SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
or
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
Commission File Number: 0-29204
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HomeCom Communications, Inc.
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(Exact name of registrant specified in its charter)
Delaware 58-2153309
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Building 12, Suite 110
3495 Piedmont Road
Atlanta, Georgia 30305
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(Address of principal executive offices and zip code)
Registrant's Telephone Number, Including Area Code:
(404) 237-4646
Securities registered pursuant to Section 12(B) of the Act:
Title of each class Name of exchange on which registered
------------------- ------------------------------------
Common Stock, par value $0.0001 per share OTC-BB
Securities registered pursuant to Section 12(G) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ NO / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the average of the closing bid and ask quotations for
the Common Stock on March 12, 2002 as reported on the OTC Bulletin Board, was
approximately $42,000. The shares of Common Stock held by each officer and
director and by each person known to us who owns 5% or more of the outstanding
Common Stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 12, 2002, Registrant
had outstanding 14,999,156 shares of Common Stock.
TABLE OF CONTENTS
Item No. Description Page No.
-------- ----------- --------
PART I
1. BUSINESS.................................................... 1
2. PROPERTIES.................................................. 3
3. LEGAL PROCEEDINGS........................................... 4
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 4
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
SHAREHOLDER MATTERS......................................... 5
6. SELECTED FINANCIAL DATA..................................... 6
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................... 7
8. FINANCIAL STATEMENTS........................................ 11
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.................................... 32
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......... 33
11. EXECUTIVE COMPENSATION...................................... 35
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.................................................. 37
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 38
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K......................................................... 39
SIGNATURES.................................................. 46
ii
PART I
Item 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain statements, such as statements regarding
HomeCom's future plans, that constitute forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities and Exchange Act of 1934, as amended, including certain
statements contained under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" concerning our expectations, beliefs, or
strategies regarding increased future revenues and operations, and certain
statements contained under "Business" concerning our future business plans. When
used in this Form 10-K, the words "expects", "believes," "intends,"
"anticipates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected or implied
by such forward-looking statements. Such risks and uncertainties include things
such as changes in the value and condition of our assets, the loss of key
personnel, whether we are able to complete the proposed transactions described
in this form 10-K, a change in control of the company or changes in financial
markets and general economic conditions. Reference is also made in particular to
the discussion set forth in our Registration Statements on Forms S-1 (File Nos.
333-12219, 333-42599, 333-45383, 333-86837, 333-88491, and 333-56795) and S-3
(333-73123 and 333-81581).
HISTORY AND RECENT DEVELOPMENTS
Recent Developments
On March 23, 2001, HomeCom Communications, Inc., a Delaware corporation
("HomeCom", "we" or "us"), issued a press release to announce our intention to
wind down our operations and, to the extent possible, sell our remaining assets.
In our press release, we stated, "HomeCom also announced that it has decided to
wind down its operations... HomeCom has been unable to obtain additional
financing and has insufficient assets to completely satisfy its obligations to
creditors and the liquidation preferences of its preferred stock." The press
release went on to state: "HomeCom continues to explore other possibilities,
which may include the sale of other assets." This announcement followed the sale
of substantially all of the assets of First Institutional Marketing, Inc.
("FIMI") and its affiliates to Digital Insurance, Inc. on January 31, 2001 and
the sale of substantially all of the assets used in our Internet Banking
operations to Netzee, Inc. on March 15, 2001. These sales left us with only one
remaining business, our hosting and web site maintenance business, which we had
been trying to sell for approximately two years.
We are negotiating an agreement to sell substantially all of the assets of
our hosting and web site maintenance business to Tulix Systems, Inc., a company
in which Timothy R. Robinson, Gia Bokuchava and Nino Doijashvili, who are
officers and directors of both the Company and Tulix, are the principal
shareholders. If completed the sale of this business will constitute a sale of
substantially all of our operating assets and will leave us without any
operating business with which to generate revenues or profits. We have not yet
entered into a definitive agreement with Tulix regarding the sale, but we expect
to enter into such an agreement if we are able to obtain the approval of our
stockholders.
History
The Company was organized in 1994 to provide complex web-based software
applications and integration services to businesses seeking to take advantage of
the Internet. Over time, we evolved into a Web design, financial applications
and solutions provider to the financial services market, including banking,
insurance, securities brokerage firms and other financially oriented web
portals. In fact, prior to and during 2000, we derived revenue from, among other
sources, professional web development services, software licensing, application
development, insurance and securities sales commissions, and hosting and
transactions fees.
1
On March 24, 1999, we acquired all of the outstanding shares of FIMI and
certain of its affiliates for 1,252,174 shares of common stock. In addition, we
entered into employment agreements for an initial term of three years with the
three principals of FIMI, calling for them to continue in their roles for the
acquired companies. Prior to the closing of the acquisition, we loaned the
shareholders of FIMI $370,000 ("FIMI notes"). The FIMI notes were to be repaid
in either cash or common stock and were collateralized by common stock. We also
granted these FIMI shareholders 300,000 warrants to acquire our shares of common
stock at an exercise price of $3.74 per share. Vesting of the warrants was
contingent upon FIMI meeting certain operating goals.
On April 23, 1999, we acquired all the outstanding shares of Ganymede
Corporation for total consideration of 185,342 shares of common stock and
$100,000 cash. Ganymede was a Chicago-based web site developer for financial
institutions. In addition, we entered into employment agreements with the three
principals of Ganymede, calling for them to continue in their current roles for
the acquired company.
On October 1, 1999 we sold our security consulting and integration service
operations in exchange for $200,000 in cash, certain security audit rights and
shares of a non-public entity originally valued at approximately $823,000, and
entered into a joint marketing program with the acquirer.
On January 31, 2001, we sold substantially all of the assets of FIMI and
its affiliates to Digital Insurance, Inc. ("Digital") for approximately $458,000
in cash and the assumption of certain liabilities. In connection with the sale,
the FIMI principals surrendered the shares of the common stock that
collateralized the FIMI notes and forfeited their warrants.
On March 15, 2001, we sold substantially all of the assets used in our
Internet Banking operations to Netzee, Inc. The sale generated net proceeds to
HomeCom of approximately $407,000.
Following the sale of our Internet Banking operations and our InsureRate
division, we had only one remaining operating business, our hosting and web site
maintenance business.
Sales and Marketing
We currently have no active marketing strategies or plans.
Intellectual Property Rights
In accordance with industry practice, we have relied primarily on a
combination of copyright, patent and trademark laws, trade secrets,
confidentiality procedures and contractual provisions to protect our proprietary
rights. We have sought to protect our software, documentation and other written
materials principally under trade secret and copyright laws, which afford only
limited protection. We have tried to use non-disclosure and confidentiality
agreements with employees, vendors, contractors, consultants and customers to
address these concerns.
We do not believe that any of our products infringe the proprietary rights
of third parties. There can be no assurance, however, that third parties will
not claim infringement by us with respect to our products. In addition, Web site
developers such as ours face potential liability for the actions of customers
and others using their services, including liability for infringement of
intellectual property rights, rights of publicity, defamation, libel, fraud,
misrepresentation, unauthorized computer access, theft, tort liability and
criminal activity under the laws of the United States, various states and
foreign jurisdictions.
Employees
As of March 12, 2001, we had 8 full-time employees. If we sell our assets
to Tulix, we expect that all of these employees will resign from their positions
with us and go to work for Tulix. Such being the case, the Board of Directors
intends to search for new executive officers if the sale is completed.
2
Customers
During 1999, two customers each accounted for more than 10% of our total
revenue. During 2000, two customers each accounted for over 10% of revenues with
one of those customers accounting for over 40%. During 2001 only one customer,
Roadrunner, accounted for over 10% of sales, accounting for 82%. Our sales to
our five largest customers represented approximately 51%, 76% and 89% of the
total revenues for 1999, 2000, and 2001 respectively.
Insurance
We maintain liability and other insurance that we believe to be customary
and generally consistent with industry practice. We believe that such insurance
is adequate to cover potential claims relating to our existing business
activities.
Government Regulation
Except with regard to insurance and securities sales, as discussed below,
we do not believe that we are currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and also believe that there are currently few laws or regulations directly
applicable to Web site service companies. The Federal Communications Commission
is studying the possible regulation of the Internet. Any such regulations
adopted by the Federal Communications Commission may adversely impact the manner
in which we conduct our business. It is possible that a number of additional
laws and regulations may be adopted with respect to the Internet, covering
issues such as user privacy, pricing, characteristics, and quality of products
and services. The adoption of any such laws or regulations may decrease the
growth of the Internet, which could in turn decrease the demand for our products
and services and increase our cost of doing business or cause us to modify our
operations, or otherwise have an adverse effect on our business, financial
condition and operating results. Moreover, the applicability to the Internet of
existing laws governing issues such as property ownership, libel, and personal
privacy is uncertain. We cannot predict the impact, if any, that future
regulation or regulatory changes may have on our business. In addition, Web site
developers such as us face potential liability for the actions of customers and
others using their services, including liability for infringement of
intellectual property rights, rights of publicity, defamation, libel, fraud,
misrepresentation, unauthorized computer access, theft, tort liability and
criminal activity under the laws of the U.S., various states and foreign
jurisdictions. Any imposition of liability could have a material adverse effect
on us.
In addition, our network services are transmitted to our customers over
dedicated and public telephone lines. These transmissions are governed by
regulatory policies establishing charges and terms for communications. Changes
in the regulatory environment relating to the telecommunications and media
industry could have an effect on our business, including regulatory changes
which directly or indirectly affect use or access of the Internet or increase
the likelihood or scope of competition from regional telephone companies, could
have a material adverse effect on us.
We own, and prior to January 31, 2001, operated a subsidiary named "FIMI
Securities, Inc." FIMI Securities was a NASD regulated broker/dealer and was
affiliated with various insurance agencies until it terminated its membership in
the NASD on December 29, 2000. We still own FIMI Securities, but it no longer
conducts any broker/dealer activities and is a dormant entity.
Item 2. PROPERTIES
As of March 12, 2002 we occupy approximately 7,000 square feet in one
office building in Atlanta, Georgia under a lease expiring in October 2002. This
facility serves as our headquarters and computer center. We have also abandoned
3
an office in New York City where we used to occupy approximately 3,400 square
feet under a lease expiring in January 2003, and abandoned an office in Chicago,
Illinois where we used to occupy approximately 1,000 square feet under a lease
expiring in 2004. Our InsureRate operations in Houston, Texas occupied
approximately 17,500 sq. ft. under two leases that expire in 2004. In connection
with the sale of the assets of the InsureRate operations, we subleased
approximately 13,100 sq.ft. to the purchaser and abandoned approximately 4,400
sq.ft.
As of December 31, 2001 we have an accrual for real estate disposition
liabilities of approximately $240,000, which we believe will be sufficient to
settle all obligations related to the closing and abandonment of our offices in
New York, and Atlanta. We reached settlements with the representatives of the
properties in Houston and Chicago.
We believe that the properties which we currently have under lease are
adequate to serve our business operations for the foreseeable future. We believe
that if we were unable to renew the lease on either of these facilities, we
could find other suitable facilities with no material adverse effect on our
business.
Item 3. 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 seeks damages in the amount
of $141,752 plus interest of $23,827, plus attorneys' fees and court costs.
On or about January 14, 2002, Creditors Adjustment Bureau, Inc., a
California corporation and the assignee of the claims of Siemens ICN, filed a
complaint against us alleging, among other things, that we breached our contract
with Siemens. The complaint seeks damages of $18,058.08 plus interest at a rate
of 18% from January 26, 2001, plus expenses and attorneys' fees. The complaint
was filed in the Superior Court of California, County of Santa Clara,
California.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We did not submit any matters to a vote of securityholders during the
fourth quarter of 2001.
4
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Our Common Stock has been quoted on the OTC Bulletin Board under the symbol
"HCOM" since December 8, 2000. Prior to that date it was quoted on the Nasdaq
SmallCap Market. The following table shows for the periods indicated the high
and low sale prices for the Common Stock as reported by the Nasdaq SmallCap
Market and the range of high and low bid prices as quoted on the OTC Bulletin
Board (indicated by an asterisk). The quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
2000: High Low
----- ---- ---
First quarter $ 4.88 $ 3.13
Second quarter 3.25 1.00
Third quarter 1.13 .44
Fourth quarter .470 .020 *
2001:
-----
First quarter $ .190 * $ .018 *
Second quarter .023 * .006 *
Third quarter .019 * .007 *
Fourth quarter .019 * .003 *
2002:
-----
First quarter (through March 12, 2002) $ .010 * $ .004 *
Holders of Record
We had approximately 111 holders of record of our Common Stock as of March 12,
2002.
Dividends
We have not paid any cash dividends on our capital stock to date and do not
foresee that we will have earnings with which to pay dividends in the
foreseeable future. Our board of directors would determine the amount of future
dividends, if any, based upon our earnings, financial condition, capital
requirements and other conditions.
Recent Sales of Unregistered Securities
On December 28, 2001, we issued 5,640,000 shares of Common Stock to MacNab,
LLC, a holder of our Series C Preferred Stock, in a series of conversions by
MacNab, LLC of 1.62855 shares of our Series C Preferred Stock. We relied upon
the exemptions from registration provided by Section 3(a)(9) and Section 4(2) of
the Securities Act of 1933, as amended, to issue those shares of common stock.
See "Part III, Item 12, Changes in Control."
5
Item 6. SELECTED FINANCIAL DATA
The following selected financial data of HomeCom Communications, Inc.
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
related notes.
