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, 2001.
/ / 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 ___ No X
The Company did not timely file a Current Report 8-K to report the sale of
certain assets on January 31, 2001.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 15, 2001, there were
9,359,156 outstanding 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, 2001 and December 31, 2000
March 31, 2001 December 31,
(unaudited) 2000
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ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 620,324 $ 520,716
Accounts receivable, net 166,918 443,352
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Total current assets 787,242 964,068
Furniture, fixtures and equipment held for sale 66,076 476,088
Deposits 37,739 37,739
Intangible assets, net 557,173
Investment 493,905 493,905
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Total assets $ 1,384,962 $ 2,528,973
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,076,290 $ 1,264,416
Accrued payroll liabilities 37,696 375,535
Current portion of obligations under capital leases 24,471 147,523
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Total current liabilities 1,138,457 1,787,474
Other liabilities 151,914 152,782
Obligations Under capital Leases 12,935 357,757
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Total liabilities 1,303,306 2,298,013
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Redeemable Preferred stock, Series B, $.01 par value, 125 shares authorized,
125 shares issued at March 31, 2001 and December 31, 2000 and 17.8 shares
outstanding at March 31, 2001 and December 31, 2000, convertible,
participating; $392,021 liquidation value as of March 31, 2001 251,750 251,750
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STOCKHOLDERS' DEFICIT:
Common stock, $.0001 par value, 15,000,000 shares
authorized, 9,359,156 shares issued and outstanding at
March 31, 2001 and December 31, 2000 936 936
Preferred stock, Series C, $.01 par value, 175 shares
issued and authorized, 92.1 shares outstanding at March 31, 2001 and
December 31, 2000, convertible, participating; $2,027,162 liquidation
value at March 31, 2001 1 1
Preferred stock, Series D, $.01 par value, 75 shares issued
and authorized, 1.3 shares outstanding at March 31, 2001
and December 31, 2000, convertible, participating;
$28,150 liquidation value at March 31, 2001 1 1
Preferred stock, Series E, $.01 par value, 106.4 shares
issued and authorized, 106.4 shares outstanding at March 31, 2001 and
December 31, 2000, convertible, participating; $2,290,167 liquidation
value at March 31, 2001 1 1
Additional paid-in capital 25,044,740 25,226,101
Accumulated deficit (25,215,773) (25,247,830)
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Total stockholder's deficit (170,094) (20,790)
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Total liabilities and stockholder's deficit $ 1,384,962 $ 2,528,973
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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, 2001 and 2000
Three Months Ended
March 31,
(unaudited)
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2001 2000
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Revenues $ 329,812 $ 1,166,471
Cost of Revenues 324,973 410,908
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GROSS PROFIT 4,839 755,563
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OPERATING EXPENSES:
Sales and marketing 549,421
Product development 3,793
General and administrative 243,376 985,116
Depreciation and amortization 495,757
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Total operating expenses 243,376 2,034,087
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OPERATING LOSS (238,537) (1,278,524)
OTHER EXPENSES (INCOME)
Interest expense 4,065
Other income, net (7,654) (31,421)
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LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (230,883) (1,251,168)
INCOME TAX PROVISION (BENEFIT) -- --
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LOSS FROM CONTINUING OPERATIONS (230,883) (1,251,168)
LOSS FROM DISCONTINUED OPERATIONS (240,000)
GAIN ON DISPOSAL OF DISCONTINUED BUSINESS SEGMENT 262,940
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NET INCOME (LOSS) 32,057 (1,491,168)
DEEMED PREFERRED STOCK DIVIDEND (36,603) (311,422)
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LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (4,546) $(1,802,590)
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EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
CONTINUING OPERATIONS $ (0.03) $ (0.21)
DISCONTINUED OPERATIONS 0.03 (0.03)
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$ (0.00) $ (0.24)
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WEIGHTED NUMBER OF SHARES OUTSTANDING 9,359,156 7,498,251
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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, 2001 and 2000
Three Months Ended
March 31,
(unaudited)
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 32,057 $(1,491,168)
