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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 September 30, 2003.
/ / 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
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
----------------------
(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 October 10, 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 September 30, 2003 and December 31, 2002
September 30, 2003 December 31, 2002
(unaudited)
------------------ -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 85,784 $ 160,342
Accounts receivable, net 258,949 243,159
------------ ------------
Total current assets 344,733 403,501
Prepaid expenses 42,029 20,358
Furniture, fixtures and equipment held for sale 105,624 83,695
Licensed Technology rights, net 920,475
------------ ------------
Total assets $ 1,412,861 $ 507,554
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 2,417,271 $ 2,109,069
------------ ------------
Total current liabilities 2,417,271 2,109,069
Note payable 175,000
Convertible preferred stock (See Note 9) 6,442,133
------------ ------------
Total liabilities 9,034,404 2,109,069
Redeemable Convertible Preferred stock, Series B, $.01
par value, 125 shares authorized, 125 shares issued
and 17.8 shares outstanding at December 31, 2002,
convertible, participating (See Note 9) 251,750
------------ ------------
STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 15,000,000 shares
authorized, 14,999,156 shares issued and outstanding
at September 30, 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
December 31, 2002, convertible, participating (See
Note 9) 1
Preferred stock, Series D, $.01 par value, 75 shares
issued and authorized, 1.3 shares outstanding at
December 31, 2002, convertible, participating (See
Note 9) 1
Preferred stock, Series E, $.01 par value, 106.4 shares
issued and authorized, 106.4 shares outstanding at
December 31, 2002, convertible, participating (See
Note 9) 1
Preferred stock, Series H, $.01 par value, 13,500 shares
authorized, 13,500 shares issued and outstanding at
September 30, 2003, convertible, participating,
$13,500,000 liquidation value at September 30, 2003 135
Treasury stock, 123,695 shares at September 30, 2003
and December 31, 2002 (8,659) (8,659)
Additional paid-in capital 19,228,821 23,949,577
Accumulated deficit (26,843,340) (25,795,686)
------------ ------------
Total stockholder's deficit (7,621,543) (1,853,265)
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Total liabilities and stockholder's deficit $ 1,412,861 $ 507,554
============ ============
The accompanying notes are an integral part of these financial statements.
2
HOMECOM COMMUNICATIONS, INC.
Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2002
Three Months Ended Nine Months Ended
September 30, September 30,
(unaudited) (unaudited)
---------------------------- ----------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues $ 410,005 $ 367,710 $ 1,227,745 $ 1,112,461
Cost of Revenues 280,445 274,110 818,300 746,964
------------ ------------ ------------ ------------
GROSS PROFIT 129,560 93,600 409,445 365,497
------------ ------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing
Product development
General and administrative 178,368 103,407 439,637 395,600
Depreciation and amortization 49,311 65,748
------------ ------------ ------------ ------------
Total operating expenses 227,679 103,407 505,385 395,600
------------ ------------ ------------ ------------
OPERATING LOSS (98,119) (9,807) (95,940) (30,103)
OTHER EXPENSES (INCOME)
Interest expense 238,499 239,732
Other income, net (1,039) (1,435) (90,748) (25,249)
------------ ------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (335,579) (8,372) (244,924) (4,854)
INCOME TAX PROVISION (BENEFIT)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE, NET OF TAX (802,730) (802,730)
------------ ------------ ------------ ------------
NET LOSS (1,138,309) (8,372) (1,047,654) (4,854)
DEEMED PREFERRED STOCK DIVIDEND (176,682) (336,361) (530,049)
------------ ------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (1,138,309) $ (185,054) $ (1,384,015) $ (534,903)
============ ============ ============ ============
LOSS PER SHARE - BASIC AND DILUTED:
Loss before cumulative effect of a change in
accounting principle (0.022) (0.012) (0.038) (0.036)
Cumulative effect of a change in accounting
principle, net of tax (0.054) (0.054)
------------ ------------ ------------ ------------
LOSS PER SHARE - BASIC AND DILUTED $ (0.076) $ (0.012) $ (0.092) $ (0.036)
============ ============ ============ ============
WEIGHTED NUMBER OF SHARES OUTSTANDING 14,999,156 14,999,156 14,999,156 14,999,156
The accompanying notes are an integral part of these financial statements.
3
HOMECOM COMMUNICATIONS, INC.
Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002
Nine Months Ended
September 30,
(unaudited)
--------------------------
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,047,654) $ (4,854)
Adjustments to reconcile net loss to cash used in
operating activities:
Cumulative effect of a change in accounting principle 802,730
Provision for bad debts 23,054 (8,369)
Deferred rent expense (4,932)
Change in operating assets and liabilities:
Accounts receivable (38,844) (62,165)
Prepaid expenses (21,671) (35,145)
Accounts payable and accrued expenses 54,756 (75,502)
----------- -----------
Net cash used in operating activities (227,629) (190,967)
----------- -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, and equipment (21,929) (28,883)
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Net cash used in investing activities (21,929) (28,883)
----------- -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Issuance of Note Payable 175,000
----------- -----------
Net cash provided by financing activities 175,000
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (74,558) (219,850)
CASH AND CASH EQUIVALENTS at beginning of period 160,342 413,346
----------- -----------
CASH AND CASH EQUIVALENTS at end of period $ 85,784 $ 193,496
=========== ===========
SUPPLEMENTAL DATA:
Non-Cash Activities:
Preferred stock issued for acquisition of
technology licenses $ 986,223
Accrued penalty on preferred stock $ 478,791 $ 478,790
The accompanying notes are an integral part of these financial statements.
4
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 September 30, 2003 of approximately
$25.8 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.
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 (subject to certain
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adjustments), the principal amount of the Note will be increased by an amount
equal to the difference between $325,053 (as adjusted) 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 (as adjusted), the excess will be divided 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
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 will 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 will give 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 notified
the Company or Tulix that it intends to terminate its relationship with HomeCom
or Tulix, that it does not intend to transfer its business to Tulix upon
completion of the Asset Sale, or that it intends to materially change the amount
of business that it does with HomeCom or Tulix. 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.
On May 22, 2003, the Company completed a transaction with Eurotech, Ltd.
("Eurotech"). The Company had entered into a License and Exchange Agreement with
Eurotech and, with respect to Articles V and VI thereof, Polymate, Ltd. and
Greenfield Capital Partners LLC, on March 27, 2003 (as amended, the "Exchange
Agreement"). In connection with the completion of the transaction, the Company
entered into a License Agreement, dated May 22, 2003 with Eurotech (as amended,
the "License Agreement"). Pursuant to the Exchange Agreement and the License
Agreement, Eurotech has licensed to the Company its rights to the EKOR, HNIPU,
Electro Magnetic Radiography/Acoustic Core (EMR/AC), Rad-X, Firesil, LEM and
Rapidly Biodegradable Hydrophobic Material (RBHM) technologies. In exchange for
6
the licenses of these technologies, the Company (i) issued to Eurotech 11,250
shares of Series F Convertible Preferred Stock and 1,069 shares of Series G
Convertible Preferred Stock, both of which were new series of the Company's
preferred stock, and (ii) will 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. The License Agreement provides that the licenses
granted to the Company thereunder will become terminable at the option of
Eurotech (i) if the Company has not effected a commercial sale of any licensed
technology or improved licensed technology by April 1, 2006, and (ii) in certain
other circumstances. The holders of the outstanding shares of Series F Preferred
Stock have surrendered and cancelled their outstanding shares of Series F
Preferred Stock in exchange for the right to receive shares of Series H
Convertible Preferred Stock, which we issued on September 30, 2003.
Shares of Series H 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 H Preferred Stock, subject to adjustment as set forth in the
Certificate of Designations governing the Series H Preferred Stock. As such, the
13,500 shares of Series H Preferred Stock issued to Eurotech, Polymate and
Greenfield are convertible into 135,000,000 shares of common stock. The Series H
Certificate of Designations, however, provides that no holder of Series H Shares
may convert Series H Shares into shares of common stock if such conversion would
result in that holder beneficially owning more than 9.9% of the outstanding
shares of common stock (excluding, for purposes of the calculation, any
unconverted Series H Shares). In addition, the Series H Certificate of
Designations provides that the shares of Series H Preferred Stock will only
become convertible at such time as 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.
Currently, the Company has only 15,000,000 shares of authorized common stock, of
which 14,999,156 shares have been issued and are outstanding. Given this
deficiency, and given that the License and Exchange Agreement requires that we
increase the number of shares of common stock that we are authorized to issue to
not less than 150,000,000 shares, 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. Shares of Series H
Preferred Stock do not have the right to vote.