Year Ended December 31,
----------------------------------------------------------------------------
1997 1998 1999 2000 2001
------------ ------------ ------------ ------------ ------------
Statement of Operations Data:
-----------------------------
Revenues $ 2,503,185 $ 2,481,905 $ 3,907,282 $ 4,509,977 $ 1,279,486
Cost of revenues 2,139,982 2,085,598 951,406 2,722,309 1,007,430
------------ ------------ ------------ ------------ ------------
Gross profit 363,203 396,307 2,955,876 1,787,668 272,056
------------ ------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing 1,440,002 1,142,222 2,878,302 1,944,020 858
Product development 514,655 633,268 315,809 321,259
General and administrative 2,538,229 2,896,287 3,765,514 1,182,192 770,659
Depreciation and amortization 238,537 542,269 1,757,124 1,605,345
Asset Impairment 1,436,078 493,905
------------ ------------ ------------ ------------ ------------
Total operating expenses 4,731,423 5,214,046 8,716,749 6,488,894 1,265,422
------------ ------------ ------------ ------------ ------------
Operating loss (4,368,220) (4,817,739) (5,760,873) (4,701,226) (993,366)
Other expenses (income):
Gain on sale of division (4,402,076)
Interest expense 543,420 445,216 32,583 (5,981)
Other expense (income), net (93,298) (166,917) (103,175) (90,793) (146,362)
------------ ------------ ------------ ------------ ------------
Loss from continuing operations before
income taxes (4,818,342) (693,962) (5,690,281) (4,604,452) (847,004)
Income tax provision (benefit) -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Loss from continuing operations (4,818,342) (693,962) (5,690,281) (4,604,452) (847,004)
Loss from discontinued operations (62,839) (510,178) (4,630,508) (1,755,898)
Gain (loss) on disposal of business segment 1,144,591 (3,000,377) 394,543
------------ ------------ ------------ ------------ ------------
Loss (4,881,181) (1,204,140) (9,176,198) (9,360,727) (452,461)
Deemed preferred stock dividend (666,667) (2,557,466) (1,526,728) (708,778)
------------ ------------ ------------ ------------ ------------
Loss applicable to common shareholders $ (4,881,181) $(1,870,807) $(11,733,664) $(10,887,455) $ (1,161,239)
============ ============ ============ ============ ============
Loss per common share--basic and diluted
Continuing operations $ (1.86) $ (0.16) $ (0.90) $ (0.72) $ (0.16)
Discontinued operations (0.02) (0.28) (0.96) (0.55) 0.04
------------ ------------ ------------ ------------ ------------
Total $ (1.88) $ (0.44) $ (1.86) $ (1.27) $ (0.12)
============ ============ ============ ============ ============
Weighted average common shares outstanding 2,602,515 4,287,183 6,324,791 8,549,693 9,869,074
============ ============ ============ ============ ============
--------------------------------------------------------------------
1997 1998 1999 2000 2001
----------- ----------- ----------- ----------- -----------
Balance Sheet Data:
-------------------
Working capital (deficit) $ 2,721,930 $ 2,265,725 $ 1,033,802 $ (823,406) $ (960,154)
Total assets 4,664,779 4,565,490 10,535,718 2,528,973 665,391
Long-term obligations 1,652,009 88,242 315,275 357,757 --
Total liabilities 2,708,007 1,117,041 2,930,600 2,298,013 1,533,124
Redeemable Preferred Stock 1,624,920 251,750 251,750
Stockholders' equity (deficit) 1,956,772 3,448,449 5,980,198 (20,790) (1,119,483)
6
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
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 are negotiating an agreement to sell substantially all of the
assets used in our hosting and website maintenance business to Tulix. If the
sale is completed, we will have no operating assets and no source of revenue or
profits.
In March 1999, we completed the acquisition of all the outstanding shares
of the First Institutional Marketing companies, a group of insurance agencies
and a NASD broker/dealer (the "FIMI Companies"), for 1,252,174 shares of common
stock. Pursuant to the Merger and Plan of Reorganization the FIMI Companies
continued as separate subsidiaries of HomeCom. On January 31, 2001 we sold
substantially all of the assets of the FIMI Companies for approximately $458,000
and the assumption of certain liabilities. We recorded a loss on the sale of
$3,000,377. We have removed the results of this discontinued operation from the
continuing operations of the Company for all periods presented.
On April 23, 1999, we acquired all the outstanding shares of Ganymede
Corporation for total consideration of 185,342 shares of common stock and
$100,000 cash. Ganymede was a Chicago-based web site developer for financial
institutions. Pursuant to the Merger and Plan of Reorganization of Ganymede,
Ganymede was merged into HomeCom and has ceased to exist as a separate
corporation.
In August 1996, we acquired all of the outstanding capital stock of HomeCom
Internet Security Services, Inc. (HISS), a Delaware corporation formed in July
1996 to provide Internet and intranet security system consulting services. In
October, 1999 we sold HISS for $200,000, certain security audit and reseller
rights and shares of a non-public entity valued at approximately $823,000, and
entered into a joint marketing program with the acquiror. Results of operations
from the discontinued HISS unit have been shown as a discontinued operation in
the Statement of Operations for all periods presented. This discontinued
operations presentation results in certain revenue and expense reclassifications
for the periods presented.
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
Year Ended December 31, 2000 as Compared to Year Ended December 31, 2001
Revenues. Revenues decreased 71.6% from $4,509,977 in 2000 to $1,279,486 in
2001. This decrease of $3,230,491 is primarily attributable to the absence of
any web development work and the expiration of all maintenance contracts without
renewal. Revenues now consist exclusively of hosting and hourly billing site
maintenance work. We recognized revenues from continuing operations for the year
ended December 31, 2001 at the time the services were provided. These services
consisted of $53,181 in maintenance services, and $1,226,305 in web site hosting
services.
7
Cost of Revenues. Cost of revenues includes salaries for programmers,
technical staff, sales staff and customer support, as well as a pro-rata
allocation of telecommunications, facilities and data center costs. Cost of
revenues decreased from $2,722,309, or 60.4% of revenues in 2000 to $1,007,430
or 78.7% of revenues in 2001. The decrease in the cost of sales is attributable
to reductions in production personnel and to the reduction of internet
connection and local loop costs. Costs of Revenues increased as a percentage of
revenues due to the loss in Web development revenues outpacing reductions in
production costs.
Gross Profit. Gross profit decreased by $1,515,612 from $1,787,668 in 2000
to $272,056 in 2001. Gross profit margins also decreased from 39.6% during 2000
to 21.3% during 2001. This decrease as a percentage of net sales is due to the
loss of higher margin Web development work.
Sales and Marketing. Sales and marketing expenses include salaries,
variable commissions, and bonuses for the sales force, advertising and
promotional marketing materials, and a pro-rata allocation of
telecommunications, facilities and data center costs. Sales and marketing
expenses decreased $1,943,162 from $1,944,020, or 43.1% of revenues, in 2000 to
$858, or 0.1% of revenues in 2001. The Company has discontinued all significant
sales and marketing efforts.
Product Development. Product development costs consist of personnel costs
required to conduct our product development efforts, and a pro-rata allocation
of telecommunications, facilities and data center costs. Total expenditures for
product development decreased from $321,259, or 7.1% of revenues in 2000 to $0
in 2001. The Company has discontinued all product development efforts.
General and Administrative. General and administrative expenses include
salaries for administrative personnel, insurance and other administrative
expenses, as well as a pro-rata allocation of telecommunications, and facilities
and data center costs. General and administrative expenses decreased from
$1,182,192 in 2000 to $770,659 in 2001. As a percentage of net sales, these
expenses increased from 26.2% in 2000 to 60.2% in 2001. The percentage increase
is due to the continued decline in revenues.
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 decreased from $1,605,345, or 35.6% of net sales in 2000 to $0 or
0.0% in 2001. With the write down of the carrying value of all fixed assets in
the fourth quarter of 2000 and the Company's announcement that it intends to
wind-down its operations, the Company has suspended depreciation of its
remaining assets.
Other Income. Other income consists of miscellaneous amounts received which
are outside the normal course of operations. Other income increased from $90,793
in 2000 to $146,362 in 2001. The increase is primarily due to the favorable
settlement of a $130,000 liability related to the prior sale of certain assets.
Without this settlement other income would have declined.
Asset Impairment Charge. We incurred an asset impairment charge of $493,905
in association with the writedown of the carrying value of our investment in
iDefense.
Interest Expense. No interest expense was incurred in 2001.
Discontinued Operations. On January 31, 2001 we sold our FIMI division.
FIMI incurred operating losses of $1,970,584 for the year ended December 31,
2000. On March 15, 2001 we sold our Internet Banking segment for a gain of
$394,543. This segment produced net income of $214,686 for the year ended
December 31, 2000 with no operating profit or loss for the year ended December
31, 2001.
8
Year Ended December 31, 1999 as Compared to Year Ended December 31, 2000
Revenues. Revenues increased 15.4% from $3,907,282 in 1999 to $4,509,977 in
2000. This increase of $602,695 is primarily attributable to growth in, and
increased reliance upon revenue from the website development portion of our
business. The $4,509,977 in revenues from continuing operations for the year
ended December 31, 2000 were comprised of two primary sources of income.
$2,677,475 in revenue was recognized under the percentage-of-completion method
for fixed price development contracts. All contracts were recognized as 100%
complete at the end of the year. Revenues for other services were recognized at
the time the services were provided for a total of $1,832,502 consisting of
$583,441 in maintenance services, $9,020 in consulting services and $1,240,041
in web site hosting services.
Cost of Revenues. Cost of revenues includes commissions for financial
institutions and agents, salaries for programmers, technical staff, sales staff
and customer support, as well as a pro-rata allocation of telecommunications,
facilities and data center costs. Cost of revenues increased from $951,406, or
24.3% of revenues in 1999 to $2,722,309, or 60.4% of revenues in 2000. This
increase reflects greater costs associated with an increase in technical
personnel as a percentage of employees and, more significantly, an increase in
the pro-rata carrying portion of center operating costs due to reductions in
Sales and Marketing and General and Administrative costs.
Gross Profit. Gross profits decreased by $1,168,208 from $2,955,876 in 1999
to $1,787,668 in 2000. Gross profit margins also decreased from 75.7% during
1999 to 39.6% during 2000. The primary cause for the reduction was an increased
allocation of pro-rata costs to Cost of Revenues, due to reductions in General
and Administrative and Sales and Marketing expenditures.
Sales and Marketing. Sales and Marketing expenses include salaries,
variable commissions, and bonuses for the sales force, advertising and
promotional marketing materials, and a pro-rata allocation of
telecommunications, facilities and data center costs. Sales and Marketing
expenses decreased $934,282 from $2,878,302 in 1999 to $1,944,020 in 2000. This
decrease was primarily attributable to undertaking a more targeted marketing
approach concentrating on obtaining website development work as opposed to
previous efforts at product marketing. Additionally, we placed our reliance upon
individual sales contacts and dramatically reduced our previous expenditures on
general advertising. As a percentage of net sales, these expenses decreased from
73.7% in 1999 to 43.1% in 2000.
Product Development. Product development costs consist of personnel costs
required to conduct our product development efforts, and a pro-rata allocation
of telecommunications, facilities and data center costs. Total expenditures for
product development were $321,259, or 7.1% of net sales in 2000. This compares
to total product development expenditures of $315,809, or 8.0% of net sales in
1999.
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
$3,765,514 in 1999 to $1,182,192 in 2000. This decrease is due to significant
efforts to cut overhead costs including stringent scrutiny of all non-production
expenses, greater usage of internal resources and reduced outsourcing costs
associated with legal, accounting, and printing. Additionally, we shut down our
operations in the Chicago regional office, and a reduced administrative
personnel in the corporate office. As a percentage of net sales, these expenses
decreased from 96.4% in 1999 to 26.2% in 2000.
Depreciation and Amortization. Depreciation and amortization includes
depreciation and amortization of computers, network equipment, office equipment,
equipment under capital leases, and intangible assets. Depreciation and
amortization decreased from $1,757,124, or 45.0% of net sales in 1999 to
$1,605,345, or 35.6% in 2000, primarily reflecting the discontinuation of
amortization of intangible assets associated with the Ganymede acquisition, as
these intangibles were written off.
9
Asset Impairment Charge. We incurred an asset impairment charge of
$1,436,078 consisting of; $831,310 to write off the remaining Ganymede goodwill,
$329,270 to reduce the carrying value of the investment in iDefense and $275,498
to reduce the value of fixed assets to an estimated realizable value.
Other Income. In 2000 and 1999 we recorded other income of $90,793 and
$103,175, respectively.
Interest Expense. Interest expense decreased from $32,583 in 1999 to
($5,981) during 2000.
Discontinued Operations. We recorded a loss of $3,000,377 on the sale of
our FIMI division, which closed on January 31, 2001. In addition, FIMI incurred
operating losses of $2,736,678 and $1,970,584 for the years ended December 31,
1999 and 2000, respectively. Internet Banking, which was sold in March of 2001,
incurred operating losses of $1,396,004 and produced net income of $214,686 in
the years ended December 31, 1999 and 2000, respectively. HISS incurred
operating losses of $497,825 in 1999.
Recently Issued Accounting Standards
See Note 1 to Notes to Consolidated Financial Statements for a complete
discussion of recently issued accounting standards and their expected impact on
our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
General
Our sources of capital are extremely limited. We have incurred operating
losses since inception and as of December 31, 2001, we had an accumulated
deficit of $25,700,291 and a working capital deficit of $960,154. On March 23,
2001, we announced our intentions to wind down operations. We have negotiated an
agreement to sell substantially all of our operating assets to Tulix. If we
complete this sale, we will have no operating assets and no source of revenue or
profits.
Whether we sell our remaining assets 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. We may elect
to implement other cost reduction actions as we may determine are necessary and
in our best interests. Also, we believe that there may be value in remaining
current in our reporting obligations under the Securities Exchange Act of 1934,
as amended, 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
HomeCom's ability to continue as a going concern. The financial statements
included herein have been prepared assuming HomeCom is a going concern and do
not include any adjustments that might result should HomeCom be unable to
continue as a going concern.
Net cash used in operating activities was $892,530 for the year ended
December 31, 2001. Funds necessary for operations were provided by the sale of
our FIMI and Internet Banking segments, $458,000 and $406,603 respectively, and
the use of funds on deposit at the end of 2000.
We spent $31,825 and $151,507 during 2001 and 2000, respectively, for the
purchase of capital equipment. These amounts were 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. Our commitments as of
December 31, 2001 consist of our leases on our Atlanta, Georgia and New York
City facilities.
10
Item 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants 12
Consolidated Balance Sheets as of December 31, 2000 and 2001 13
Consolidated Statements of Operations for Each of the Three
Years in the Period Ended December 31, 2001 14
Consolidated Statements of Changes in Stockholders' Equity
(Deficit) for Each of the Three Years in the Period Ended
December 31, 2001 15
Consolidated Statements of Cash Flows for Each of the Three
Years in the Period Ended December 31, 2001 16
Notes to Consolidated Financial Statements 18
11
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Homecom Communications, Inc.
We have audited the accompanying consolidated balance sheets of HomeCom
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
related statements of operations, stockholder's equity (deficit) and cash flows
for the years ended December 31, 2001, 2000 and 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement and
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of HomeCom
Communications, Inc. and subsidiaries as of December 31, 2001 and 2000 and the
results of its operations and its cash flows for the years ended December 31,
2001, 2000 and 1999 in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has experienced recurring losses and negative
cash flows since its inception and has an accumulated deficit. The Company is
dependent on continued financing from investors to sustain its activities and
there is no assurance that such financing will be available. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Feldman Sherb & Co., P.C.
-----------------------------
Feldman Sherb & Co., P.C.