Adjustments to reconcile net loss to cash used in operating activities:
Depreciation and amortization 495,757
Provision for bad debts 30,577 386
Deferred rent expense (868) (4,337)
Change in operating assets and liabilities:
Accounts receivable 18,554 (350,467)
Prepaid expenses (1,030)
Accounts payable and accrued expenses (363,658) (122,357)
Accrued payroll liabilities (323,696) 62,399
Unearned revenue (201,086)
Other 46,329
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Net cash used in operating activities (607,034) (1,565,574)
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CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures, and equipment (19,786)
Loans to related parties 9,250
Proceeds from sale of divisions 733,000
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Net cash provided by (used in) investing activities 733,000 (10,536)
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CASH FLOW FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (26,358) (38,843)
Proceeds from issuance of common shares and exercise of warrants 81
Proceeds from a receivable of a related party 200,000
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Net cash provided (used in) financing activities (26,358) 161,238
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 99,608 (1,414,872)
CASH AND CASH EQUIVALENTS at beginning of period 520,716 1,497,678
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CASH AND CASH EQUIVALENTS at end of period $ 620,324 $ 82,806
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The accompanying notes are an integral part of these financial statements.
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HOMECOM COMMUNICATIONS, INC.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to Article 10 of Regulation S-X of the
Securities and Exchange Commission. The accompanying unaudited financial
statements reflect, in the opinion of management, all adjustments necessary to
achieve a fair statement of the financial position and results of operations of
HomeCom Communications, Inc. (the "Company") for the interim periods presented.
All such adjustments are of a normal and recurring nature. These financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on form 10-K.
2. GOING CONCERN MATTERS
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern, which contemplates 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, 2001 of approximately $25.2
million. The Company continues to experience negative cash flows from operations
and has been dependent on continued financing from investors to sustain its
activities. There is no assurance that such financing will be available in the
future. These factors raise doubt about the Company's ability to continue as a
going concern.
On March 23, 2001 the Company announced that it is seeking to wind down its
operations. Our business is dependent on continued financing from investors to
sustain our activities, and we have been unable to obtain the additional
financing that we need to remain in operation. We currently have insufficient
assets to satisfy completely our obligations to our creditors and the
liquidation preferences of our preferred stock. We continue to evaluate our
alternatives, including the possible sale of other assets, but we cannot offer
any assurances that we will be able to identify or complete any transactions
that will enable us to remain in operation.
3. SEGMENT INFORMATION
Historically, the Company was organized into five separate business units.
The Company has determined that its reportable segments were those that were
based on the Company's method of internal reporting, which disaggregated its
business by product and service category into business units. The Company's
reportable segments were custom Web development (FAST), Internet outsourcing
services (HostAmerica), Internet security services (HISS), software products,
and InsureRate/FIMI. On June 9, 1998, the Company sold substantially all of the
assets of its HostAmerica Internet outsourcing services business unit to Sage
Acquisition Corp. On October 1, 1999 the company sold all of the assets of its
HISS unit to Infrastructure Defense, Inc. On January 31, 2001 the Company sold
all of the assets of its InsureRate/FIMI unit to Digital Insurance, Inc. and on
March 15, 2001 the Company sold the remaining assets of its Software Products
group to Netzee, Inc. The Company currently operates in a single business
segment, including hosting services and web development. Historical segment
information is not provided since each of the former business segments is
presented as discontinued operations.
4. BASIC AND DILUTED LOSS PER SHARE
Loss per common share is computed by dividing net loss available to common
shareholders 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, 2001 and 2000, as it is antidilutive.
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5. TAXES
There was no provision for cash payment of income taxes for the three
months ended March 31, 2001 and 2000, respectively, as the Company anticipates a
net taxable loss for the year ended December 31, 2001.
