
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rights of first refusal granted to us in the Shareholders' Agreement will
require that Tulix give us (and the other Tulix shareholders) the right to
purchase any securities, subject to certain exclusions, that it intends to offer
to third parties before it offers those securities to third parties. The
anti-dilution rights contained in the Shareholders' Agreement require Tulix to
grant us additional shares of common stock any time, subject to certain
exclusions, it issues shares of common stock to other persons so that our
aggregate ownership interest in Tulix is generally not diluted. Finally, the
Shareholders' Agreement gives us the right to inspect the books and records of
Tulix, subject to the specific terms of the Shareholders' Agreement.
The parties intend to complete the Asset Sale if (i) it is approved by the
Company's stockholders as required under Delaware law and (ii) the other
conditions to closing set forth in the Agreement are satisfied or waived. These
conditions include, among others, the requirement that all third parties who
have a contractual right to approve the assignment of their contracts to Tulix
must consent to such assignment and a condition in favor of Tulix that the
largest customer of the business to which the assets relate not have given
notice that it intends to terminate its relationship with the business. As such,
we can offer no assurance that the Asset Sale will be completed. Neither we nor
Tulix is under any obligation to pay any type of termination fee if we do not
complete the Asset Sale, and there are no other deal protection measures. The
Agreement also contains a release from Tulix pertaining to certain matters and
mutual releases with Mr. Robinson, Mr. Bokuchava and Ms. Doijashvili regarding
certain employment matters.
Also on March 27, 2003, the Company entered into a License and Exchange
Agreement with Eurotech, Ltd. ("Eurotech") and, with respect to Articles V and
VI thereof, Polymate, Ltd. and Greenfield Capital Partners LLC (the "Exchange
Agreement"). The Exchange Agreement contemplates that Eurotech and the Company
will enter into a License Agreement (the "License Agreement"). Pursuant to the
Exchange Agreement and the License Agreement, Eurotech will license to the
Company its rights to the EKOR, HNIPU and Electro Magnetic Radiography (EMR)
technologies. In exchange for the license of these technologies, the Company
will (i) issue to Eurotech 11,250 shares of Series F Preferred Stock and 1,069
shares of Series G Preferred Stock, both of which are new series of the
Company's preferred stock, and (ii) pay Eurotech a royalty of seven percent (7%)
on net sales generated by the licensed technologies and a royalty of four
percent (4%) on net sales generated by products and services that are
improvements on the licensed technologies. Closing of this transaction is
subject to a number of conditions, including, among others, the Company's
delivery of evidence that: (i) the Company's accounts payable have been reduced
to approximately $600,000, which would require that the holders of the Company's
Series B, C, D, and E Preferred Stock forgive approximately $1,687,000 in
penalties that have accrued with respect to their shares of preferred stock and
(ii) the holders of the Company's Series B, C, D and E Preferred Stock have
waived the mandatory conversion provisions of their respective shares of
preferred stock. As such, we can offer no assurance that this transaction will
be completed. The Exchange Agreement provides that, during the period prior to
closing of the sale of the Company's hosting and web site maintenance business,
the financial needs of the hosting and web site maintenance business will be
funded by the operations of that business, while the finances relating to the
new licensed technologies will be kept separate.
EMR is a technology intended for the imaging of subterranean nuclear and
hazardous wastes in ground and marine settings, and for oil exploration. HNIPU
is a technology intended to improve upon conventional monolithic polyurethanes
through a non-toxic process. EKOR is a family of non-toxic advanced composite
polymer materials used in the containment of nuclear and hazardous materials.