Certified Public Accountants
New York, New York
March 7, 2002
12
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2000 2001
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 520,716 $ 413,346
Accounts receivable, net 443,352 154,144
------------ ------------
Total current assets 964,068 567,490
Furniture, fixtures and equipment, net 476,088 97,901
Deposits 37,739
Intangible assets, net 557,173
Investment 493,905
------------ ------------
Total assets $ 2,528,973 $ 665,391
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,264,416 $ 1,527,644
Accrued payroll liabilities 375,535
Current portion of obligations under capital leases 147,523
------------ ------------
Total current liabilities 1,787,474 1,527,644
Obligations under capital leases 357,757
Other liabilities 152,782 5,480
------------ ------------
Total liabilities 2,298,013 1,533,124
------------ ------------
Redeemable Preferred stock, Series B $.01 par value, 125 shares
authorized, 125 shares issued at December 31, 2000 and 2001,
respectively and 17.8 shares outstanding at December 31, 2000
and 2001, respectively, convertible, participating, $405,637
liquidation value as of December 31, 2001 251,750 251,750
Comments and contingencies (Note 5)
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value, 15,000,000 shares authorized,
9,359,157 and 14,999,156 shares issued and outstanding at
December 31, 2000 and 2001, respectively 936 1,500
Preferred stock, Series C, $.01 par value, 175 shares issued
and authorized, 92.1 and 90.5 shares outstanding at December
31, 2000 and 2001, respectively, convertible, participating;
$2,073,419 liquidation value at December 31, 2001 1 1
Preferred stock, Series D, $.01 par value, 75 shares issued and
authorized, 1.3 shares outstanding at December 31, 2000 and
2001, respectively; convertible, participating; $29,322
liquidation value at December 31, 2001 1 1
Preferred stock, Series E, $.01 par value, 106.4 shares issued
and outstanding as of December 31, 2001, convertible,
participating; $2,418,836 liquidation value at December 31, 2001 1 1
Treasury stock, 123,695 shares at December 31, 2001 0 (8,659)
Additional paid-in capital 25,226,101 24,587,964
Accumulated deficit (25,247,830) (25,700,291)
------------ ------------
Total stockholders' equity (deficit) (20,790) (1,119,483)
------------ ------------
Total liabilities and stockholders' equity $ 2,528,973 $ 665,391
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
13
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Revenues $ 3,907,282 $ 4,509,977 $ 1,279,486
Cost of revenues 951,406 2,722,309 1,007,430
------------ ------------ ------------
GROSS PROFIT 2,955,876 1,787,668 272,056
------------ ------------ ------------
OPERATING EXPENSES:
Sales and marketing 2,878,303 1,944,020 858
Product development 315,809 321,259
General and administrative 3,765,514 1,182,192 770,659
Depreciation and amortization 1,757,124 1,605,345
Asset impairment charge 1,436,078 493,905
------------ ------------ ------------
Total operating expenses 8,716,750 6,488,894 1,265,422
------------ ------------ ------------
OPERATING LOSS (5,760,874) (4,701,226) (993,366)
OTHER EXPENSES (INCOME)
Interest expense 32,583 (5,981)
Other income (103,175) (90,793) (146,362)
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (5,690,282) (4,604,452) (847,004)
INCOME TAX PROVISION (BENEFIT) -- -- --
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (5,690,282) (4,604,452) (847,004)
LOSS FROM DISCONTINUED OPERATIONS (4,630,508) (1,755,898)
GAIN (LOSS) ON DISPOSAL OF DISCONTINUED BUSINESS SEGMENT 1,144,591 (3,000,377) 394,543
------------ ------------ ------------
NET LOSS (9,176,199) (9,360,727) (452,461)
DEEMED PREFERRED STOCK DIVIDEND (2,557,466) (1,526,728) (708,778)
------------ ------------ ------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $(11,733,665) $(10,887,455) $ (1,161,239)
============ ============ ============
GAIN (LOSS) PER SHARE--BASIC AND DILUTED
CONTINUING OPERATIONS $ (1.30) $ (0.72) $ (0.16)
DISCONTINUED OPERATIONS (0.56) (0.55) 0.04
------------ ------------ ------------
TOTAL $ (1.86) $ (1.27) $ (0.12)
============ ============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 6,324,791 8,549,693 9,869,074
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
14
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For Each of the Three Years in the Period Ended December 31, 2001
Preferred Stock Common Stock Treasury
Shares Amount Shares Amount Stock
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1998 -- $ -- 5,072,397 $ 507 $ --
Issuance of preferred
stock and warrants,
net of offering costs 250 3 -- -- --
Common stock issued in
conjunction with the
acquisition of FIMI -- -- 1,252,174 125 --
Common stock issued in
conjunction with the
acquisition of
Ganymede -- -- 185,342 19 --
Warrant exercises -- -- 106,875 11 --
Conversion of preferred
stock to common shares (37) -- 344,777 34 --
Stock option exercises -- -- 53,278 5 --
Cancellation of
subscription
receivable under
employment agreements -- -- -- -- --
Other -- -- 25,682 3 --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 213 3 7,040,525 704 --
Issuance of preferred
stock and warrants,
net of offering costs 106 1 -- -- --
Warrant exercises -- -- 15,077 1 --
Conversion of Series B
preferred stock to
common shares -- -- 902,307 90 --
Conversion of Series C and
D preferred stock to
common shares (119) (1) 1,391,629 139 --
Stock option exercises -- -- 8,197 1 --
Cancellation of
subscription
receivable under
employment agreements -- -- -- -- --
Penalties on Series E
preferred stock -- -- -- -- --
Other -- -- 1,421 1 --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 200 3 9,359,156 $ 936 --
Receipt of Treasury stock -- -- -- -- (8,659)
Conversion of Series C
preferred stock to
common shares (2) -- 5,640,000 564 --
Penalties on preferred
stock -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 198 $ 3 14,999,156 $ 1,500 $ (8,659)
============ ============ ============ ============ ============
Table continues on following page.
15
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
(Continued)
For Each of the Three Years in the Period Ended December 31, 2001
Total
Additional Stockholders'
Paid-In Subscriptions Accumulated Equity
Capital Receivable Deficit (Deficit)
------------ ------------ ------------ ------------
Balance, December 31, 1998 $ 10,355,724 $ (196,878) $ (6,710,904) $ 3,448,449
Issuance of preferred
stock and warrants,
net of offering costs 5,265,031 -- -- 5,265,034
Common stock issued in
conjunction with the
acquisition of FIMI 4,235,979 -- -- 4,236,104
Common stock issued in
conjunction with the
acquisition of
Ganymede 1,248,167 -- -- 1,248,186
Warrant exercises 427,489 -- -- 427,500
Conversion of preferred
stock to common shares 141,263 -- -- 141,297
Stock option exercises 209,450 -- -- 209,455
Cancellation of
subscription
receivable under
employment agreements -- 132,191 -- 132,191
Other 48,178 -- -- 48,181
Net loss -- -- (9,176,199) (9,176,199)
------------ ------------ ------------ ------------
Balance, December 31, 1999 21,931,281 (64,687) (15,887,103) 5,980,198
Issuance of preferred
stock and warrants,
net of offering costs 1,855,425 -- -- 1,855,426
Warrant exercises 79,617 -- -- 79,618
Conversion of Series B
preferred stock to
common shares 1,599,044 -- -- 1,599,134
Conversion of Series C and
D preferred stock to
common shares (138) -- -- --
Stock option exercises 12,083 -- -- 12,084
Cancellation of
subscription
receivable under
employment agreements -- 64,687 -- 64,687
Penalties on Series E
preferred stock (251,211) -- -- (251,211)
Other -- -- 1
Net loss -- -- (9,360,727) (9,360,727)
------------ ------------ ------------ ------------
Balance, December 31, 2000 25,226,101 0 (25,247,830) (20,790)
Receipt of Treasury stock -- -- -- (8,659)
Conversion of Series C
preferred stock to
common shares (564) -- -- --
Penalties on preferred
stock (637,573) -- -- (637,573)
Net loss -- -- (452,461) (452,461)
------------ ------------ ------------ ------------
Balance, December 31, 2001 $ 24,587,964 $ 0 $(25,700,291) $ (1,119,483)
============ ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
15(con't)
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------
1999 2000 2001
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(9,176,198) $(9,360,727) $ (452,461)
Adjustments to reconcile net loss to cash used in operating
activities:
Depreciation and amortization 1,916,170 1,632,939
Write down of investment, fixed assets and intangibles 4,638,314 477,759
Forgiveness of subscriptions receivable 132,189 64,687
Expense recorded for issuance of warrants 11,797
Non-cash compensation expense 68,071
Gain on sale of division (1,144,591)
Provision for bad debts 228,000 (184,851) 37,472
Deferred rent expense (31,532) (124,321) 2,698
Change in operating assets and liabilities:
Accounts receivable (499,465) 901,613 24,433
Accounts payable and accrued expenses 542,947 (228,422) (982,431)
Accrued payroll liabilities (45,700) 85,121
Unearned revenue 167,974 (296,319)
Other 128,054 244,402
----------- ----------- -----------
Net cash used in operating activities (7,702,284) (2,627,564) (892,530)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of furniture, fixtures and equipment (507,117) (362,161) (15,679)
Cash from acquisition 136,938
Loans to related parties (474,583) 200,000
Proceeds from sale of divisions 864,603
Release of Restricted cash 250,000
----------- ----------- -----------
Net cash provided by (used in) investing activities (594,762) (162,161) 848,924
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of capital lease obligations (133,691) (54,747) (63,764)
Proceeds from issuance of common shares and exercise of warrants 648,682 12,084
Proceeds from issuance of preferred shares and warrants 6,987,801 1,855,426
----------- ----------- -----------
Net cash provided by financing activities 7,502,792 1,812,763 (63,764)
16
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31,
-----------------------------------------
1999 2000 2001
----------- ----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS $ (794,254) $ (976,962) $ (107,370)
CASH AND CASH EQUIVALENTS at beginning of period 2,291,932 1,497,678 520,716
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of period $ 1,497,678 $ 520,716 $ 413,346
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON CASH
INVESTING AND FINANCING ACTIVITIES:
Interest paid $ 32,400 $ -- $ --
=========== =========== ===========
Capital lease obligations incurred during year on lease of
computer equipment $ 308,093 $ 40,474 $ --
=========== =========== ===========
Year 2001
1.63 shares of preferred stock were converted into 5,640,000 shares of common stock.
123,695 shares of common stock were returned to the Company and classified as treasury
stock (See Note 12).
Year 2000
216.33 shares of preferred stock were converted into 2,293,936 shares of common stock.
Year 1999
The Company issued 1,252,174 shares of common stock for the net assets of First
Institutional Marketing, Inc. and certain of its affiliates. Additionally, 185,342 shares
of common stock were issued for the net assets of Ganymede Corporation. The Company also
converted 47 shares of preferred stock into 344,777 shares of common stock.
The accompanying notes are an integral part of these consolidated financial statements.
17
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business and Basis of Presentation--Going Concern
Historically, HomeCom Communications, Inc. (the "Company") developed and
marketed specialized software applications, products and services to enable
financial institutions and their customers to use the Internet and
intranets/extranets to obtain and communicate important business information,
conduct commercial transactions and improve business productivity. Revenue was
derived from professional web development services, software licensing,
application development, insurance and securities sales commissions, hosting
fees and transactions fees. The Company's financial statements are prepared
using generally accepted accounting principles applicable to a going concern
which contemplate the realization of assets and liquidation of liabilities in
the normal course of business. The Company has incurred significant losses since
its incorporation, resulting in an accumulated deficit at December 31, 2001 of
approximately $26 million. The Company continues to experience negative cash
flows from operations and is dependent on continued financing from investors to
sustain its activities. There is no assurance that such financing will be
available. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
On March 23, 2001 the Company announced that it was seeking to wind down
its operations. Additionally, the Company has filed a preliminary Proxy
Statement to announce a Special Meeting of the stockholders. One of the
proposals that the stockholders are being asked to consider and vote upon is a
proposal to sell the remaining hosting and website maintenance business to Tulix
Systems, Inc., a company in which Timothy R. Robinson, Gia Bokuchava and Nino
Doijashvili, who are officers and directors of both the Company and Tulix, are
the principal shareholders. If completed, the sale of this business, which is
the Company's only operating business, will constitute a sale of substantially
all of the Company's operating assets and will leave us without any operating
business with which to generate revenues or profits.
Asset Impairment
The Company evaluates the recoverability and carrying value of its
long-lived assets at each balance sheet date, based on guidance in SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Among other factors considered in such evaluation is the
historical and projected operating performance of business operations, the
operating environment and business strategy, competitive information and market
trends. The Company recognized a charge of $493,905 and $1,436,078 during the
year ending December 31, 2001 and 2000 respectively for asset impairment.
Investment in iDefense
During the fourth quarter of year 2000, the Company recognized an
impairment loss of $329,270 with no associated tax benefit, related to its
investment in iDefense (See Note 11). The Company identified conditions
including the continued losses of iDefense, the difficulty iDefense had in
obtaining additional financing, as well as significant reductions in valuations
of Internet related companies. The Company believed that these items were all
indicators of asset impairment. During the second quarter of year 2001, the
Company recorded an additional impairment charge of $493,905 with no associated
tax benefit to writedown the remaining carrying value. Subsequently, on October
19th, 2001 the Company was advised that iDefense had filed Chapter 11 Bankruptcy
in the Eastern District of Virginia, and under the supervision of the Bankruptcy
Court the assets of iDefense had been sold. The sale did not produce sufficient
funds to satisfy iDefense's creditors. The Chapter 11 filing is anticipated to
be converted to Chapter 7 with liquidation of all assets in fractional
satisfaction of outstanding creditor claims. No residual value for stockholders
is anticipated.
Ganymede Goodwill
During the second quarter of 2000, the Company recognized a goodwill
impairment charge of $831,310 with no associated tax benefit, related to the
1999 acquisition of Ganymede Corporation ("Ganymede") (See Note 11). The review
for the impairment of these operations was triggered by cash flow losses and
forecasted operating cash flows below those expected at the time that Ganymede
was acquired. Accordingly, the Company concluded that intangible assets were no
longer recoverable through future operations and therefore recognized an
impairment charge related to this asset.
18
Fixed Assets
In the fourth quarter of year 2000, the Company recorded a charge of
$275,498 related to the write-down of fixed assets at its Atlanta operations.
These write-downs were a result of the conditions as outlined above relative to
the future of the Company. The Company has suspended depreciation of its
remaining assets.
Intangible Assets
Intangible assets represented identifiable and unidentifiable intangible
assets related to acquired businesses. Amounts assigned to certain relationships
and licenses were amortized on a straight-line basis over three years; amounts
assigned to retail insurance operations were amortized on a straight-line basis
over seven years; costs in excess of net tangible and identifiable intangible
assets acquired that were recorded as goodwill were amortized on a straight-line
basis over periods ranging from three to five years. As of December 31, 2000 the
remaining Intangible Assets balance of $557,173 represents the net recoverable
asset in conjunction with the ultimate disposition of the FIMI operations. This
amount was written off in the first quarter of 2001 in conjunction with the
closing of the sale of FIMI to Digital Insurance.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries, subsequent to acquisition, after the
elimination of all significant intercompany accounts and transactions.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
Cash and Cash Equivalents
For purposes of the statement of cash flows, management considers all
highly liquid investments with a maturity of three months or less when purchased
to be cash equivalents.
Accounts Receivable, Net
Accounts receivable are shown net of the allowance for doubtful accounts.