Pursuant to the License Agreement, the Company issued 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. The
Series G Certificate of Designations, however, provides that no holder of Series
G Shares may convert Series G Shares into shares of common stock if such
conversion would result in that holder owning more than 9.9% of the outstanding
shares of common stock (excluding, for purposes of the calculation, any
unconverted Series G Shares). Shares of Series G Preferred Stock do not have the
right to vote.
The Exchange Agreement provides that, during the period prior to closing of
the Asset Sale, 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. On May 22,
2003, we executed a note in favor of one of our preferred shareholders that, as
7
amended, provides that we may borrow up to $200,000 for use solely in connection
with the technologies that we have licensed from Eurotech. Advances under this
agreement, which advances are secured by a security agreement, bear interest at
a rate of 10% per annum and mature on December 31, 2003. As of September 30,
2003, we had borrowed $175,000 under this agreement. Since September 30, 2003,
we have borrowed another $25,000 from this lender under this agreement.
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 connection with the closing of the transaction with Eurotech, the
holders of the Company's Series C, Series D, and Series E Preferred Stock (i)
have agreed to waive the mandatory conversion features of their respective
series of Preferred Stock and to vote in favor of an amendment to the
Certificates of Designations that govern their respective shares to delete these
mandatory conversion provisions from the Certificates of Designations, and (ii)
together with one holder of the Company's Series B Preferred Stock, have agreed
to refrain from converting their shares of Preferred Stock into shares of common
stock until the Company has amended its Certificate of Incorporation to
authorize at least 150,000,000 shares of common stock. In addition, the holder
of the outstanding shares of the Company's Series C, Series D and Series E
Preferred Stock has agreed to accept payment for approximately $2.0 million of
penalties that may be owed to it in shares of common stock instead of cash.
These penalties are attributable to the Company's failure to register the resale
of the shares of Common Stock into which those shares of Preferred Stock are
convertible, as the Company was required to do by its agreements with the
holders of those Preferred Shares.
In conjunction with the transaction, Lawrence Shatsoff and David Danovitch
resigned from the Company's Board of Directors, and Don V. Hahnfeldt, formerly a
director, the President and Chief Executive Officer of Eurotech, and Randolph A.
Graves, Jr., a director and the Chief Financial Officer and Vice President of
Eurotech, were elected to fill these vacancies on the Company's Board of
Directors. The Board of Directors also appointed Mr. Hahnfeldt and Dr. Graves to
serve as officers of our Licensed Technologies Division, which is the new
division that we created in connection with the license of the above-referenced
technologies from Eurotech. Mr. Hahnfeldt has subsequently resigned his
positions as an officer and director of HomeCom.
If we complete the Tulix transaction, we expect Mr. Robinson, Mr. Bokuchava
and Ms. Doijashvili to resign from the Board of Directors.
3. SEGMENT INFORMATION
During 2002, HomeCom operated as a single business unit. Beginning May 22,
2003, with the closing of the License Agreement with Eurotech, the Company was
reorganized into two separate business units. These units are organized based
upon the products and services which they deliver. HomeCom's reportable segments
are (i) Internet Services which consists of custom web development, hourly
maintenance services, and hosting; and (ii) Licensed Technologies, which
consists of business activities associated with the technologies licensed from
Eurotech.
The table below presents information about the reported business unit
income for HomeCom Communications, Inc. for the three and nine months ended
September 30, 2003 and 2002.
8
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Revenues:
Internet Services $ 409,560 $ 367,710 $ 1,219,499 $ 1,112,461
Licensed Technologies 445 8,246
----------- ----------- ----------- -----------
Totals $ 410,005 $ 367,710 $ 1,227,745 $ 1,112,461
Business Unit Net Income:
Internet Services $ 199,226 $ 93,600 $ 534,467 $ 365,497
Licensed Technologies (69,666) (125,022)
----------- ----------- ----------- -----------
Totals $ 129,560 $ 93,600 $ 409,445 $ 365,497
Adjustments to reconcile business
unit net income with
consolidated net loss
General and Administrative Expenses 227,679 103,407 505,385 395,600
Interest expense 238,499 239,732
Other income, net (1,039) (1,435) (90,748) (25,249)
Cumulative effect of change in
accounting principles, net of tax 802,730 802,730
----------- ----------- ----------- -----------
Consolidated net loss $(1,138,309) $ (8,372) $(1,047,654) $ (4,854)
=========== =========== =========== ===========
4. 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 and nine months ended September 30, 2003 and 2002, as it is antidilutive.