6. DISPOSITION OF BUSINESS UNITS
On January 31, 2001, the Company sold substantially all the assets of its
InsureRate / First Institutional Marketing, Inc. ("FIMI") division to Digital
Insurance for $458,000 in cash. Additionally, notes receivable of $370,000
issued by certain shareholders of FIMI were forgiven in exchange for the
surrender of the common stock that collateralized the notes. Additionally
300,000 warrants to acquire 300,000 shares of Homecom common stock at an
exercise price of $3.74 were forfeited. The purchase price was established
through arms' length negotiations between the Company and Digital Insurance.
The Company has removed the results of this discontinued operation from the
continuing operations of the Company for all periods presented. The Company
recorded a loss of approximately $3 million on the sale of the FIMI assets in
the fourth quarter of year 2000.
On March 15, 2001, the Company sold substantially all the assets of its
Software Products division to Netzee, Inc. ("Netzee") for $275,000 in cash. The
purchase price was established through arms' length negotiations between the
Company and Netzee.
The Company has removed the results of this discontinued operation from the
continuing operations of the Company for all periods presented. The Company
recorded a gain of $262,940 on the sale of this division.
7. OTHER MATTERS
Certain prior period amounts have been reclassified to conform to current
period presentation.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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. The Company notes that a variety of
risk factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. Reference is made in particular to the
discussion set forth below in this report and set forth in the Company's Annual
Report on Form 10-K and to the Company's Registration Statements on Forms S-1
and S-3.
On March 23, 2001, we announced our intentions to wind down our operations.
Our business is dependent on continued financing from investors to sustain our
activities, and we have been unable to obtain the additional financing that we
need to remain in operation. We currently have insufficient assets to satisfy
completely our obligations to our creditors and the liquidation preferences of
our preferred stock. We continue to evaluate our alternatives, including the
possible sale of other assets, but we cannot offer any assurances that we will
be able to identify or complete any transactions that will enable us to remain
in operation.
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
acquirer. During the first quarter of 2001, we sold our remaining software
applications businesses. Currently, we only derive revenue from professional web
development services and hosting fees.
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On March 29, 2001, Harvey Sax resigned from his position as our President,
Chief Executive Officer and member of our Board of Directors. In connection with
Mr. Sax's resignation, we entered into a separation and release agreement with
Mr. Sax pursuant to which we paid Mr. Sax severance of $150,000 and pursuant to
which we and Mr. Sax released one another from various potential claims and
liabilities.
On January 31, 2001, we sold substantially all of the assets used in the
operation of our InsureRate division to Digital Insurance, Inc. for
approximately $458,000 in cash and the assumption of certain liabilities. On
March 15, 2001, we sold substantially all of the assets used in our internet
banking operations to Netzee, Inc. in a transaction that generated net proceeds
to HomeCom of approximately $275,000. The proceeds from these two transactions
do not represent significant operating capital for us.
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, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31,
2000
NET SALES. Net sales decreased 71.7% from $1,166,471 in the first quarter
of 2000 to $329,812 in the first quarter of 2001. This decrease of $836,659 is
primarily attributable to the absence of any web development work. Revenues now
consist exclusively of hosting and site maintenance work.
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 decreased
from $410,908, or 35.2% of revenues in the first quarter of 2000, to $324,973,
or 98.5% of revenues in the first quarter of 2001. The increase in the
percentage of cost of sales is due to the lack of web development work and the
fact that, at the new reduced manpower levels, production now accounts for a
much higher portion of the cost ratios used to calculate pro-rata distributions.
GROSS PROFIT. Gross profit decreased by $750,724 from $755,563 in the first
quarter of 2000 to $4,839 in the first quarter of 2001. Gross profit margins
declined from 64.8% during the first quarter of 2000 to 1.5% during the first
quarter of 2001. This erosion in gross profit is primarily related to a less
profitable product mix and the dramatic decline in revenue.
SALES AND MARKETING. Sales and marketing expenses include salaries,
variable commissions and bonuses for the sales force, advertising and
promotional marketing materials, and a pro-rata allocation of
telecommunications, facilities and data center costs. The cost of sales
decreased from $549,421, or 47.1% of revenues in the first quarter of 2000 to $0
in the first quarter of 2001. The Company has discontinued all sales and
marketing efforts at this time.