Allowance for Doubtful Accounts
Three Years ended December 31, 2001
-----------------------------------
Balance at Additions (Reductions) Deductions
Beginning of Charged to Costs and (A/R Written Off Balance at End of
Description Period Expenses to Bad Debt) Period
----------- ---------- ---------------------- ---------- -----------------
Year Ending 12/31/99 $ (95,384) $(228,541) $ 108,000 $(215,925)
Year Ending 12/31/00 $(215,925) $ 95,060 $ 89,790 $ (31,075)
Year Ending 12/31/01 $ (31,075) $ (52,321) $ 14,850 $ (68,546)
19
Historically, concentration of credit risk with respect to trade accounts
receivable has been generally diversified due to the large number of entities
comprising and the quality of its customer base. However, the Company's sales to
its five largest customers represented approximately 76% and 89% of total
revenues for the years ended December 31, 2000 and 2001, respectively. During
2000, two customers each accounted for more than 10% of the revenues of the
Company. During 2001, one customer accounted for 82% of the revenues of the
Company. The Company provides an allowance for accounts which are estimated to
be uncollectible.
Furniture, Fixtures and Equipment, Net
Furniture, fixtures and equipment are recorded at cost less accumulated
depreciation, which is computed using the straight-line method over the
estimated useful lives of the related assets. Furniture and fixtures are
depreciated over a 5 year life; computer equipment is depreciated over a 3 year
life. Assets recorded under capital leases are amortized over the shorter of
their useful lives or the term of the related leases using the straight-line
method. Maintenance and repairs are charged to expense as incurred. Upon sale,
retirement or other disposition of these assets, the cost and the related
accumulated depreciation are removed from the respective accounts and any gain
or loss on the disposition is included in income. The company has suspended
depreciation of its remaining assets.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments approximates
fair value.
Revenue Recognition
The Company recognizes revenues on web site development and specialized
software application contracts using the percentage-of-completion method. Earned
revenue is based on the percentage that incurred hours to date bear to total
estimated hours after giving effect to the most recent estimates of total hours.
Earned revenue reflects the original contract price adjusted for agreed upon
claim and change order revenue, if any. If estimated total costs on any of these
contracts indicate a loss, the entire amount of the estimated loss is recognized
immediately. Revenues related to other services are recognized as the services
are performed. Revenues related to insurance product commissions are recognized
upon receipt. Revenues from equipment sales and related costs are recognized
when products are shipped to the customer. Unearned revenue, as reflected on the
accompanying balance sheet, represents the amount of billings recorded on
contracts in advance of services being performed.
For the year ended December 31, 1999, $1,716,002 in revenue was recognized
under the percentage-of-completion method for fixed price contracts. The
weighted average completion was 89%. Revenues for other services were recognized
at the time the services were provided and consisted of $1,094,906 in
maintenance services, $195,424 in consulting services and $900,950 in web site
hosting services.
For the year ended December 31, 2000, $2,677,475 in revenue was recognized
under the percentage-of-completion method for fixed price contracts. All
contracts were 100% complete as of the end of the year. Revenues for other
services were recognized at the time the services were provided and consisted of
$583,441 in maintenance services, $9,020 in consulting services and $1,240,041
in web site hosting services.
For the year ended December 31, 2001, revenues for all services were
recognized at the time the services were provided and consisted of $53,181 in
maintenance services and $1,226,305 in web site hosting services.
Advertising Expenses
Advertising costs are expensed when incurred. Advertising expenses were
approximately $1,147,000, $216,098 and $0 for the years ended December 31, 1999,
2000 and 2001, respectively.
20
Income Taxes
The Company accounts for income taxes using the asset and liability method
as described by Statement of Financial Accounting Standards No. 109, Accounting
For Income Taxes ("SFAS No. 109").
Under SFAS 109 the liability method is used in accounting for income taxes.
Under this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
The Company provides a valuation allowance for deferred tax assets which
are determined by management to be below the threshold for realization
established by SFAS 109.
Basic and Diluted Loss Per Share
Basic and diluted loss per share are calculated according to the provisions
of Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("FAS 128"). Due to the net loss position of the Company for each of the three
years in the period ending December 31, 2001, the numerator and denominator are
the same for both basic and diluted loss per share.
The table below illustrates the calculation of the loss per share amounts
attributable to continuing and discontinued operations applicable to common
shareholders.
Year Ended December 31,
--------------------------------------------
1999 2000 2001
------------ ------------ ------------
Loss from continuing operations $ (5,690,281) $ (4,604,452) (847,004)
Less: Deemed Preferred stock dividend (2,557,466) (1,526,728) (708,778)
------------ ------------ ------------
Loss from continuing operations applicable to
common shareholders (8,247,747) (6,131,180) (1,555,782)
Discontinued operations (3,485,917) (4,756,275) 394,543
------------ ------------ ------------
Net loss applicable to common shareholders $(11,733,664) $(10,887,455) (1,161,239)
============ ============ ============
Weighted average common shares outstanding--
Basic and diluted 6,324,791 8,549,693 9,869,074
------------ ------------ ------------
Loss per share--continuing operations (0.90) (0.72) (0.16)
Loss per share--discontinued operations (0.96) (0.55) 0.04
------------ ------------ ------------
$ (1.86) $ (1.27) (0.12)
============ ============ ============
The Company has not declared or paid any dividends to the shareholders of
the Preferred Stock. However, the Preferred Stock possess conversion rights (the
"Beneficial Conversion Feature") that are analogous to dividends. Accordingly,
the Beneficial Conversion Feature is accounted for as a Deemed Preferred Stock
Dividend. (See footnotes 7, 8, 9 and 10).
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 ("SFAS 141"), "Business
Combinations," which supercedes Accounting Principles Board ("APB") Opinion No.
16, "Business Combinations." SFAS No. 141 requires the purchase method of
accounting for business combinations initiated after June 30, 2001 and
eliminates the pooling-of-interests method. The provisions of SFAS 141 have been
adopted as of July 1, 2001. The adoption of SFAS 141 has not changed the method
of accounting used in previous business combinations initiated prior to July 1,
2001.
In July 2001, the FASB also issued Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets," which is
effective for fiscal years beginning after December 15, 2001. Certain provisions
shall also be applied to acquisitions initiated subsequent to June 30, 2001.
SFAS 142 supercedes APB Opinion No. 17, "Intangible Assets," and requires, among
other things, the discontinuance of amortization related to goodwill and
indefinite lived intangible assets. These assets will then be subject to an
impairment test at least annually. Management believes that the implementation
of this standard will have no impact on the Company's results of operations and
financial position.
21
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), "Accounting for the Impairment or Disposal of
Long-Lived Assets," which supercedes Statement of Financial Accounting Standards
No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and certain provisions of APB Opinion
No. 30, "Reporting Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS 144 requires that long-lived assets to be
disposed of by sale, including discontinued operations, be measured at the lower
of carrying amount or fair value, less cost to sell, whether reported in
continuing operations or in discontinued operations. SFAS 144 also broadens the
reporting requirements of discontinued operations to include all components of
an entity that have operations and cash flows that can be clearly distinguished,
operationally and for financial reporting purposes, from the rest of the entity.
The provisions of SFAS 144 are effective for fiscal years beginning after
December 15, 2001. Management believes that the implementation of this standard
will have no impact on the Company's results of operations and financial
position.
Other Matters
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net, are comprised of the following as
of:
December 31,
--------------------------
2000 2001
----------- -----------
Furniture and fixtures $ 235,921 $ 8,940
Computer equipment 1,225,407 88,961
Computer equipment under capital leases 843,708 0
----------- -----------
2,305,036 97,901
Less: accumulated depreciation and amortization (1,553,450)
Less: write down to fair value less costs to sell (275,498)
----------- -----------
$ 476,088 $ 97,901
=========== ===========
During the year ending December 31, 2000 Furniture, Fixtures and Equipment
were adjusted to reflect estimated realizable value pending sale. This approach
to fixed assets has been maintained during the year ending December 31, 2001,
given the business conditions outlined above relative to the future of the
company.
22
3. INTANGIBLE ASSETS
Intangible assets consist of the following:
December 31,
----------------------------
2000 2001
----------- -----------
Licenses and training programs $ 172,269 $
Bank and carrier relationships 450,000
Retail insurance operations 1,500,000
Goodwill 3,830,888 557,173
----------- -----------
5,953,157 557,173
Less: Accumulated amortization (2,028,297)
Less: Write down related to asset
impairment and sale of division (3,367,687) (557,173)
----------- -----------
$ 557,173 $ 0
=========== ===========
Amortization expense relating to intangible assets was $1,337,655 for the
year ended December 31, 1999. Amortization charged to expense in 2000 was
$987,564, of which $63,912 related to the amortization of Ganymede goodwill and
$923,652 related to the amortization of FIMI intangibles. The $3,367,687 write
down in 2000 related to asset impairment consists of $831,310 related to the
purchase of Ganymede in 1999 (See Note 1) and $2,536,377 related to the sale of
FIMI (See Note 12). The $557,173 write down in 2001 represents the remaining
intangible value of FIMI that was written off in the process of the closing of
the sale.
4. SEGMENT INFORMATION
Historically, the Company was organized into five separate business units.
The Company 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), Internet Banking, 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 Internet Banking
group to Netzee, Inc. The Company currently operates in a single business
segment.
The contribution of each historical business segment for the year 2000 and 1999
to total discontinued operations is reflected in the following table.
Discontinued Operations Segments
--------------------------------
Year Ended
December 31,
-----------------------------
1999 2000
----------- -----------
Revenues:
HISS $ 257,000 $
FIMI 2,438,168 2,497,366
Internet Banking 210,723 465,467
----------- -----------
Totals $ 2,905,891 $ 2,962,833
=========== ===========
Gain (Loss) from Discontinued Operations
HISS $ (497,826)
FIMI (2,736,678) $(1,970,584)
Internet Banking (1,396,004) 214,686
----------- -----------
Totals $(4,630,508) $(1,755,898)
=========== ===========
23
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating
lease agreements expiring through 2002. The Company has previously entered into
capital leases of computer equipment. Future minimum lease payments under
operating leases are $131,593 for the year ending December 31, 2002.
The Company had leased office space in New York City, Chicago, Houston, and
Atlanta. The Company has recorded a deferred credit to reflect the excess of
rent expense over cash payments since inception of the leases. The Company has
abandoned facilities in New York, Houston, Chicago, and Atlanta. Liabilities
have been settled with the leaseholders in Houston and Chicago. Lease
obligations are still outstanding in Atlanta and New York. As such, a real
estate disposition liability of approximately $240,000 has been provided for.
Rental expense under operating leases was approximately $588,000, $831,999
and $150,307 for the years ended December 31, 1999, 2000 and 2001 respectively.
Various legal proceedings may arise in the normal course of business.
Additionally, the Company's software and equipment are vulnerable to computer
viruses or similar disruptive problems caused by customers or other Internet
users. Computer viruses or problems caused by third parties could lead to
interruptions, delays or cessation in service to the Company's customers.
Moreover, customers of the Company could use computer files and information
stored on or transmitted to Web server computers maintained by the Company to
engage in illegal activities that may be unknown or undetectable by the Company,
including fraud and misrepresentation, and unauthorized access to computer
systems of others. Furthermore, inappropriate use of the Internet by third
parties could also jeopardize the security of customers' confidential
information that is stored in the Company's computer systems. Any such actions
could subject the Company to liability to third parties. The Company does not
have errors and omissions, product liability or other insurance to protect
against risks caused by computer viruses or other misuse of software or
equipment by third parties. The Company does maintain errors and omissions to
protect it from malfunctions or non-merchantability of its software products and
from potential market conduct liabilities relating to its insurance and
securities operations. Although the Company attempts to limit its liability to
customers for these types of risks through contractual provisions, there can be
no assurance that these provisions will be enforceable. Management does not
believe that there are currently any asserted or unasserted claims that will
have a material adverse effect on the financial position, results of operations
or cash flows of the Company.
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS
In connection with the completion of the Company's initial public offering,
the Company granted its underwriter warrants to acquire 100,000 shares of the
Company's common stock at an exercise price of $7.20 per share. The exercise
price is subject to adjustment under certain circumstances. These warrants
expire on May 12, 2002 if not earlier exercised.
At December 31, 2000 and 2001, 442,000 warrants are outstanding at a
weighted average exercise price of $4.16.
7. ISSUANCE OF SERIES B PREFERRED STOCK
The Company issued Series B Preferred Stock totaling $2,500,000 on March
25, 1999 (the "Issuance Date"). The Series B Preferred Stock investors were
issued 125 shares of preferred stock, having a stated value of $20,000 per
share, and 225,000 warrants to purchase common stock at $5.70 per share. The
Company paid offering costs of $216,250 cash plus 25,000 warrants to purchase
common stock at $5.70 per share, resulting in net proceeds to the Company of
$2,283,750 for the preferred shares and warrants.
The Series B Preferred Stock bears no dividends and is convertible at the
option of the holder at the earlier of 90 days after issuance or the effective
date of a registration statement covering the shares. The warrants are
exercisable at any time and expire five years from the date of issuance.
24
The Series B Preferred Stock is convertible into common stock at a
conversion price equal to the lower of (a) the average of the closing price for
four consecutive trading days in the twenty-five consecutive trading days ending
one day prior to the conversion date ($4.86 at the Issuance date) and (b) $5.23.
The number of common shares into which the Series B Preferred Stock is
convertible is determined by dividing the stated value of the Series B Preferred
Stock, increased by 5% annually, by the conversion price. As the Series B
Preferred Stock is automatically convertible on March 24, 2002, the most
beneficial conversion ratio was determined to include the additional common
shares attributable to the 5% annual increase for the three year period ending
in 2002. After adjustment for this additional benefit the $4.86 conversion price
is reduced to $4.23, the most beneficial conversion price at the Issuance Date.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $2,283,750 to the preferred stock
and the warrants based on their relative fair values at the Issuance Date,
resulting in $1,766,217 assigned to the preferred stock and $517,533 assigned to
the warrants as of March 24, 1999. The Company then allocated $899,284 of the
Series B net proceeds to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return. Approximately $792,000,
$18,000, and $2,672 of the beneficial conversion was amortized in 1999, 2000 and
2001, respectively. During 1999, 10 shares of Series B Preferred Stock were
converted into 63,317 shares of common stock. During 2000, 97.19 shares of
Series B Preferred Stock were converted into 902,307 shares of common stock.
The Company has the option to redeem the Series B Preferred Stock after 110
days for 120% of face value. Additionally, if the Company has issued common
stock upon conversion of the Series B Preferred Stock such that 19.99% of the
common stock outstanding is held by the preferred shareholders, the Company must
obtain approval of the shareholders before any more preferred shares can be
converted. If such approval is not obtained within 60 days of notice, the
preferred shareholders may require the Company to repurchase the remaining
Series B Preferred Stock at 120% of face value. The Series B Preferred Stock is
presented outside of permanent equity as the outcome of the shareholder vote,
and possible redemption, is outside of the control of the Company.