5. STOCK OPTIONS
The Company has adopted the disclosure requirement of Statement of
Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation-Transition and Disclosure" effective December 15, 2002. SFAS 148
amends Statement of Financial Accounting Standards No. 123 (SFAS 123),
"Accounting for Stock Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based compensation and also amends the disclosure requirements of SFAS
123 to require prominent disclosure in both annual and interim financial
statements about the methods of accounting for stock-based employee compensation
and the effect of the method used on report results. As permitted by SFAS 148
and SFAS 123, the Company continues to apply the accounting provisions of APB
25, and related interpretations, with regard to the measurement of compensation
cost for options granted under the Company's Stock Option Plan. No compensation
expense has been recorded as all options granted had an exercise price equal to
the market value of the underlying stock on the grant date. The pro-forma effect
on our results of operations, had expense been recognized using the fair value
method described in SFAS 123, using the Black-Scholes option pricing model, is
shown below.
For the three months ended
September 30,
----------------------------
2003 2002
----------- -----------
Loss applicable to common shareholders:
As reported (1,138,309) (185,054)
Pro forma (1,228,438) (227,481)
Basic and diluted loss per share:
As reported (0.076) (0.012)
Pro forma (0.082) (0.015)
9
6. TAXES
There was no provision for cash payment of income taxes for the nine months
ended September 30, 2003 and 2002, respectively, as the Company anticipates a
net taxable loss for the year ended December 31, 2003.
7. 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 September 30,
2003, such registration statement has not been declared effective and penalties
are owed. 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. The Company accrued penalties of $159,597 as
interest expense during the quarter ending September 30, 2003. As of September
30, 2003, $2,005,962 has been accrued into accounts payable and accrued expenses
for such penalties. In connection with the closing of the transaction with
Eurotech, the holders of the Company's Series C, Series D, and Series E
Preferred Stock (i) have agreed to waive the mandatory conversion features of
their respective series of Preferred Stock and to vote in favor of an amendment
to the Certificates of Designations that govern their respective shares to
delete these mandatory conversion provisions from the Certificates of
Designations, and (ii) together with one holder of the Company's Series B
Preferred Stock, have agreed to refrain from converting their shares of
Preferred Stock into shares of common stock until the Company has amended its
Certificate of Incorporation to authorize at least 150,000,000 shares of common
stock. In addition, the holder of the outstanding shares of the Company's Series
C, Series D and Series E Preferred Stock has agreed to accept payment for
approximately $2.0 million of penalties that may be owed to it in shares of
common stock instead of cash.
8. ISSUANCE OF SERIES F AND H PREFERRED STOCK
On May 22, 2003, the Company issued 13,500 shares of the Company's Series F
Convertible Preferred Stock, par value $.01 per share. Each Series F Share was
convertible into 10,000 shares of common stock and has a stated value of $1,000
per share (See Note 2). The holders of the outstanding shares of Series F
Preferred Stock have cancelled and surrendered their Series F Shares and have
been subsequently issued shares of Series H Preferred Stock.
On September 30, 2003, the Company issued 13,500 shares of the Company's
Series H Convertible Preferred Stock, par value $.01 per share. Each Series H
Share was convertible into 10,000 shares of common stock and has a stated value
of $1,000 per share; provided, however, that no holder of Series H shares may
convert Series H shares into shares of common stock if the aggregate shares of
common stock beneficially owned by such holder and its affiliates would exceed
9.9% of the outstanding shares of common stock following such conversion
(excluding, for purposes of the calculation, the unconverted Series H Shares).
9. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement in the
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statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. For financial
instruments created before the issuance date of this statement, transition shall
be achieved by reporting the cumulative effect of a change in accounting
principle by initially measuring the financial instrument at fair value. We
adopted SFAS 150 on July 1, 2003.
Since the Series B, C, D, E and G Preferred Stock represent financial
instruments that embody unconditional obligations that will be settled with a
variable number of the Company's common equity shares, based on a fixed monetary
amount that was known at inception, the Company reclassified its Series B, C, D,
E and G Preferred Stock as a long term liability and recorded a loss of $802,730
as a cumulative effect of a change in accounting principle. We recorded each
series of Preferred Stock at its liquidation value as of July 1, 2003. The
Company believes that this represents the fair value of the obligation.