PRODUCT DEVELOPMENT. Product development costs consist of personnel costs
required to conduct the Company's product development efforts, and a pro-rata
allocation of telecommunications, facilities and data center costs. Management
believes that continuing investment in product development is required to
compete effectively in the Company's industry. Total expenditures for product
development decreased from $3,793 in the first quarter of 2000 to $0 in the
first quarter of 2001. The Company has discontinued all product development
efforts at this time.
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
$985,116 in the first quarter of 2000 to $243,376 in the first quarter of 2001
due to the reductions in overhead begun in the fourth quarter of 2000 and
continued in the first quarter of 2001. As a percentage of net sales, these
expenses decreased from 84.5% in the first quarter of 2000 to 73.8% in the first
quarter of 2001, due to continued cuts in overhead.
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases and intangible assets. Depreciation and
amortization was $495,757, or 42.5% of revenues in the first quarter of 2000.
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.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of capital are extremely limited. We have incurred operating
losses since inception and as of March 31, 2000, we had an accumulated deficit
of $25,215,773 and a working capital deficit of $351,215. On March 23, 2001, we
announced our intentions to wind down operations. While we continue to evaluate
our alternatives, we have been unable to obtain additional financing and do not
have sufficient assets to completely satisfy our obligations to our creditors
and the liquidation preferences of our preferred shareholders.
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. We may elect to implement other cost reduction actions as we may
determine are necessary and in our best interests, including the possible
additional sale of assets. Also, we believe that there may be value in remaining
current in our reporting obligations under the Securities Exchange Act of 1934,
although we can give no assurance that we will ever be able to realize any value
from our situation. 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 doubt about our 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Asset Purchase Agreement dated January 31, 2001 for the Acquisition of
Certain Assets of Homecom Communications, Inc., InsureRate, Inc., and
FIMI Securities, Inc. by Digital Insurance, Inc. (Filed as Exhibit 2.1
to the Company's Annual Report on Form 10-K, as filed with the
Commission on April 12, 2001, and incorporated herein by reference.)
2.2 Asset Purchase Agreement by and between Netzee, Inc. and HomeCom
Communications, Inc. dated as of March 15, 2001. (Filed as Exhibit 2.2
to the Company's Annual Report on Form 10-K, as filed with the
Commission on April 12, 2001, and incorporated herein by reference.)
10.1 Separation and Release Agreement, dated March 29, 2001, between
HomeCom Communications, Inc. and Harvey Sax.
(b) Reports on Form 8-K
During the first quarter of 2001, we filed the following reports on Form
8-K:
(i) On March 1, 2001, we filed a current report on Form 8-K to report the
resignation of Roger Nebel from the Board of Directors on February 26,
2001.
(ii) On February 14, 2001, we filed a current report on Form 8-K to report
a change in our Certifying Accountant on February 8, 2001.
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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
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Timothy R. Robinson
Executive Vice President, Chief Financial Officer
May 15, 2001
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EXHIBIT INDEX
2.1 Asset Purchase Agreement dated January 31, 2001 for the Acquisition of
Certain Assets of Homecom Communications, Inc., InsureRate, Inc., and
FIMI Securities, Inc. by Digital Insurance, Inc. (Filed as Exhibit 2.1
to the Company's Annual Report on Form 10-K, as filed with the
Commission on April 12, 2001, and incorporated herein by reference.)
2.2 Asset Purchase Agreement by and between Netzee, Inc. and HomeCom
Communications, Inc. dated as of March 15, 2001. (Filed as Exhibit 2.2
to the Company's Annual Report on Form 10-K, as filed with the
Commission on April 12, 2001, and incorporated herein by reference.)
10.1 Separation and Release Agreement, dated March 29, 2001, between
HomeCom Communications, Inc. and Harvey Sax.
(c)