8. ISSUANCE OF SERIES C PREFERRED STOCK
On July 28, 1999, the Company completed a private placement of $3,500,000
principal amount of the Company's Series C Convertible Preferred Stock, par
value $.01 per share (the "Series C Preferred Stock") and warrants to acquire up
to 59,574 shares of Common Stock (the "Series C Preferred Warrants"). The Series
C Preferred Stock has an initial stated value of $20,000 per share, which stated
value increases at the rate of 6% per year (such stated value, as increased from
time to time, is referred to as the "Series C Stated Value"). Each Series C
Preferred Share is convertible, from and after 120 days following the date of
issuance, at the option of the holder, into such number of shares of Common
Stock as is determined by dividing the Series C Stated Value by the lesser of
(a) $5.875, and (b) 82.5% of the average of the closing bid prices for the five
trading days preceding the date of conversion. Any Series C Preferred Stock
issued and outstanding on July 22, 2002 will automatically be converted into
Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $3,323,748 to the preferred stock
and the warrants based on their relative fair values at the Issuance Date,
resulting in $3,170,904 assigned to the preferred stock and $152,844 assigned to
the warrants as of July 27, 1999. The Company then allocated $1,678,505 of the
Series C net proceeds to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return. Approximately $1,485,000,
$72,000, and $190 of the beneficial conversion was amortized in 1999, 2000 and
2001, respectively. During 1999, 37.5 shares of Series C Preferred Stock were
converted into 281,460 shares of common stock. During 2000, 45.4 shares of
Series C Preferred Stock were converted in to 802,056 shares of common stock.
During 2001, 1.63 shares of Series C Preferred Stock was converted into
5,640,000 shares of Common Stock.
25
The Company has the right, in its sole discretion, to redeem, from time to
time, any or all of the Series C Preferred Stock; provided that certain
conditions are met, including the availability of cash, credit or standby
underwriting facilities available to fund the redemption at 120% of the original
purchase price.
The Series C Preferred Warrants expire on July 27, 2004 and have an
exercise price of $7.34 per share, subject to adjustment under certain
circumstances.
9. ISSUANCE OF SERIES D PREFERRED STOCK
On September 28, 1999, the Company completed a private placement of
$1,500,000 principal amount of the Company's Series D Convertible Preferred
Stock, par value $.01 per share (the "Series D Preferred Stock") and warrants to
acquire up to 25,000 shares of Common Stock (the "Series E Preferred Warrants").
The Series D Preferred Stock has an initial stated value of $20,000 per share,
which stated value increases at the rate of 6% per year (such stated value, as
increased from time to time, is referred to as the "Series D Stated Value").
Each Series E Preferred Share is convertible, from and after 120 days following
the date of issuance, at the option of the holder, into such number of shares of
Common Stock as is determined by dividing the Series D Stated Value by the
lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for
the five trading days preceding the date of conversion. Any Series D Preferred
Stock issued and outstanding on September 22, 2002 will automatically be
converted into Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $1,423,750 to the preferred stock
and the warrants based on their relative fair values at the Issuance Date,
resulting in $1,387,477 assigned to the preferred stock and $36,273 assigned to
the warrants as of September 28, 1999. The Company then allocated $642,084 of
the Series D net proceeds to additional paid in capital for the beneficial
conversion feature. The beneficial conversion feature will be recognized as a
deemed dividend to the preferred shareholders over the minimum period in which
the preferred shareholders can realize that return. Approximately $280,000 and
$281,000 of the beneficial conversion was amortized in 1999 and 2000,
respectively. During 2000, 73.7 shares of Series D Preferred Stock were
converted into 589,573 shares of common stock.
The right of the holders of the Series D Preferred Stock to convert their
shares is also subject to the following restrictions: (i) during the period
beginning on the issuance date through the following 90 days, each holder may
not convert more than 25% of the Series D Preferred Stock purchased by such
holder; (ii) during the period beginning on the issuance date through the
following 120 days, each holder may not convert more than 50% of the Series D
Preferred Stock purchased by such holder; and (iii) during the period beginning
on the issuance date through the following 150 days, each holder may not convert
more than 75% of the Series D Preferred Stock purchased by such holder. At any
time after the issuance date, the Company shall have the right, in its sole
discretion, to redeem, from time.
10. ISSUANCE OF SERIES E PREFERRED STOCK
On April 14, 2000, the Company completed a private placement of $2,127,000
principal amount of the Company's Series E Convertible Preferred Stock, par
value $.01 per share (the "Series E Preferred Stock") and warrants to acquire
66,667 shares of common stock (the "Series E Preferred Warrants"). The Series E
Preferred Stock has an initial stated value of $20,000 per share, which stated
value increases at the rate of 8% per year. Each Series E Preferred Share is
convertible 120 days following the date of issuance, at the option of the
holder, into such number of shares of common stock as is determined by dividing
the Series E Stated Value by the lesser of (a) $3.53, or (b) 82.5% of the
average of the closing bid prices for the five trading days preceding the date
of conversion. Any Series E Preferred Stock issued and outstanding on April 14,
2003 will automatically be converted into common stock at the conversion price
then in effect.
Pursuant to certain registration rights granted to the investors in the
private placement, we are obligated to file a registration statement under the
Securities Act of 1933 with respect to a minimum of 1,808,293 shares of common
26
stock issueable upon conversion of the Series E Preferred Stock and exercise of
the Series E Preferred Warrants. The Company is obligated to pay penalties if
the Registration Statement is not filed and/or declared effective within the
specified time periods. As of March 12, 2002, such registration statement has
not been declared effective and penalties are owed to the Series E Preferred
Stock holders. In accordance with the terms of the private placement, penalties
accrue at the rate of 2% per 30 day period of the outstanding purchase price of
the unregistered securities. $251,211 and $637,572 was recorded as a deemed
dividend to the Preferred Stockholders for the years ended December 31, 2000 and
2001, respectively.
The Company may at its option at any time after the 90th day following the
issuance of the Series E Preferred Stock through April 14, 2002, prohibit
holders of the Series E Preferred Stock from exercising any conversion rights
for up to 90 days, provided that certain conditions are met. If the Company
exercises that right, the Company is required to compensate the holders of the
Series E Preferred Stock in cash in an amount equal to 3% of the principal
amount of the Series E Preferred Stock held by each holder for each thirty days
that prohibition is in effect (pro rated for partial months) or, at the
Company's option, deliver common stock in payment of such amount (based on the
average closing bid prices for the common stock for the twenty trading days
preceding the end of each calendar month during the period conversion is so
prohibited).
At any time after the issuance date, the Company shall have the right, in
its sole discretion, to redeem, from time to time, any or all of the Series E
Preferred Stock; provided that certain conditions are met, including the
availability of cash, credit or standby underwriting facilities available to
fund the redemption. The redemption price will be calculated as (i) 105% of the
original purchase price for the first 30 days following the issuance date; (ii)
110% of the original purchase price for the next 90 days thereafter and (iii)
120% of the original purchase price after 120 days from the issuance date.
In determining the accounting for the beneficial conversion feature, the
Company first allocated the net proceeds of $1,855,426 to the Series E Preferred
Stock and the Series E Preferred Warrants based on their relative fair values at
the issuance date, resulting in $1,791,211 assigned to the Series E Preferred
Stock and $64,215 assigned to the Series E Preferred Warrants as of April 14,
2000. The Company then allocated $1,059,347 of the Series E Preferred Stock net
proceeds to additional paid in capital for the beneficial conversion feature.
The beneficial conversion feature will be recognized as a deemed dividend to the
preferred shareholders over the minimum period in which the preferred
shareholders can realize that return. Approximately $905,000 and $68,344 of the
beneficial conversion was amortized in 2000 and 2001, respectively. The balance
of the beneficial conversion feature will be recognized through April 14, 2003.
The Series E Preferred Warrants expire on April 14, 2005 and have an exercise
price of $3.35 per share, subject to adjustment under certain circumstances.
11. STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Stock Option Plan") was
adopted by the Company's stockholders in September 1996. Shares of common stock
may be sold or awarded to officers, key employees and consultants. On March 3,
1999 at a Special Meeting of Stockholders, the Company's stockholders approved
an amendment to the Stock Option Plan which increased the number of shares
reserved for issuance under the Stock Option Plan to 2,000,000. Options granted
under the Stock Option Plan may be either (i) options intended to qualify as
"incentive stock options" under Section 422 of the Internal Revenue Code or (ii)
non-qualified stock options.
The options granted to purchase shares under the Stock Option Plan. The
options vest 25% per year and expire ten years after the grant date. The
exercise price of the options was at or above the fair market value of the stock
on the grant date.
The Company's Non-Employee Directors' Stock Option Plan (the "Directors'
Plan") was adopted by the Company's stockholders in September 1996. Shares of
common stock may be sold or awarded to directors who are not officers or
employees of the Company ("Non-Employee Directors"). The Company has reserved
300,000 shares of common stock for issuance under the Directors' Plan.
27
The Directors' Plan provides for the automatic granting of an option to
purchase 10,000 shares of common stock to each Non-Employee Director who is
first appointed or elected to the Board of Directors. Also, each Non-Employee
Director is automatically granted an option to purchase 5,000 shares of common
stock on the date of each annual meeting of the Company's stockholders.
Furthermore, the Directors' Plan allows the Board of Directors to make
extraordinary grants of options to Non-Employee Directors.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("FAS 123") requires that companies with stock-based
compensation plans either recognize compensation expense based on new fair value
accounting method or continue to apply the provisions of Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and
disclose pro forma net income and earnings per share assuming the fair value
method had been applied.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options, however, on September 20, 2000, the
Company re-priced options to purchase its common stock, $.0001 par value, held
by certain employees and certain officers. To be eligible for the re-pricing,
option holders were required to exchange one and one-half old options for each
new option. As such, 587,580 old options were exchanged for 391,719 new options.
Options having an exercise price greater than $0.59, the closing bid price of
Homecom common stock on September 20, 2000, were re-priced to an exercise price
of $0.59. In addition, each option holder agreed to a six month lock-up period
in which they would be precluded from exercising any of their options. According
to FASB Interpretation No. 44 "Accounting for Certain Transactions Involving
Stock Compensation," reductions to the exercise price of a fixed option award
must be accounted for as variable from the date of the modification to the date
the award is exercised, forfeited or expires unexercised. Under variable
accounting, a compensation cost must be recorded based on the intrinsic value of
the award, which is computed as the difference between the exercise price and
the fair value of Homecom's common stock on the date of the re-pricing.
Thereafter, an additional compensation cost must be recorded or reversed based
on the difference between the value of the option at the beginning and end of
the accounting period. The reversal of compensation cost cannot be larger than
accumulated compensation expense incurred. To date, no compensation expense has
been recognized as Homecom's stock price has been below the new exercise price
of $0.59. The Company has recognized no compensation expense for options issued
to employees, non-employees, and non-employee directors.
Pro forma information regarding loss per share is required by FAS 123 and
has been determined as if the Company had accounted for its employee stock
options under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions:
December 31,
------------------------------
1999 2000 2001
-------- -------- --------
Risk-free interest rate 5.11% 5.58% N/A
Volatility factors of the expected market
price of the Company's common stock 110% 85% 106%
Weighted average expected life of the options 5 years 5 years 5 years
Expected dividend yield 0% 0% 0%
28
Had compensation cost for the Company's stock-based compensation plans been
determined under the provisions consistent with FAS 123, the Company's net loss
and loss per share for the years ended December 31, 1999, 2000 and 2001 would
have been the pro forma amounts listed below:
Year Ended December 31,
-------------------------------------------
1999 2000 2001
------------ ------------ -----------
Loss applicable to common shareholders:
As reported $(11,733,665) $(10,887,455) $(1,161,239)
Pro forma (12,591,580) (11,496,918) (1,073,237)
Basic and diluted loss per share:
As reported (1.86) (1.27) (0.12)
Pro forma (1.99) (1.34) (0.11)
Option activity under all of the stock option plans is summarized as follows:
Year Ended December 31,
----------------------------------------------------------------------------
1999 2000 2001
------------------------ ------------------------- ----------------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Shares Exercise Shares Exercise
Price Price Price
------------------------ ------------------------- ----------------------
Outstanding at beginning of year 558,610 $4.59 1,155,259 $4.49 $ 791,644 2.75
Granted 1,067,958 4.31 924,688 1.17 0 0.00
Exercised (53,278) 3.93 (4,500) 4.06 0 0.00
Forfeited (418,031) 4.25 (1,283,803) 3.10 (402,559) 2.87
---------- ---------- -----------
Outstanding at end of year 1,155,259 4.49 791,644 2.75 389,085 2.31
========== ======= ===========
Options exercisable at year end 251,112 4.85 348,349 3.52 239,081 3.32
========== ======= ===========
Shares available for future grant 912,912 1,080,187 1,610,915
========== ========= ===========
Weighted-average fair value of
options granted during the year
at the shares' fair value $ 3.10 $ 0.40 $ 0.00
========== =========== ===========
The following table summarizes information about fixed options outstanding at
December 31, 2001.
Weighted Average
Remaining Contractual
Exercise Prices Shares Life
--------------- -------- ---------------------
$0.59-0.75 232,761 8.1
$2.18-2.81 3,000 6.2
$3.47-4.55 92,687 5.9
$5.25-6.50 60,637 5.9
--------
389,085 7.3
========
12. ACQUISITIONS, DIVESTITURES AND DISCONTINED OPERATIONS
FIMI/InsureRate
On March 24, 1999, the Company acquired First Institutional Marketing,
Inc., and certain of its affiliates ("FIMI") of Houston, Texas for total
consideration of $4,236,104, consisting of 1,252,174 shares of common stock. The
acquisition was accounted for as a purchase transaction. The value of the shares
was determined by using the average closing stock price of the two days before
and after the definitive agreement was publicly announced. The resulting
29
intangible assets were being amortized over a period of approximately 3 to 7
years. Prior to the closing of the acquisition, the Company loaned the
shareholders of FIMI $370,000 ("FIMI notes"). The notes were to be repaid in
either cash or common stock and were collateralized by common stock.
Additionally, the principal shareholders of FIMI were granted 300,000 warrants
to acquire HomeCom common stock at an exercise price of $3.74 per share. Vesting
of the warrants was contingent upon FIMI meeting certain operating goals as
defined in the agreement.
On January 31, 2001, the Company sold substantially all of the assets of
FIMI and its affiliates to Digital Insurance, Inc. ("Digital") for approximately
$458,000 in cash and the assumption of certain liabilities. Additionally, the
FIMI notes were defaulted on and were exchanged for 123,695 shares of Company
common stock that collateralized the notes. This Common stock was returned to
the Company and has been treated as Treasury stock. It has been valued at
$8,659, or $0.07 per share, the fair market value at closing. Additionally, the
warrants were forfeited. The purchase price was established through arms' length
negotiations between the Company and Digital.
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 assets of FIMI in
2000.
Ganymede
On April 23, 1999, the Company acquired all of the outstanding shares of
Ganymede Corporation ("Ganymede") for total consideration of $1,348,186,
consisting of 185,342 shares of common stock and $100,000 cash. The acquisition
was accounted for as a purchase transaction. The purchase price was allocated to
assets acquired and liabilities assumed based on their estimated fair values at
the time and the resulting intangible assets were being amortized over a period
of approximately 3 to 5 years. Results of operations for Ganymede have been
included with those of the Company for periods subsequent to the date of
acquisition. In June 2000, the company recognized a goodwill impairment charge
of approximately $800,000 with no associated tax benefit, related to this
acquisition (See Note 1).