Additionally, the Company accrued additional penalty interest, which was
reported as a deemed dividend in previous periods, in the amount of $159,597 as
interest expense for the third quarter (see note 7) and $75,137 in interest
expense related to the required increase in stated value as called for in the
conversion rate calculation of the Series B, C, D and E 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 viability of and plans for the technologies that we
license from 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 transaction with Tulix, our ability to obtain
additional financing, the commercial viability of the licensed technologies that
we have acquired from Eurotech, our ability to retain the licenses to these
technologies, and other factors discussed in this report and set forth in our
Annual Report on Form 10-K and in our other securities filings.
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
11
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 derive revenue primarily from professional web development
services and hosting fees. On March 23, 2001, we announced our intentions to
wind down our operations. On March 27, 2003 we entered into an agreement to sell
substantially all of the assets used in our web development, hosting and website
maintenance business to Tulix.
On May 22, 2003 we closed the transactions contemplated by the License and
Exchange Agreement to license certain technologies from Eurotech. If the Tulix
transaction is 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 the shares of Tulix stock that Tulix will issue to
us in the transaction.
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 SEPTEMBER 30, 2003 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 2002
NET SALES. Net sales increased 11.5% from $367,710 in the third quarter of
2002 to $410,005 in the third quarter of 2003. This increase of $42,295 is
primarily attributable to increased sales to Roadrunner. Revenues consisted of
development work of $4,166, which is recognized based upon an average percentage
completion calculation of 100% of current contracts which total $12,500, hosting
and hourly development services of $405,394 and sales of EKOR of $445, both of
which are recognized at the time that products are shipped or services are
provided.
COST OF SALES. Cost of sales includes: cost of materials; 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 $274,110, or 74.5% of revenues, in the third quarter of
2002 to $280,445, or 68.4% of revenues, in the third quarter of 2003. The
increase in the cost of sales is primarily due to expenses incurred with the
start up of the Licensed Technologies Division. The percentage cost of sales
decreased by 6.1% reflecting the increased revenue from Roadrunner outpacing
increases in cost.
GROSS PROFIT. Gross profit increased by $35,960 from $93,600 in the third
quarter of 2002 to $129,560 in the third quarter of 2003. Gross profit margins
increased from 25.5% during the third quarter of 2002 to 31.6% during the third
quarter of 2003. This increase in gross profit is primarily related to the
increased revenue from Roadrunner outpacing the increase of the cost of sales in
support of the Licensed Technologies Division for the quarter.
12
SALES AND MARKETING. The Company ceased all sales and marketing efforts
related to our Internet Services Division in 2001. There were no such
expenditures in the third quarter of 2002 or 2003. As of the end of the third
quarter of 2003, there have been no expenditures for sales and marketing related
to the Licensed Technologies Division.
PRODUCT DEVELOPMENT. The Company ceased all product development efforts
related to our Internet Services Division in 2001. There were no such
expenditures in the third quarter of 2002 or 2003. As of the end of the third
quarter of 2003, there have been no expenditures for product development related
to the Licensed Technologies Division.
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
$103,407 in the third quarter of 2002 to $178,368 in the third quarter of 2003.
As a percentage of net sales, these expenses increased from 28.1% in the third
quarter of 2002 to 43.5% in the third quarter of 2003. This increase is
primarily due to the cost of the Licensed Technologies Division.
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. Amortization
expense of $49,311, which represents three months of amortization of the
intangible Licensed Technologies, was recognized in the third quarter of 2003.
OTHER INCOME. Other income in the third quarter of 2003 consisted of $1,039
in interest earned on money market accounts, $3,765 in interest expense on the
notes related to the Licensed Technologies Division, $75,137 in interest charges
on the B, C, D and E preferred stock and $159,597 in penalty interest on B, C,
D, and E preferred stock.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. As described in note 9
to the unaudited consolidated financial statements the Company has reflected the
adoption of SFAS 150 effective July 1, 2003 as a cumulative effect of a change
in accounting principle. The net impact was $802,730.
NINE MONTHS ENDED SEPTEMBER 30, 2003 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2002
NET SALES. Net sales increased 10.4% from $1,112,461 in the first nine
months of 2002 to $1,227,745 in the first nine months of 2003. This increase of
$115,284 is primarily attributable to increased sales to Roadrunner and in sales
by the Licensed Technologies Division. Revenues consisted of development work of
$4,166, which is recognized based upon an average percentage completion
calculation of 100% of current contracts which total $12,500, hosting and hourly
development services of $1,215,333 and sales of EKOR of $8,246, both of which
are recognized at the time that products are shipped or services are provided.