Shares of Series F Convertible Preferred Stock are convertible into shares
of common stock at a conversion rate of 10,000 shares of common stock per share
of Series F Preferred Stock subject to adjustment as set forth in the
Certificate of Designations governing the Series F Preferred Stock. As such, the
11,250 shares of Series F Preferred Stock to be issued to Eurotech will be
convertible into 112,500,000 shares of common stock. In connection with the
consummation of the transactions contemplated by the Exchange Agreement, we have
agreed to issue 1,500 shares of Series F Preferred Stock to Polymate and 750
shares of Series F Preferred Stock to Greenfield. As such, we have agreed to
issue a total of 13,500 shares of Series F Preferred Stock that will be
convertible into 135,000,000 shares of common stock. The Certificate of
Designations, however, provides that the shares of Series F Preferred Stock will
only be convertible if the Company has a sufficient number of authorized but
unissued shares of common stock available to support the conversion of the
outstanding shares of all series of preferred stock (although the Certificate of
Designations states that the shares of Series F Preferred Stock will become
convertible on December 31, 2003 regardless of whether a sufficient number of
shares of common stock have been authorized by such date). Currently, however,
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the Company has only 15,000,000 shares of authorized common stock, of which
14,999,156 shares have been issued and are outstanding. As such, our Board of
Directors has approved, and has directed us to submit to our stockholders, a
proposal to amend our Certificate of Incorporation to, among other things,
increase the number of shares of common stock that we are authorized to issue to
300,000,000 shares. If this amendment is approved, and if Eurotech converts its
shares of Series F Preferred Stock into shares of common stock, a change in
control of the Company could occur. For example, if Eurotech were to convert all
of its shares of Series F Preferred Stock, and if Polymate and Greenfield were
to convert their shares of Series F Preferred Stock into shares of common stock,
and if none of our other preferred shareholders were to convert their shares of
preferred stock into shares of common stock, Eurotech would hold approximately
112,500,000 of the approximately 150,000,000 shares of common stock
then-outstanding, or roughly 75% of the then-outstanding shares of common stock,
and Polymate and Greenfield would hold, in the aggregate, approximately
22,500,000 shares of common stock, representing roughly 15% of the
then-outstanding shares. Shares of Series F Preferred Stock have the right to
vote on all matters with the common stock to the extent that such shares of
Series F Preferred Stock are then convertible into shares of common stock.
Pursuant to the License Agreement, the Company has agreed to issue 1,069
shares of Series G Convertible Preferred Stock to Eurotech. Each share of Series
G Convertible Preferred Stock is convertible into a number of shares of common
stock determined by dividing $1,000 by a number equal to 82.5% of the average
closing price of the common stock over the preceding five business days. Shares
of Series G Preferred Stock have no voting rights.
The Company has agreed to enter into a commercially reasonable registration
rights agreement with Eurotech, Polymate and Greenfield pursuant to which the
Company would grant both demand and piggyback registration rights to those
entities.
In anticipation of the transaction, Lawrence Shatsoff and David Danovitch
have resigned from the Company's Board of Directors, and Don Hahnfeldt, the
President and Chief Executive Officer of Eurotech, and Dr. Randolph Graves, a
director and the Chief Financial Officer and Vice President of Eurotech, have
been elected to fill these vacancies on the Company's Board of Directors.
If we complete the Tulix transaction, we expect Mr. Robinson, Mr. Bokuchava
and Ms. Doijashvili to resign from the Board of Directors. This would leave
Michael Sheppard, Mr. Hahnfeldt and Dr. Graves as the three members of the
Company's Board of Directors, meaning that the two designees of Eurotech will
constitute a majority of our Board of Directors. It is expected that new Company
officers, who will be identified by Eurotech, will be appointed by the Board of
Directors at such time.
3. BASIC AND DILUTED LOSS PER SHARE
Loss per common share is computed by dividing net loss available to common
stockholders by the weighted average number of shares of common stock
outstanding for the period of time then ended. The effect of the Company's stock
options and convertible securities is excluded from the computations for the
three months ended March 31, 2003 and 2002, as it is antidilutive.
4. TAXES
There was no provision for cash payment of income taxes for the three
months ended March 31, 2003 and 2002, respectively, as the Company anticipates a
net taxable loss for the year ended December 31, 2003.
5. STOCKHOLDERS' DEFICIT
As a requirement of the private placements of the Company's Series B, C, D
and E Convertible Preferred Stock, the Company was obligated to file and have
declared effective, within a specified time period, a registration statement
with respect to a minimum number of shares of common stock issuable upon
conversion of the Series B, C, D and E Preferred Stock. As of March 31, 2003,
such registration statement has not been declared effective and penalties are
owed. In addition, given the Company's financial condition as discussed in
footnote 2, the Company has no current plans to ensure that such registration
statement is declared effective. In accordance with the terms of the agreement
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between the parties, penalties accrue at a percentage of the purchase price of
the unregistered securities per 30 day period. As of March 31, 2003, $1,686,768
has been accrued into accounts payable and accrued expenses for such penalties.