HISS
On October 1, 1999, the Company sold substantially all of the assets of its
HomeCom Internet Security Services ("HISS") division to Infrastructure Defense,
Inc. ("iDefense") for $823,175 in common stock of the non-public acquiror,
certain security audit rights and $200,000 cash, paid in January, 2000. The
purchase price was established through arms' length negotiations between the
Company and iDefense.
The fair value of the common stock was established at the time of the
transaction based upon the review of recent investment activity in iDefense. The
stated fair value of the stock in the purchase agreement was to be $20.50/share.
As iDefense was a private company, no quoted prices or exchanges were available.
However, iDefense had sold shares for cash in private placement transactions
near year end. iDefense had sold shares for $25.00/share with the investor
receiving the same number of shares for free as an inducement. These
transactions resulted in a transaction with a fair value of $12.50/share. Given
the shares tendered in consideration within the sale, the value of the
investment in iDefense was determined to be $823,175. The sale was an arms'
length transaction and there were no related parties.
The Company has removed the results of this discontinued operation from the
continuing operations of the Company for all periods presented. The Company
recorded a gain of approximately $1.14 million on the sale of the HISS unit in
1999. Subsequently, the Company has written off its entire investment in
iDefense (See Note 1).
30
Internet Banking
On March 15, 2001, the Company sold substantially all of the assets of its
Internet Banking group to Netzee, Inc. ("Netzee") for $406,603 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 $394,543 on the sale of the Internet
Banking group in 2001.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows, as of:
December 31,
-----------------------------------------
1999 2000 2001
----------- ----------- -----------
Temporary differences:
Allowance for uncollectibles $ 82,052 $ $
Vacation accrual 29,812
Depreciation 113,930
Deferred rent expense 19,490
Cash to accrual adjustment 100,278
Other accruals 160,000 102,000
Software development expenses 32,620
Net operating loss carryforward 5,043,323 6,018,000 400,000
----------- ----------- -----------
Deferred tax asset 5,581,505 6,200,000 400,000
Valuation allowance (4,896,133) (6,200,000) (400,000)
----------- ----------- -----------
Net deferred tax asset 685,372 -- --
Acquired intangibles (685,372) -- --
----------- ----------- -----------
Deferred tax liability (685,372) -- --
----------- ----------- -----------
Net deferred tax asset (liability) $ -- $ -- $ --
=========== =========== ===========
At December 31, 2001, the Company had net operating loss carryforwards for
income tax purposes of approximately $18 million which begin to expire in 2011.
Realization of these assets is contingent on having future taxable earnings. In
addition, certain stock transactions during 1997 resulted in the Company
incurring an ownership change as defined in Internal Revenue Code Section 382.
The result of this ownership change is to substantially limit the future
utilization of the Company's net operating loss carryforwards as of the change
date. Certain stock transactions occurring in 1998 and 1999 may have resulted in
the Company incurring an ownership change, which may result in a limitation on
the Company's future utilization of net operating loss carryforwards generated
in 1998 and 1999. Based on the cumulative losses in recent years and the
limitation and the use of the Company's net operating losses management believes
that a full valuation allowance should be recorded against the deferred tax
asset.
The income tax benefit differs from the amounts computed by applying the
Federal statutory rate of 34% to loss before taxes principally as a result of
the recording of the valuation allowance.
31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(a) Previous Independent Accountants
(i) On February 8, 2001, we dismissed PricewaterhouseCoopers LLP ("PWC"), as our
independent accountants effective immediately. Our Board of Directors
participated in and approved the decision to change independent accountants.
(ii) The reports of PWC on our consolidated balance sheets as of December 31,
1999 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows, did not contain an adverse
opinion or disclaimer of opinion, and were not qualified or modified as to
uncertainty, audit scope or accounting principles. However, in its report on our
financial statements for the fiscal years ended December 31, 1999 and 1998, it
included the following explanatory paragraph: "The accompanying financial
statements have been prepared assuming that the Company will continue as a going
concern. As discussed in Note 1 to the financial statements, the Company has
experienced recurring losses and negative cash flows since its inception and has
an accumulated deficit. The Company is dependent on continued financing from
investors to sustain its activities and there is no assurance that such
financing will be available. These factors raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty."
(iii) In connection with its audits for the two most recent fiscal years and
through February 8, 2001, there have been no disagreements with PWC on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreements if not resolved to the
satisfaction of PWC would have caused them to make reference thereto in their
report on the financial statements for such years.
(iv) During the two most recent fiscal years and through February 8, 2001, there
have been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
(v) On February 13, 2001, we delivered a copy of the disclosures which we made
in Item 4 on Form 8-K as filed on February 14, 2001, and requested that PWC
furnish it with a letter addressed to the Securities and Exchange Commission
stating whether or not PWC agreed with such disclosures. A copy of such letter
dated February 13, 2001 indicating such agreement was filed as Exhibit 16.1 to
that Form 8-K.
(b) New Independent Accountants
(i) On February 8, 2001, the Company engaged the firm of Feldman Sherb & Co,
("FSC") as independent accountants for the Company's fiscal year ending December
31, 2000. The Company's Board of Directors approved the selection of FSC as
independent accountants.
(ii) During the two most recent fiscal years and through February 8, 2001, the
Company has not consulted with FSC with respect to (1) the application of
accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on the Company's financial
statements; or (2) on any matter that was either the subject of a disagreement
(as defined in Item 304 (a)(1)(iv) of Regulation S-K) or a reportable event (as
described in Item 304(a)(1)(v) of Regulation S-K).
32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors, Executive Officers and Significant Employees
The names and ages of the directors and executive officers of the Company
as of December 31, 2001 and certain information about them are set forth below.
Name Age Position
---- --- --------
Gia Bokuchava, Ph.D 38 Chief Technical Officer and Director
Timothy R. Robinson 38 Executive Vice President, Chief Financial
Officer and Director
Nino Doijashvili, Ph.D. 40 Director of Technical Services and Director
David Danovitch 39 Director
Larry Shatsoff 47 Director
Michael Sheppard 51 Director
William Walker resigned from his position as a member of the Board of
Directors in September 2000. In November of 2000, Claude A. Thomas and Daniel A.
Delity resigned from their positions as members of the Board (Ms. Doijashvili
was named to the Board in April 2001 to fill Mr. Thomas' position and Mr.
Danovitch was named to the Board in November 2001 to fill Mr. Delity's position,
until such positions expire). In December of 2000, James Wm. Ellsworth resigned
as a member of the Board (in November 2001, Mr. Shatsoff was named to the Board
to fill Mr. Ellsworth's position until such position expires). Roger Nebel
resigned from his position as a member of the Board in February 2001 (Mr.
Robinson was named to the Board in March 2001 to fill Mr. Nebel's position until
Mr. Nebel's term expires). Harvey Sax resigned from the Board effective March
29, 2001 (in November 2001, Mr. Sheppard was named to the Board to fill Mr.
Sax's position until such position expires).
The Board is divided into three classes, each of which serves a three-year
term. The Class I directors (Ms. Doijashvili, and Mr. Danovitch, formerly Mr.
Thomas, Mr. Walker and Mr. Delity) were to serve until the 2001 Annual Meeting
of Stockholders. However, because we never had a 2001 Annual Meeting of
Stockholders, they remain on the Board of Directors. The Class II directors (Dr.
Bokuchava and Mr. Robinson, formerly Mr. Nebel) will serve until the 2002 Annual
Meeting of Stockholders. The Class III directors (formerly Messrs. Sax and
Ellsworth) were to serve until the 2000 Annual Meeting of Stockholders. However,
because we never held the 2000 Annual Meeting of Stockholders, these individuals
remain on the Board of Directors as well. Please note, however, that we expect
Mr. Robinson, Mr. Bokuchava and Ms. Doijashvili to resign from the Board of
Directors if we complete the Asset Sale. This would leave us with one Class I
director (David Danovitch), no Class II directors, and two Class III directors
(Messrs. Shatsoff and Sheppard).
Background of our Directors and Executive Officers
Gia Bokuchava, Ph.D., has served as our Chief Technical Officer since
August 1995. Dr. Bokuchava served as a visiting professor at Emory University
from September 1994 until August 1995 and was employed by the National Library
of Medicine, assisting in the development of Internet based applications, from
January 1995 until August 1995. From July 1990 until September 1994, Dr.
Bokuchava was the Director of The Computer Center at the Institute of Mechanical
Engineering at Georgia Technical University, Tblisi, Georgia (formerly a part of
the Soviet Union). Dr. Bokuchava has taught computer science as a visiting
associate professor at the Universities of Moscow and China. Dr. Bokuchava
received a doctorate in Theoretical Physics from Georgia Technical University,
Tblisi, in 1990. Dr. Bokuchava has been a member of the Board of Directors since
September 1996.
Timothy R. Robinson has served as our Executive Vice President, Chief
Financial Officer since August 2000. Prior to joining the Company, Mr. Robinson
served as Vice President and Chief Financial Officer of Tanner's Restaurant
Group, Inc. from December of 1996 until January of 2000. Mr. Robinson, a
Certified Public Accountant, served as a senior manager with the firm that is
now known as PricewaterhouseCoopers, LLP from June 1986 to December 1996. Mr.
Robinson graduated from Georgia State University with a Bachelor of Business
Administration, Accounting. Mr. Robinson has been a member of the Board since
March 2001.
33
Nino Doijashvili, Ph.D., has served as our Director of Technical Services
since December of 1997. Prior to that Dr. Doijashvili served as one of our
Senior Software Engineers from September 1995 until December 1997. Dr
Doijashvili served as a visiting professor at Emory University from February
1995 until September 1995. From September 1989 until February 1995, Dr.
Doijashvili was an Associate Professor at the Georgia Technical University,
Tbilisi, Georgia (formerly a part of the Soviet Union) teaching CAD/CAM systems
and computer science. Dr Doijashvili received a doctorate in Computer Science
from Moscow Technical University, Russia in February 1989. Dr. Doijashvili has
been a member of the Board since April 2001.
David Danovitch, 39, is currently a Senior Partner of NewWest Associates,
LLC, an international firm specializing in business consultancy, Del Rey
Investments, LLC., a merchant banking firm, and NewWest Films, a feature film
production and finance concern. The companies are involved with a variety of
enterprises throughout the world in a variety of industries, including
technology, medical device, entertainment, and energy concerns. Prior to joining
NewWest and Del Rey, Mr. Danovitch was a Managing Director of Cambridge
Partners, a merchant bank with $1.7 billion under management, which focused on
misunderstood or mis-financed companies and assets. Prior to joining Cambridge,
he was a founding principal of Snowden Capital, Inc., a New York City-based
investment banking and direct investment firm focused on serving the corporate
finance needs of middle market companies. Mr. Danovitch received a bachelor of
arts from Kenyon College in 1984, a juris doctor from Suffolk University Law
School in 1987, and an L.L.M. in Taxation from Boston University School of Law
in 1988. He is a member of the District of Columbia, Massachusetts, and New York
bar associations. His honors include having been named by the American Banker -
the primary industry publication - as one of the "50 Most Influential People in
Banking" in 1990. Throughout his career, he has been a speaker at many seminars
and conferences covering a range of issues in a variety of industry and has
served on several boards of directors of both for-profit and not-for-profit
concerns, including, among others, the boards of Imaging Diagnostic Systems,
Inc., Renaissance, Inc., Milestone Pictures, Vidikron of America, Inc., and
Great Clips Mid-Atlantic Regional Companies, Inc. Mr. Danovitch also serves as a
director of Imaging Diagnostic Systems, Inc. and Markland Technologies, Inc.
Lawrence Shatsoff, 47, is President of Markland Technologies, Inc., a
technology company involved in the sale and marketing of home theater products,
and serves on the board of directors of Markland. Prior to becoming President of
Markland in June 2001, Mr. Shatsoff served from June 2000 to April 2001 in
various executive capacities and as a director of Corzon, Inc., a
telecommunications company. From 1995 to 2000, Mr. Shatsoff was the Vice
President and Chief Operations Officer of DCI Telecommunications, Inc. From 1991
to 1994 he served as Vice President and Chief Operations Officer of Alpha
Products, a computer circuit board sales and manufacturing company. Mr. Shatsoff
graduated in 1975 from Rider College with a B.S. Degree in Decision Sciences and
Computers.
Michael Sheppard, 51, is the President of Technest Holdings, Inc. Mr.
Sheppard joined Technest in 1997, and heads up the day-to-day strategy of
Technest. Prior to joining Technest, Mr. Sheppard was the Chief Operating
Officer of Freelinq Communications, a provider of real time video-on-demand via
ATM/XDSL technology. Mr. Sheppard has also acted as the Chief Executive Officer
and Chief Operating Officer of several early stage development companies,
overseeing the development of a corporate infrastructure for each company. From
1980 to 1992, Mr. Sheppard served as the President of Lee America, a Westward
Communications Company whose North American holdings included Panavision, Inc.
Mr. Sheppard has an extensive background in the entertainment industry and
received a BA and an MFA in film from New York University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the officers,
directors and persons who own more than ten percent of the Company's stock, to
file reports of ownership and changes of ownership with the Securities Exchange
Commission (SEC). Officers, directors and greater than ten percent owners are
required by SEC regulations to furnish the Company with copies of all Section
16(a) forms they file.
34
Based solely on its review of the copies of such forms received by it, the
Company believes that, to the best of its knowledge, each of its officers,
directors, and greater than ten-percent owners complied with all section 16(a)
filing requirements applicable to them during the year ended December 31, 2001,
except that the Company did not receive duplicate filings pursuant to Rule
16a-3(e) of any Section 16(a) reports that may have been filed by Brittany
Capital Management Limited, David Donovitch, Larry Shatsoff or Michael Sheppard
and therefore is uncertain whether these persons filed the required reports.
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation
The following table sets forth the total compensation paid or accrued by
the Company in 2001 to its Chief Executive Officer and each executive officer of
the Company whose total annual salary and bonus exceeded $100,000 (each, a
"Named Executive Officer"):
SUMMARY COMPENSATION TABLE
Annual Long-Term
Compensation Compensation Awards
Number of
Securities
Other Annual Underlying All Other
Position Year Salary Bonus Compensation Options Compensation
-------- ---- ------ ----- ------------ ------- ------------
(1)
Harvey W. Sax 2001 $37,500 $150,000
Former President, 2000 146,297
Former Chief 1999 147,420 50,000
Executive Officer
and Former Director
Gia Bokuchava, Ph.D 2001 $105,000
Chief Technical 2000 102,022 $66,518
Officer and Director 1999 100,019 75,566
Timothy R. Robinson 2001 $135,000 $25,000
Executive Vice 2000 70,885 30,000 150,000
President, Chief 1999 N/A
Financial Officer
and Director
Nino Doijashvili 2001 $102,000
Director of 2000 98,695 $8,755
Technical Services 1999 85,641 10,544
and Director
---------------------
(1)Pursuant to the employment agreements between the Company and Drs.