COST OF SALES. Cost of sales includes: cost of materials; 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 $746,964, or 67.1% of revenues, in the first nine months of
13
2002 to $818,300, or 66.7% of revenues, in the first nine months of 2003. The
increase in the cost of sales is primarily due to expenses incurred with the
start up of the Licensed Technologies Division. The decrease in the percentage
of cost of sales is due to increased revenue from Roadrunner outpacing increases
in cost.
GROSS PROFIT. Gross profit increased by $43,948 from $365,497 in the first
nine months of 2002 to $409,445 in the first nine months of 2003. Gross profit
margins increased from 32.9% during the first nine months of 2002 to 33.3%
during the first nine months of 2003. The improvement in gross profit is
primarily related to recognizing continued growth in Roadrunner. Gross profit
would have increased an additional $125,022 and gross profit margins would have
increased to 43.5% without the additional costs associated with the Licensed
Technologies Division.
SALES AND MARKETING. The Company ceased all sales and marketing efforts
related to our Internet Services Division in 2001. There were no such
expenditures in the first nine months of 2002 or 2003. As of the end of the
first nine months of 2003, there have been no expenditures for sales and
marketing related to the Licensed Technologies Division.
PRODUCT DEVELOPMENT. The Company ceased all product development efforts
related to our Internet Services Division in 2001. There were no such
expenditures in the first nine months of 2002 or 2003. As of the end of the
first nine months of 2003, there have been no expenditures for product
development related to the Licensed Technologies Division.
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
$395,600 in the first nine months of 2002 to $439,637 in the first nine months
of 2003. As a percentage of net sales, these expenses increased from 35.6% in
the first three quarters of 2002 to 35.8% in the first three quarters of 2003.
This increase is primarily due to the costs associated with the Licensed
Technologies Division. This increase was offset by the reversal of accruals for
operating expenses incurred during the fall of 2001 which were ultimately
resolved at a lower cost than estimated or were no longer needed for their
originally intended purpose. The increase was also offset by successful
negotiations to reduce the cost of the Company's internet connections and a one
time charge of $42,133 taken in 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. Amortization
expense of $65,748, which represents four months of amortization of the
intangible Licensed Technologies, was recognized in the first nine months of
2003.
OTHER INCOME. Other income in the first nine months of 2003 consisted of
$3,519 in interest earned on money market accounts, $4,998 in interest expense
on the notes related to the Licensed Technologies Division, $75,137 in interest
charges on the B, C, D and E preferred stock, $159,597 in penalty interest on B,
C, D, and E preferred stock, $18,388 in the reversal of accruals related to
defaults on the lease for our Atlanta offices during the third quarter of 2001,
and $68,841 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.
14
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. As described in note 9
to the unaudited consolidated financial statements the Company has reflected the
adoption of SFAS 150 effective July 1, 2003 as a cumulative effect of a change
in accounting principle. The net impact was $802,730.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS
No. 150 establishes standards for classification and measurement in the
statement of financial position of certain financial instruments with
characteristics of both liabilities and equity. It requires classification of a
financial instrument that is within its scope as a liability (or an asset in
some circumstances). SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003 and, otherwise is effective at the beginning
of the first interim period beginning after June 15, 2003. For financial
instruments created before the issuance date of this statement, transition shall
be achieved by reporting the cumulative effect of a change in accounting
principle by initially measuring the financial instrument at fair value. We
adopted SFAS 150 on July 1, 2003.
Since the Series B, C, D, E and G Preferred Stock represents financial
instruments that embody unconditional obligations that will be settled with a
variable number of the Company's common equity shares, based on a fixed monetary
amount that was known at inception, the Company reclassified its Series B, C, D,
E and G Preferred Stock as a long term debt liability and recorded a loss of
$802,730 as a cumulative effect of a change in accounting principle. We recorded
each series of Preferred Stock at its liquidation value as of July 1, 2003. The
Company believes that this represents the fair value of the obligation.
Additionally, the Company accrued additional penalty interest, which was
reported as a deemed dividend in previous periods, in the amount of $159,597 as
interest expense for the third quarter (see note 7) and $75,137 in interest
expense related to the required increase in stated value as called for in the
conversion rate calculation of the Series B, C, D and E Preferred stock.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of capital are extremely limited. We have incurred operating
losses since inception and as of September 30, 2003, we had an accumulated
deficit of $26,683,743 and a working capital deficit of $1,997,401. On March 23,
2001, we announced our intentions to wind down operations. We have entered into
an agreement to sell substantially all of the operating assets of our hosting
and website maintenance business to Tulix and we have entered into an agreement
whereby we license certain technologies from Eurotech. If we complete the Tulix
transaction, 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.