As a condition to the closing of the Eurotech Exchange Agreement, the Company is
required to reduce its accounts payable to approximately $600,000, which would
require that the holders of the Company's Series B, C, D, and E Preferred Stock
forgive approximately $1,687,000 in penalties that have accrued with respect to
their shares of preferred stock. Additionally, the Exchange Agreement requires
that, as a condition to closing, these shareholders waive the mandatory
conversion provisions of their respective shares of preferred stock.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
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. Forward looking statements include,
but may not be limited to, those statements regarding the Company's
expectations, beliefs, intentions, or strategies regarding the future. All
forward-looking statements included in this document are based on information
available to the Company on the date hereof, and the Company assumes no
obligation to update any such forward-looking statements. Specifically, the
Company's statements with respect to, among other things, the completion of the
sale of assets to Tulix, the completion of the potential transaction with
Eurotech, and our ability or inability to continue as a going concern are
forward looking statements. The Company notes that a variety of risk factors
could cause the Company's actual results and experience to differ materially
from the anticipated results or other expectations expressed in the Company's
forward-looking statements including, among other things, our ability or
inability to complete the transactions with Tulix and Eurotech, our ability to
obtain additional financing, the viability of the licensed technologies that we
will acquire from Eurotech if the transaction closes, and other factors
discussed in this report and set forth in our Annual Report on Form 10-K and our
Registration Statements on Forms S-1 and S-3.
Historically, we developed and marketed specialized software applications,
products and services that enabled 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. We provided 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 our 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. During 2001, we sold our remaining software applications businesses.
Currently, we only derive revenue from professional web development services and
hosting fees. On March 23, 2001, we announced our intentions to wind down our
operations. We have entered into an agreement to sell substantially all of the
assets used in our hosting and website maintenance business to Tulix. We have
also entered into an agreement to license certain technologies from Eurotech. If
these transactions are consummated, our primary assets will include cash and
accounts receivable that we do not transfer to Tulix, the assets that we license
from Eurotech, the Tulix Note and shares of Tulix stock.
Our revenues and operating results have varied substantially from period to
period, and should not be relied upon as an indication of future results.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31,
2002
NET SALES. Net sales increased 9.5% from $371,264 in the first quarter of
2002 to $406,522 in the first quarter of 2003. This increase of $35,258 is
primarily attributable to increased sales to Roadrunner. All revenues consisted
exclusively of hosting which was recognized at the time the services were
provided.
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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 increased
from $236,017, or 63.6% of revenues, in the first quarter of 2002 to $250,775,
or 61.7% of revenues, in the first quarter of 2003. The increase in the cost of
sales is due to costs associated with increasing the scale of services,
including bandwidth provisions, to Roadrunner.
GROSS PROFIT. Gross profit increased by $20,500 from $135,247 in the first
quarter of 2002 to $155,747 in the first quarter of 2003. Gross profit margins
increased from 36.4% during the first quarter of 2002 to 38.3% during the first
quarter of 2003. This improvement in gross profit is primarily related to
recognizing continued growth in Roadrunner revenue while at the same time
controlling costs associated with managing the resultant increased work volume.
SALES AND MARKETING. The Company ceased all significant sales and marketing
efforts entering 2001. There were no such expenditures in the first quarter of
2001 or 2002.
PRODUCT DEVELOPMENT. The Company ceased all significant product development
efforts entering 2001. There were no such expenditures in the first quarter of
2001 or 2002.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as a pro-rata allocation of telecommunications, and facilities
and data center costs. General and administrative expenses decreased from
$105,001 in the first quarter of 2002 to $86,215 in the first quarter of 2003.
As a percentage of net sales, these expenses decreased from 28.3% in the first
quarter of 2002 to 21.2% in the first quarter of 2003. This decrease is
primarily due to the reversal of accruals for operating expenses incurred during
the fall of 2001 related to the closing of our Chicago, New York and Houston
offices which were ultimately resolved at a lower cost than estimated or were no
longer needed for their originally intended purpose. Without these reductions in
accruals being reversed into their respective expense categories, general and
administrative expenses would have been $115,539, or 28.4% of net sales, in the
first quarter of 2003, an increase of $10,538 compared to the first quarter of
2002.