Bokuchava and Doijashvili, Dr. Bokuchava and Dr. Doijashvili were eligible
to receive cash bonuses to repay certain promissory notes issued by them to
the Company in connection with their individual purchase of shares of
Common Stock from the Company in August 1996.
Each of the Company's executive officers also is eligible to receive cash
bonuses to be awarded at the discretion of the Compensation Committee of
the Board of Directors.
Mr. Sax received $150,000 as a part of his termination agreement with the
company (see item 13).
35
No options were granted to or exercised by named executive officers in
2001. The following table sets forth the value of options held by the executive
officers at December 31, 2001:
Option Exercises in Last Fiscal Year and Year-End Option Values
Number of Securities
Underlying Unexercised Value of Unexercised
Shares Options at In-The-Money Options at
Acquired Value December 31, 2001 December 31, 2001
Executive Officer on Exercise Realized Unexercisable Exercisable Unexercisable Exercisable
----------------- ----------- -------- ------------- ----------- ------------- -----------
Gia Bokuchava, Ph.D 0 0 0 25,000 $0 $0
Tim Robinson 0 0 112,500 37,500 $0 $0
Nino Doijashvili 0 0 16,667 29,760 $0 $0
Employment Contracts
We have entered into an employment agreement with Timothy R. Robinson, our
Executive Vice President, Chief Financial Officer and Director. This employment
agreement is subject to early termination as provided therein, including
termination by the Company "for cause," as defined in the employment agreement.
The employment agreement provides for an annual base salary of not less than
$135,000 and for annual bonus compensation up to 30% of base salary. The
employment agreement further provides for a severance payment if termination
occurs for any reason other than for cause, with the minimum amount of such
severance payment to be equal to six months' salary. Further, the employment
agreement provides that any relocation or diminution of title, role or
compensation, as defined in the employment agreement, shall also result in the
payment of a severance amount of not less than six months' salary.
We have entered into an employment agreement with Gia Bokuchava, our Chief
Technical Officer. This employment agreement is subject to early termination as
provided therein, including termination by the Company "for cause," as defined
in the employment agreement. The employment agreement provides for an annual
base salary of not less than $105,000. The employment agreement further provides
for a severance payment if termination occurs for any reason other than for
cause, with the minimum amount of such severance payment to be equal to nine
months' salary. Further, the employment agreement provides that any relocation
or diminution of title, role or compensation, as defined in the employment
agreement, shall also result in the payment of a severance amount of not less
than nine months' salary.
Principal employees of the Company, including executive officers, are
required to sign an agreement with the Company (i) restricting the ability of
the employee to compete with the Company during his or her employment and for a
period of eighteen months thereafter, (ii) restricting solicitation of customers
and employees following employment with the Company, and (iii) providing for
ownership and assignment of intellectual property rights to the Company.
Additional Information with Respect to Compensation Committee
Historically, the Board of Directors had four standing committees: a
Compensation Committee, an Audit Committee, a Strategic Planning Committee and
an Executive Committee. The Compensation Committee provided recommendations to
the Board of Directors concerning salaries and incentive compensation for
officers and employees of the Company. The Audit Committee recommended our
independent auditors and reviewed the results and scope of audit and other
accounting-related services provided by such auditors. The Strategic Planning
Committee was authorized to work with our investment bankers to identify and
evaluate strategic alternatives for us. The Executive Committee had day-to-day
executive decision-making authority on behalf of the Company, subject to the
overall review and approval of the Board of Directors.
36
With the resignation of the directors and the recent appointments of Mr.
Robinson, Ms. Doijashvili, Mr. Bokuchava, Mr. Danovitch, Mr. Shatsoff and Mr.
Sheppard to the Board of Directors, these committees have been disbanded and
were not reconstructed upon the filling of vacancies on the Board of Directors.
There were no changes to the Company's executive compensation policies in 2001.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following tables provide information as of March 12, 2001, concerning
beneficial ownership of Common Stock by (1) each person or entity known by the
Company to beneficially own more than 5% of the outstanding Common Stock, (2)
each director for the Company, (3) each Named Executive Officer, and (4) all
directors and executive officers of the Company as a group. The information as
to beneficial ownership has been furnished by the respective stockholders,
directors, and executive officers of the Company and, unless otherwise
indicated, each of the stockholders has indicated that they have sole voting and
investment power with respect to the shares beneficially owned. This table
excludes holders of our convertible securities who have agreed to limit the
number of shares of common stock that any such shareholders hold at any one time
to not more than 4.99% of the outstanding shares of our common stock.
Amount of Nature of
Title of Class Name of Beneficial Owner (2) Beneficial Ownership (3) Percent of Class
-------------- ---------------------------- ------------------------ ----------------
Common Brittany Capital Management 5,640,000 37.6%
Common Harvey W. Sax (4) 823,534 5.5%
Common George Bokuchava, Ph.D. (5) 64,559 (1)
Common Nino Doijashvili (7) 34,704 (1)
Common Timothy Robinson (6) 37,500 (1)
Common All executive Officers and (1)
Directors as a group (Messrs.
Bokuchava, Doijashvili and Robinson) 136,763 (1)
------------------------
(1) Less than 1%.
(2) Except as otherwise noted, the street address of each named beneficial owner
is Building 12, Suite 110, 3495 Piedmont Road, Atlanta, Georgia 30305.
(3) Unless otherwise indicated below, the persons and entities named in the
table have sole voting and sole investment power with respect to all shares of
Common Stock beneficially owned, subject to community property laws where
applicable. Shares of Common Stock subject to options that are currently
exercisable or exercisable within sixty days of following the date of this
Report are deemed to be outstanding and to be beneficially owned by the person
holding such options for the purpose of computing the percentage ownership of
such person but are not treated as outstanding for the purpose of computing the
percentage ownership of any other person.
(4) Excludes 5,000 common shares owned by a family member, to which Mr. Sax
disclaims beneficial ownership.
(5) Includes 25,000 shares of Common Stock issuable upon the exercise of options
outstanding as of March 12, 2001 at a weighted average exercise price of $4.48
per share.
(6) Includes 37,500 shares of Common Stock issuable upon the exercise of options
outstanding as of March 12, 2001 at an exercise price of $0.75. Excludes 112,500
shares of Common Stock issuable upon the exercise of options outstanding held by
Timothy Robinson as of March 12, 2001 at an exercise price of $.75 which are not
currently exercisable and which become exercisable more than 60 days following
the date of this Statement.
37
(7) Includes 29,760 shares of Common Stock issuable upon exercise of options
outstanding as of March 12, 2001 at a weighted average exercise price of $0.59.
Excludes 16,667 shares of Common Stock issuable upon the exercise of options
outstanding as of March 12, 2001 at a weighted average exercise price of $0.59
which are not currently exercisable and which become exercisable more than 60
days following the date of this Statement.
Currently, there are 17.813 shares of our Series B preferred stock, 90.478
shares of our Series C preferred stock, 1.291 shares of our Series D preferred
stock and 106.35 shares of our Series E preferred stock outstanding. All of
these shares of preferred stock are convertible into shares of our common stock
at any time. If all of these shares were converted into shares of common stock,
we would have an insufficient number of shares of common stock authorized by our
Certificate of Incorporation to support such conversions.
Changes in Control
On December 28, 2001, Brittany Capital Management Limited ("Brittany"), an
entity organized under the laws of the Bahamas, purchased a total of 5,640,000
shares of the Company's common stock from MacNab LLC ("MacNab") in a series of
private transactions with MacNab. Brittany paid an aggregate amount of
approximately $20,000 to MacNab for these shares. The shares that MacNab sold to
Brittany had been issued to MacNab in a series of conversions by MacNab of
1.62855 shares of Series C convertible preferred stock into shares of the
Company's common stock. As a result of these transactions, Brittany is now the
beneficial owner of 37.6% of the outstanding shares of our common stock. MacNab
now holds 90.478 shares of Series C convertible preferred stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Management and Others
On March 31, 2001, the Company entered into a separation and release
agreement with Harvey W. Sax pursuant to which Mr. Sax resigned as President,
Chief Executive Officer and Director of the Company. Pursuant to this agreement,
the Company paid Mr. Sax a severance payment of $150,000, representing the
amount to which he would have been entitled had he been terminated, and the
Company and Mr. Sax released one another from various potential claims and
liabilities. Additionally, all warrants and options held by Mr. Sax became fully
vested as of the date of his resignation.
We are negotiating an agreement with Tulix to sell substantially all of the
assets used in our hosting and web site maintenance business to Tulix. Timothy
R. Robinson, Gia Bokuchava and Nino Doijashvili, who are officers and directors
of both HomeCom and Tulix, own all of the outstanding stock of Tulix. As the
transaction is currently proposed, we would sell these assets to Tulix in
exchange for 15% of the outstanding capital stock of Tulix and the assumption of
certain of our liabilities by Tulix. Tulix will be capitalized with a total
investment of $20,000 from Mr. Robinson, Mr. Bokuchava and Ms. Doijashvili. If
the sale is completed, we will pay severance payments of approximately $67,500
and $78,500 to Mr. Robinson and Mr. Bokuchava, respectively.
Indebtedness of Management
On January 31, 2001 HomeCom sold substantially all the assets used in the
operation of its InsureRate division Digital Insurance, Inc. As a part of this
transaction, the Company forgave loans that it had made to Dan Delity
($165,316), Jim Ellsworth ($102,342), and David Frank ($102,342), and Messrs.
Delity, Ellsworth and Frank surrendered their options and the shares of common
stock that collateralized the notes.
38
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) List of Financial Statements
(1) Consolidated Balance Sheets as of December 31, 2000 and December 31,
2001.
(2) Consolidated Statements of Operations for years ended December 31,
1999, December 31, 2000 and December 31, 2001.
(3) Consolidated Statement of Changes in Stockholder's Equity (Deficit)
for years ended December 31, 1999, December 31, 2000 and December 31,
2001.
(4) Consolidated Statements of Cash Flows for the years ended December 31,
1999, December 31, 2000 and December 31, 2001.
(B) Exhibits
Exhibit Description
------- -----------
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.*****
2.2 --Asset Purchase Agreement by and between Netzee, Inc. and HomeCom
Communications, Inc. dated as of March 15, 2001.*****
3.1 --Restated Certificate of Incorporation of the Registrant.*
3.2 --Restated Bylaws of the Registrant.*
3.3 --Certificate of Designation of Series A Convertible Preferred
stock.***
3.4 --Certificate of Designation of Series B Convertible Preferred
Stock.**
3.5 --Certificate of Designation of Series C Convertible Preferred Stock
(previously filed).
3.6 --Certificate of Designation of Series D Convertible Preferred Stock
(previously filed).
4.1 --See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Bylaws of the Registrant defining
rights of the holders of Common Stock of the Registrant.*
4.2 --Specimen Stock Certificate.*
4.3 --Form of Warrant.*
10.1 --HomeCom Communications, Inc. Stock Option Plan and form of Stock
Option Certificate.*
10.2 --HomeCom Communications, Inc. Non-Employee Directors Stock Option
Plan and form of Stock Option Certificate.*
10.3 --Employment Agreement between the Registrant and Harvey W. Sax,
dated January 1, 1996.*
39
10.4 --Form of Employment Agreement entered into between the Registrant
and each of its executive officers except Harvey W. Sax.*
10.5 --Lease Agreement between Property Georgia OBJLW One Corporation and
the Registrant dated January 22, 1996.*
10.6 --Lease and Services Agreement between Alliance Greensboro, L.P. and
the Registrant, dated June 25, 1996.*
10.7 --Business Alliance Program Agreement between Oracle Corporation and
the Registrant, dated May 30, 1996, together with the Sublicense
Addendum, Application Specific Sublicense Addendum, Full Use and
Deployment Sublicense Addendum and License Transfer Policy, each
dated May 30, 1996.*
10.8 --Network Enrollment Agreement between Apple Computer, Inc. and the
Registrant, effective May 1996.*
10.9 --Member Level Agreement between Microsoft Corporation and the
Registrant, effective May 1996.*
10.10 --Master Agreement for internet Services and Products between BBN
Planet Corporation and the Registrant, dated February1, 1996.*
10.11 --Authorized Business Partners Agreement between BBN Planet
Corporation and the Registrant, dated May 14, 1996
10.12 --Stock Purchase Agreement between the Registrant and the
stockholders of HomeCom internet Security Services, Inc., dated
August 31, 1996.*
10.13 --Form of Promissory Notes issued by the Registrant and held by Mark
Germain.*
10.14 --Form of Promissory Notes issued by the Registrant and held by
Esther Blech and the Edward A. Blech Trust.*
10.15 --Marketing Associate Solution Alliance Agreement dated February 6,
1997 between the Registrant and Unisys Corporation.*
10.16 --Marketing Associate Agreement dated February 6, 1997 between the
Registrant and Unisys Corporation.**
10.17 --Letter agreement dated January 16, 1997 between the Registrant,
David A. Blech, Esther Blech and the Edward A. Blech Trust.*
10.18 --HomeCom Communications, Inc. Employee Stock Purchase Plan.*
10.19 --5% Convertible Debenture Purchase Agreement dated effective
September 19, 1997 between the Registrant, euro factors
International, Inc., Beauchamp Finance, FTS Worldwide Corporation
and CPLBO.***
10.20 --Form of 5% Convertible Debenture issued by the Registrant and held
by Euro Factors International, Inc., Beauchamp Finance, FTS
Worldwide Corporation and COLBO.***
40
10.21 --Registration Rights Agreement dated effective September19, 1997
between the Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.22 --Letter agreement dated September 23, 1997 between the Registrant,
Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.23 --Letter agreement dated September 27, 1997 between the Registrant,
Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.24 --Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $4.00 per share issued by the Registrant to First
Granite Securities, Inc.***
10.25 --Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $6.00 per share issued by the Registrant to First
Granite Securities, Inc.***
10.26 --Form of Securities Purchase Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997.***
10.27 --Form of Registration Rights Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997.***
10.28 --Form of Warrant to purchase 18,750 shares of Common Stock issued
by the Registrant to Sovereign Partners, L.P.***
10.29 --Form of Warrant to purchase 56,250 shares of Common Stock issued
by the Registrant to Dominion Capital Fund, LTD.***
10.30 --Common Stock Purchase Agreement dated January 23, 1998 by and
among InsureRate, Inc., the Registrant, Jerome R. Corsi and Hamilton
Dorsey Alston HomeCom.***
10.31 --Escrow Agreement dated as of January 23, 1998 by and among
InsureRate, Inc., Hamilton Dorsey Alston HomeCom, the Registrant,
Jerome R. Corsi and SunTrust Bank, Atlanta.***
10.32 --Shareholders Agreement dated January 23, 1998 by and among
Hamilton Dorsey Alston HomeCom, the Registrant and InsureRate,
Inc.***
10.33 --Web development and Hosting Services Agreement dated January 23,
1998, by and among InsureRate, Inc. and Hamilton Dorsey Alston
HomeCom.***
10.34 --Form of Warrant to purchase 25,000 shares of Common Stock for an
aggregate purchase price of $92,500 by the Registrant to Hamilton
Dorsey Alston HomeCom.***
10.35 --Loan Agreement dated January 23, 1998 by and between InsureRate,
Inc. and the Registrant.***
10.36 --Form of Master Note issued by the Registrant to InsureRate,
Inc.***
10.37 --Form of Warrant to purchase 50,000 shares of Common Stock issued
by the Registrant to The Malachi Group, Inc.+
10.38 --Letter Agreement, dated April 8, 1998 by and among HomeCom,
Eurofactors International Inc., Blauchamp France, FTS Worldwide
Corporation and COLBO.****
41
10.39 --Letter Agreement, dated April 8, 1998 by and between First Granite
Securities, Inc. and HomeCom.****
10.40 --Letter Agreement, dated April 17, 1998 by and among Sovereign
Partners, L.P., Dominion Capital Fund and HomeCom.****
10.41 --Agreement and Plan of Reorganization by and among The Insurance
Resource Center, Inc., Tim Strong, James Higham, Cameron M. Harris &
HomeCom and HomeCom, dated as of April15, 1998.***
10.42 --Employment Agreement by and between HomeCom and Tim Higham, dated
as of April 16, 1998.***
10.44 --Asset Purchase Agreement by and between HomeCom and Sage Networks
Acquisition Corp. dated as of June 10, 1998.+
10.45 --Escrow Agreement by and between HomeCom and Sage Networks
Acquisition Corp. dated as of June 10, 1998.+
10.46 --Transitional Services Agreement by and between HomeCom and Sage
Networks Acquisition Corp. dated as of June 10, 1998.+
10.47 --Co-Location Agreement by and between HomeCom and Sage Networks,
Inc. dated as of June 10, 1998.+
10.48 --Agreement and Plan of Merger by and among HomeCom Communications,
Inc, FIMI Securities Acquisitions Corp., Inc., ATF Acquisition
Corp., Inc. and Daniel A. Delity, James Wm. Ellsworth, and David B.