On May 22, 2003, we executed a note in favor of one of our preferred
shareholders that, as amended, provides that we may borrow up to $200,000 for
use solely in connection with the technologies that we have licensed from
Eurotech. Advances under this agreement, which advances are secured by a
security agreement, bear interest at a rate of 10% per annum and mature on
December 31, 2003. As of September 30, 2003, we had borrowed $175,000 under this
agreement. Since September 30, 2003, we have borrowed another $25,000 from this
lender under this agreement.
15
On September 30, 2003, we entered into a Private Equity Credit Agreement
with Brittany Capital Management LLC ("Brittany"). Pursuant to this agreement,
the Company has agreed to issue and sell to Brittany up to $10,000,000 worth of
the Company's common stock over the next three years. The Company may sell these
shares to Brittany from time to time, in its discretion, subject to certain
minimum and maximum limitations. Prior to any sales, however, the Company is
required to file a registration statement with, and have such registration
statement declared effective by, the Securities and Exchange Commission relating
to the shares to be issued. The number of shares of common stock to be purchased
by Brittany at any time will be determined by dividing (i) the dollar amount
requested by the Company by (ii) the market price of the common stock, less a
discount of 9% of the market price. The Company is required to sell at least
$1,000,000 worth of common stock to Brittany under the agreement. If the Company
does not do so, the agreement provides that the Company will pay penalties to
Brittany. The amount of the penalties will equal to 91% of the difference
between $1,000,000 (the minimum amount of common stock that the Company is
required to sell to Brittany under the agreement) and the amount of common stock
actually sold to Brittany during the term of the agreement. The Company has
agreed that, no later than March 31, 2004, it will reserve and keep available
for issuance a number of shares of common stock sufficient to enable it to
fulfill its obligations under this agreement. The agreement provides that the
number of shares to be purchased by Brittany in any particular sale shall not
exceed a number of shares that would cause Brittany to own more than 9.9% of the
then-outstanding shares of common stock. Also, in connection with this
agreement, the Company has entered into a Registration Rights Agreement with
Brittany pursuant to which the Company has agreed to register, within 150 days
after the Company's Certificate of Incorporation is amended to increase the
number of authorized shares of common stock to at least 150,000,000 shares, at
least 20,000,000 shares of common stock, subject to increases if the number of
shares of common stock sold under the Private Equity Credit Agreement exceeds
20,000,000 shares. If, by September 30, 2004, the registration statement has not
been declared effective, then the Private Equity Credit Agreement and the
Registration Rights Agreement will terminate and the Company will be required to
pay Brittany the penalties described above.
We can provide no assurance that the financing sources described above, or
any other financing that we may obtain in the future (if we are able to obtain
financing from any other sources, and we can provide no assurances that we will
be able to obtain any such financing), will enable us to sustain our operations.
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.
We spent $21,929 during the first nine months 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
16
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 have complied with this agreement and have paid
the full amount of the settlement. We have completed our obligation under this
agreement and have been released from further obligations.
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
In connection with the closing of the transaction with Eurotech, the
holders of the Company's Series C, Series D, and Series E Preferred Stock (i)
have agreed to waive the mandatory conversion features of their respective
series of Preferred Stock and to vote in favor of an amendment to the
Certificates of Designations that govern their respective shares to delete these
mandatory conversion provisions from the Certificates of Designations
(previously, the holders of the Series C, Series D and Series E Preferred Stock
and one holder of the Company's Series B Preferred Stock had agreed to extend
the mandatory conversion dates for their preferred stock until March 31, 2004),
and (ii) together with one holder of the Company's Series B Preferred Stock,
have agreed to refrain from converting their shares of Preferred Stock into
shares of common stock until the Company has amended its Certificate of
Incorporation to authorize at least 150,000,000 shares of common stock. In
addition, the holder of the outstanding shares of the Company's Series C, Series
D and Series E Preferred Stock has agreed to accept payment for approximately
$2.0 million of penalties that may be owed to it in shares of common stock
instead of cash. These penalties are attributable to the Company's failure to
register the resale of the shares of Common Stock into which those shares of
Preferred Stock are convertible, as the Company was required to do by its
agreements with the holders of those Preferred Shares.