DEPRECIATION AND AMORTIZATION. With the write down of the carrying value of
all fixed assets in the fourth quarter of 2000, the Company has suspended
depreciation of its remaining assets in anticipation of a sale. There were no
charges recognized in the first quarter of 2002 or 2003.
OTHER INCOME. Other income in the first quarter of 2003 consisted of $1,351
in interest earned on money market accounts, and $68,840 in the reversal of
accruals related to defaults on leases of capital equipment during the third
quarter of 2001 which were resolved at a lower cost than estimated.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of capital are extremely limited. We have incurred operating
losses since inception and as of March 31, 2003, we had an accumulated deficit
of $25,655,963 and a working capital deficit of $1,731,700. On March 23, 2001,
we announced our intentions to wind down operations. We have entered into an
agreement to sell substantially all of our operating assets to Tulix and we have
entered into an agreement to license certain technologies from Eurotech. If we
complete these transactions, our primary assets will include cash and accounts
receivable that we do not transfer to Tulix, the assets that we license from
Eurotech, the Tulix Note and shares of Tulix stock.
Whether we sell our remaining assets to Tulix or not, we believe that we
have exhausted our current sources of capital and also believe that it is highly
unlikely that we will be able to secure additional capital that would be
required to undertake additional steps to continue our operations. It is our
understanding that additional financing may be made available to the Company if
the proposed transaction with Eurotech closes. However, we have received no
commitment that any such financing will be made available, and the closing of
the Eurotech transaction is subject to a number of conditions that may prevent
the closing of the transaction from occurring. Furthermore, we can provide no
assurance that any such financing, even if it were to be provided to the
Company, would enable us to sustain our operations. If we cannot resolve our
liabilities, and no other alternatives are available, we may be forced to seek
protection from our creditors. The aforementioned factors raise substantial
8
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.
We spent $21,165 during the first quarter of 2003 for the purchase of
capital equipment. This amount was expended primarily for computer equipment,
communications equipment and software necessary for us to maintain the operating
integrity of our Network Operations Center for the continued provision of
services to our existing customers.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, the Company's
management conducted an evaluation, under the supervision and with the
participation of the Company's Executive Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on this evaluation, the Executive Vice
President and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. There have been no significant changes in
the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of our last evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On or about February 8, 2002, we received a complaint filed by Properties
Georgia OBJLW One Corporation in the State Court of Fulton County, Georgia on
December 6, 2001, alleging that we defaulted on our lease in Building 14 at 3495
Piedmont Road, Atlanta, Georgia 30305. The complaint sought damages in the
amount of $141,752 plus interest of $23,827, plus attorneys' fees and court
costs. On December 18, 2002 we reached a settlement with Georgia OBJLW One
Corporation in the amount of $135,000, consisting of one payment of $30,000 paid
at that time, followed by seven monthly payments of $15,000 to be made from
February thru August, 2003. We are currently in compliance with this agreement.
We are not a party to any other material legal proceedings. From time to
time, we are involved in various routine legal proceedings incidental to the
conduct of our business.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
As a requirement of the private placements of the Company's Series B, C, D
and E Convertible Preferred Stock, the Company was obligated to file and have
declared effective, within a specified time period, a registration statement
with respect to a minimum number of shares of common stock issuable upon
conversion of the Series B, C, D and E Preferred Stock. As of March 31, 2003,
such registration statement has not been declared effective and penalties are
owed to the Series B, C, D and E Preferred Stock holders. In addition, given the
Company's financial condition as discussed in note 2 to the financial statements
included in Part I hereof, the Company has no current plans to ensure that such
registration statement is declared effective. In accordance with the terms of
the agreement between the parties, penalties accrue at a percentage of the
purchase price of the unregistered securities per 30 day period. As of March 31,
2003, $1,686,768 has been accrued into accounts payable and accrued expenses for
such penalties. As a condition to the closing of the Eurotech Exchange
9
Agreement, the Company is required to reduce its accounts payable to
approximately $600,000, which would require that the holders of the Company's
Series B, C, D, and E Preferred Stock forgive approximately $1,687,000 in
penalties that have accrued with respect to their shares of preferred stock.