17
On September 30, 2003, the Company issued 13,500 shares of the Company's
Series H Convertible Preferred Stock, par value $.01 per share, to the former
holders of the outstanding shares of our Series F Preferred Stock, who had
previously surrendered and cancelled their outstanding shares of Series F
Preferred Stock in exchange for the right to receive an equal number of shares
of Series F Preferred Stock. The Company relied on the exemptions from
registration provided by Sections 4(2) and 3(a)(9) of the Securities Act of
1933, as amended (the "Securities Act") in issuing shares of Series H Preferred
Stock. Shares of Series H 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 H Preferred Stock, subject to adjustment as set forth in the
Certificate of Designations governing the Series H Preferred Stock. As such, the
13,500 shares of Series H Preferred Stock issued to Eurotech, Polymate and
Greenfield are convertible into 135,000,000 shares of common stock. The Series H
Certificate of Designations, however, provides that no holder of Series H Shares
may convert Series H Shares into shares of common stock if such conversion would
result in that holder beneficially owning more than 9.9% of the outstanding
shares of common stock (excluding, for purposes of the calculation, any
unconverted Series H Shares). In addition, the Certificate of Designations
provides that the shares of Series H Preferred Stock will only become
convertible at such time as 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. Currently, 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.
Shares of Series H Preferred Stock have a liquidation preference of $1,000 per
share over the outstanding shares of common stock. Shares of Series H Preferred
Stock do not have the right to vote.
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.
On May 22, 2003, we executed a note in favor of one of our preferred
shareholders that, as amended during the quarter ended September 30, 2003,
provides that we may borrow up to $200,000 for use solely in connection with the
technologies that we have licensed from Eurotech. Advances under this agreement,
which advances are secured by a security agreement, bear interest at a rate of
10% per annum and mature on December 31, 2003. As of September 30, 2003, we had
borrowed $175,000 under this agreement. Since September 30, 2003, we have
borrowed another $25,000 from this lender under this agreement.
The Company relied upon the exemption from registration provided by Section
4(2) of the Securities Act of 1933 in issuing these securities, based on the
sophistication of the offerees, the small number of offerees and the absence of
any advertising or general solicitation, among other factors.
On September 30, 2003, the Company entered into a Private Equity Credit
Agreement and a Registration Rights Agreement with Brittany. These agreements
are described in "Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources," above.
18
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 September 30,
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 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. During
the quarter ending September 30, 2003, the Company accrued penalties of $159,597
as interest expense. As of September 30, 2003, $2,005,962 has been accrued into
accounts payable and accrued expenses for such penalties. Additionally, 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
September 30, 2003, we would have been obligated to issue 121,072,642 shares of
common stock upon such conversions. In connection with the closing of the
transaction with Eurotech, the holders of the Company's Series C, Series D, and
Series E Preferred Stock (i) have agreed to waive the mandatory conversion
features of their respective series of Preferred Stock and to vote in favor of
an amendment to the Certificates of Designations that govern their respective
shares to delete these mandatory conversion provisions from the Certificates of
Designations, and (ii) together with one holder of the Company's Series B
Preferred Stock, have agreed to refrain from converting their shares of
Preferred Stock into shares of common stock until the Company has amended its
Certificate of Incorporation to authorize at least 150,000,000 shares of common
stock. In addition, the holder of the outstanding shares of the Company's Series
C, Series D and Series E Preferred Stock has agreed to accept payment for
approximately $2.0 million of penalties that may be owed to it in shares of
common stock instead of cash.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Designations, Preferences and Rights of Series H
Convertible Preferred Stock of HomeCom Communications, Inc., as
filed on September 30, 2003.
10.1 Private Equity Credit Agreement, dated September 30, 2003, by and
between HomeCom Communications, Inc. and Brittany Capital
Management LLC.
10.2 Registration Rights Agreement, dated September 30, 2003, by and
between HomeCom Communications, Inc. and Brittany Capital
Management LLC.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
32.1 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
None.
20
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: October 29, 2003
21
EXHIBIT INDEX
3.1 Certificate of Designation, Preferences and Rights of Series H Convertible
Preferred Stock of HomeCom Communications, Inc., as filed on September 30,
2003.
10.1 Private Equity Credit Agreement, dated September 30, 2003, by and between
HomeCom Communications, Inc. and Brittany Capital Management LLC.
10.2 Registration Rights Agreement, dated September 30, 2003, by and between
HomeCom Communications, Inc. and Brittany Capital Management LLC.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 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.)