The outstanding shares of our Series B, C, D, and E Preferred Stock were
scheduled to convert automatically into shares of common stock in March 2002,
July 2002, September 2002, and April 2003 respectively, pursuant to the
Certificates of Designations governing our Series B, C, D, and E Preferred
Stock. However, because we did not have a sufficient number of authorized shares
of Common Stock available for issuance upon conversion of these shares of Series
B, C, D, and E Preferred Stock, we are not in compliance with the requirements
of our Certificate of Incorporation. Furthermore, no shares of Series B, C, D,
or E Preferred Stock have been converted since the automatic conversion date,
and we remain obligated to convert the remaining shares of Series B, C, D, and E
Preferred Stock into shares of common stock. If the outstanding shares of Series
B, C, D, and E Preferred Stock had been converted into shares of common stock on
March 31, 2003, we would have been obligated to issue 62,334,953 shares of
common stock upon such conversions. The Exchange Agreement requires that, as a
condition to closing, the holders of the Company's Series B, C, D, and E
Preferred Stock waive the mandatory conversion provisions of their respective
shares of preferred stock.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Asset Purchase Agreement by and between HomeCom
Communications, Inc. and Tulix Systems, Inc., dated March
24, 2003. (Incorporated by reference to Exhibit 2.3 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, as filed with the Commission on April 15,
2003.)
2.2 License and Exchange Agreement, dated March 27, 2003, by and
among HomeCom Communications, Inc., Eurotech, Ltd. and, with
respect to Articles V and VI thereof, Polymate, Ltd. and
Greenfield Capital Partners LLC. (Incorporated by reference
to Exhibit 2.4 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002, as filed with the
Commission on April 15, 2003.)
3.1 Certificate of Designation of Series F Convertible Preferred
Stock. (Incorporated by reference to Exhibit 3.8 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, as filed with the Commission on April 15,
2003.)
3.2 Certificate of Designation of Series G Convertible Preferred
Stock. (Incorporated by reference to Exhibit 3.9 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002, as filed with the Commission on April 15,
2003.)
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002. (This certification is not "filed" for purposes
of Section 18 of the Exchange Act [15 U.S.C. 78r] or
otherwise subject to the liability of that section. Such
certification will not be deemed to be incorporated by
reference into any filing under the Securities Act or the
Exchange Act, except to the extent that the Company
specifically incorporates them by reference.
(b) Reports on Form 8-K
We did not file any Current Reports on Form 8-K during the applicable
period.
10
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/ Timothy R. Robinson
------------------------------
Name: Timothy R. Robinson
Title: Executive Vice President,
Chief Financial Officer
Date: May 9, 2003
11
CERTIFICATION
I, Timothy R. Robinson, Executive Vice President and Chief Financial
Officer of HomeCom Communications, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of HomeCom
Communications, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the registrant and I have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on
my evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. I have indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my most
recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
HOMECOM COMMUNICATIONS, INC.
By: /s/ Timothy R. Robinson
------------------------------
Name: Timothy R. Robinson
Title: Executive Vice President,
Chief Financial Officer
Date: May 9, 2003
12
EXHIBIT INDEX
2.1 Asset Purchase Agreement by and between HomeCom Communications, Inc.
and Tulix Systems, Inc., dated March 24, 2003. (Incorporated by
reference to Exhibit 2.3 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2002, as filed with the
Commission on April 15, 2003.)
2.2 License and Exchange Agreement, dated March 27, 2003, by and among
HomeCom Communications, Inc., Eurotech, Ltd. and, with respect to
Articles V and VI thereof, Polymate, Ltd. and Greenfield Capital
Partners LLC. (Incorporated by reference to Exhibit 2.4 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002, as filed with the Commission on April 15, 2003.)
3.1 Certificate of Designation of Series F Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.8 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed
with the Commission on April 15, 2003.)
3.2 Certificate of Designation of Series G Convertible Preferred Stock.
(Incorporated by reference to Exhibit 3.9 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2002, as filed
with the Commission on April 15, 2003.)
99.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (This certification is not "filed" for purposes of Section 18 of
the Exchange Act [15 U.S.C. 78r] or otherwise subject to the liability
of that section. Such certification will not be deemed to be
incorporated by reference into any filing under the Securities Act or
the Exchange Act, except to the extent that the Company specifically
incorporates them by reference.
13