Frank dated as of November 6, 1998, together with exhibits.++
10.50 --Securities Purchase Agreement dated as of March 25, 1999 by and
among HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View
Funds, L.P., and Liberty View Fund, L.L.C.++
10.51 --Registration Rights Agreement dated as of March 25, 1999 by and
among HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View
Funds, L.P., and Liberty View Fund, L.L.C.++
10.52 --Transfer Agent Instructions dated as of March 25, 1999.++
10.53 --Transfer Agent Legal Opinion dated as of March 25, 1999.++
10.54 --Placement Agency Agreement dated as of March 25, 1999 by and
between HomeCom Communications, Inc. and J.P. Turner & Company,
L.L.C.++
10.55 --Stock Purchase Agreement by and among HomeCom Communications, Inc.
and Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario
D'Agostino, Karen Moore, and John Kokinis, dated as of April 23,
1999.+++
10.56 --Employment Agreement Between Ganymede Corporation and Richard L.
Chu, dated as of April 23, 1999.+++
10.57 --Employment Agreement between Ganymede Corporation and John Winans,
dated as of April 23, 1999.+++
42
10.58 --Employment Agreement between Ganymede Corporation and Joseph G.
Rickard, dated as of April 23, 1999.+++
10.59 --Escrow Agreement by and among HomeCom Communications, Inc. and
Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario D'Agostino,
Karen Moore, and John Kokinis, dated as of April 23, 1999.+++
10.60 --Pledge and Security Agreement by and between HomeCom
Communications, Inc. and Richard L. Chu, Joseph G. Rickard, John R.
Winans, Mario D'Agostino, Karen Moore, and John Kokinis, dated as of
April 23, 1999.+++
10.61 --Warrant Agreement, dated as of March 25, 1999, by and among CPR
(USA), Inc. and HomeCom Communications, Inc.++++
10.62 --Warrant Agreement, dated as of March 25, 1999, by and among
Liberty View Fund, L.L.C. and HomeCom Communications, Inc.++++
10.63 --Warrant Agreement, dated as of March 25, 1999, by and among
Liberty View, Funds, L.P. and HomeCom Communications, Inc.++++
10.64 --Warrant Agreement, dated as of March 25, 1999, by and among J.P.
Turner & Company, L.L.C and HomeCom Communications, Inc.++++
10.65 --Securities Purchase Agreement dated as of July 23, 1999 by and
among HomeCom Communications, Inc. and MacNab LLC (previously
filed).
10.66 --Registration Rights Agreement dated as of July 23, 1999 by and
among HomeCom Communications, Inc. and MacNab LLC (previously
filed).
10.67 --Transfer Agent Instructions dated as of September 28, 1999
(previously filed).
10.68 --Transfer Agent Legal Opinion dated as of July 23, 1999 (previously
filed).
10.69 --Placement Agency Agreement dated as of July 23, 1999 by and
between HomeCom Communications, Inc. and Greenfield Capital Partners
(previously filed).
10.70 --Warrant Agreement, dated as of July 23, 1999, by and between
HomeCom Communications, Inc. and MacNab LLC (previously filed).
10.71 --Securities Purchase Agreement dated as of September 27, 1999 by
and among HomeCom Communications, Inc. and Jackson LLC (previously
filed).
10.72 --Registration Rights Agreement dated as of September 27, 1999 by
and among HomeCom Communications, Inc. and Jackson LLC (previously
filed).
10.73 --Transfer Agent Instructions dated as of September 28,
1999(previously filed).
10.74 --Transfer Agent Legal Opinion dated as of September 28, 1999
(previously filed).
10.75 --Placement Agency Agreement dated as of September 27, 1999 by and
between HomeCom Communications, Inc. and Greenfield Capital Partners
(previously filed).
10.76 --Warrant Agreement, dated as of September 27, 1999, by and between
HomeCom Communications, Inc. and Jackson LLC (previously filed).
43
10.77 --Asset Purchase Agreement, dated October 1, 1999, by and between
HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++
10.78 --Bill of Sale and Assignment, dated October 1, 1999, by and between
HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++
10.79 --Non-solicitation and Non-compete Agreement, Dated October1, 1999,
by and between HomeCom Communications, Inc. and Infrastructure
Defense, Inc.+++++
10.80 --Registration Rights Agreement, October 1, 1999, by and between
HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++
10.81 --Form of Opinion of Purchaser's Counsel.+++++
10.82 --Form of Opinion of Seller's Counsel.+++++
10.83 --Referral and Service Agreement, dated October 1, 1999, by and
between HomeCom Communications, Inc. and Infrastructure Defense,
Inc.+++++
10.84 --Value Added Distributor Agreement, dated October 1, 1999 by and
between HomeCom Communications, Inc. and Infrastructure Defense,
Inc.+++++
10.85 --Resignation Letter of Krishan Puri, dated November 1, 1999.++++++
10.86 --Employment Agreement between the Registrant and Timothy R.
Robinson dated August 1, 2000.
10.87 --Amendment to employment Agreement between Registrant and George
Bokchava dated January 10, 2001.
10.88 --Separation and Release Agreement, dated March 29, 2001, between
HomeCom Communications, Inc. and Harvey Sax******
21.1 --List of Subsidiaries.***
23.1 --Consent of Feldman Sherb, & Co., P.C.
--------------------------------------------------------------------------------
* Incorporated herein by reference to exhibit of the same number in
the Form S-1 Registration Statement of the Registrant (Registration
No. 333-12219).
** Incorporated herein by reference to exhibit of the same number in
the Form 10-K of the Registrant filed with the Commission on March
31, 1998.
*** Incorporated herein by reference to exhibit of the same number in
the Form S-1 Registration Statement of the Registrant (Registration
No. 333-42599).
**** Incorporated herein by reference to exhibit of the same number in
Form 8-K of the Registrant filed with the Commission on April 28,
1998 . + Incorporated herein by reference to exhibit of the same
number in Form 8-K of the Registrant filed with the Commission on
June 25, 1998.
44
++ Incorporated herein by reference to exhibit of the same number in
Form 8-K of the Registrant filed with the Commission on November 18,
1998.
+++ Incorporated herein by reference to exhibit of the same number in
Form 10-Q/A of the Registrant filed with the Commission on November
17, 1999.
+ Incorporated herein by reference to exhibit of the same number in
Form S-1 Registration Statement of the Registrant(Registration No.
333-45383).
++ Incorporated herein by reference to exhibit of the same number in
Form 10-K of the Registrant filed with the Commission on March 31,
1999.
+++ Incorporated herein by reference to exhibit of the same number in
Form 8-K of the Registrant filed with the Commission on May 10,
1999.
++++ Incorporated herein by reference to Registration Statement on Form
S-3 of the Registrant (Registration No. 333-79761)
+++++ Incorporated herein by reference to exhibit of the same number on
Form 8-K of the Registrant filed with the Commission on October 18,
1999.
++++++ Incorporated herein by reference to exhibit of the same number on
Form 8-K of the Registrant filed with the Commission on November 5,
1999.
***** Incorporated herein by reference to exhibit of the same number of
Form 10-Q of the Registrant filed with the Commission on May 21,
2001.
****** Incorporated herein by reference to Exhibit 10.1 of Form 10-Q of the
Registrant filed with the Commission on May 21, 2001.
(B) Reports on Form 8-K
There were no reports submitted on form 8-K during the fourth quarter of
2001.
45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
HOMECOM COMMUNICATIONS, INC.
BY: /s/ TIMOTHY R. ROBINSON
---------------------------
Timothy R. Robinson
Executive Vice President and Chief
Financial Officer (Principal Accounting Officer)
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ TIMOTHY R. ROBINSON Vice President--Chief Financial Officer March 29, 2001
--------------------------
Timothy R. Robinson
/s/ GIA BOKUCHAVA, PH.D. Chief Technical Officer; Director March 29, 2001
--------------------------
Gia Bokuchava, Ph.d.
/s/ NINO DOIJASHVILI, PH.D Director of Technical Services, Director March 29, 2001
--------------------------
Nino Doijashvili, Ph.d.
/s/ DAVID DANOVITCH Director March 29, 2001
--------------------------
David Danovitch
/s/ LARRY SHATSOFF Director March 29, 2001
--------------------------
Larry Shatsoff
/s/ MICHAEL SHEPPARD Director March 29, 2001
-------------------------
Michael Sheppard
46
EXHIBIT INDEX
Exhibit Description
------- -----------
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.*****
2.2 --Asset Purchase Agreement by and between Netzee, Inc. and HomeCom
Communications, Inc. dated as of March 15, 2001.*****
3.1 --Restated Certificate of Incorporation of the Registrant.*
3.2 --Restated Bylaws of the Registrant.*
3.3 --Certificate of Designation of Series A Convertible Preferred
stock.***
3.4 --Certificate of Designation of Series B Convertible Preferred
Stock.**
3.5 --Certificate of Designation of Series C Convertible Preferred Stock
(previously filed).
3.6 --Certificate of Designation of Series D Convertible Preferred Stock
(previously filed).
4.1 --See Exhibits 3.1 and 3.2 for provisions of the Restated
Certificate of Incorporation and Bylaws of the Registrant defining
rights of the holders of Common Stock of the Registrant.*
4.2 --Specimen Stock Certificate.*
4.3 --Form of Warrant.*
10.1 --HomeCom Communications, Inc. Stock Option Plan and form of Stock
Option Certificate.*
10.2 --HomeCom Communications, Inc. Non-Employee Directors Stock Option
Plan and form of Stock Option Certificate.*
10.3 --Employment Agreement between the Registrant and Harvey W. Sax,
dated January 1, 1996.*
10.4 --Form of Employment Agreement entered into between the Registrant
and each of its executive officers except Harvey W. Sax.*
10.5 --Lease Agreement between Property Georgia OBJLW One Corporation and
the Registrant dated January 22, 1996.*
10.6 --Lease and Services Agreement between Alliance Greensboro, L.P. and
the Registrant, dated June 25, 1996.*
10.7 --Business Alliance Program Agreement between Oracle Corporation and
the Registrant, dated May 30, 1996, together with the Sublicense
Addendum, Application Specific Sublicense Addendum, Full Use and
Deployment Sublicense Addendum and License Transfer Policy, each
dated May 30, 1996.*
10.8 --Network Enrollment Agreement between Apple Computer, Inc. and the
Registrant, effective May 1996.*
10.9 --Member Level Agreement between Microsoft Corporation and the
Registrant, effective May 1996.*
10.10 --Master Agreement for internet Services and Products between BBN
Planet Corporation and the Registrant, dated February1, 1996.*
10.11 --Authorized Business Partners Agreement between BBN Planet
Corporation and the Registrant, dated May 14, 1996
10.12 --Stock Purchase Agreement between the Registrant and the
stockholders of HomeCom internet Security Services, Inc., dated
August 31, 1996.*
10.13 --Form of Promissory Notes issued by the Registrant and held by Mark
Germain.*
10.14 --Form of Promissory Notes issued by the Registrant and held by
Esther Blech and the Edward A. Blech Trust.*
10.15 --Marketing Associate Solution Alliance Agreement dated February 6,
1997 between the Registrant and Unisys Corporation.*
10.16 --Marketing Associate Agreement dated February 6, 1997 between the
Registrant and Unisys Corporation.**
10.17 --Letter agreement dated January 16, 1997 between the Registrant,
David A. Blech, Esther Blech and the Edward A. Blech Trust.*
10.18 --HomeCom Communications, Inc. Employee Stock Purchase Plan.*
10.19 --5% Convertible Debenture Purchase Agreement dated effective
September 19, 1997 between the Registrant, euro factors
International, Inc., Beauchamp Finance, FTS Worldwide Corporation
and CPLBO.***
10.20 --Form of 5% Convertible Debenture issued by the Registrant and held
by Euro Factors International, Inc., Beauchamp Finance, FTS
Worldwide Corporation and COLBO.***
10.21 --Registration Rights Agreement dated effective September19, 1997
between the Registrant, Euro Factors International, Inc., Beauchamp
Finance, FTS Worldwide Corporation and COLBO.***
10.22 --Letter agreement dated September 23, 1997 between the Registrant,
Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.23 --Letter agreement dated September 27, 1997 between the Registrant,
Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide
Corporation and COLBO.***
10.24 --Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $4.00 per share issued by the Registrant to First
Granite Securities, Inc.***
10.25 --Form of Warrant to purchase 200,000 shares of Common Stock at an
exercise price of $6.00 per share issued by the Registrant to First
Granite Securities, Inc.***
10.26 --Form of Securities Purchase Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997.***
10.27 --Form of Registration Rights Agreement between the Registrant,
Sovereign Partners, L.P. and Dominion Capital Fund, LTD. dated as of
December 23, 1997.***
10.28 --Form of Warrant to purchase 18,750 shares of Common Stock issued
by the Registrant to Sovereign Partners, L.P.***
10.29 --Form of Warrant to purchase 56,250 shares of Common Stock issued
by the Registrant to Dominion Capital Fund, LTD.***
10.30 --Common Stock Purchase Agreement dated January 23, 1998 by and
among InsureRate, Inc., the Registrant, Jerome R. Corsi and Hamilton
Dorsey Alston HomeCom.***
10.31 --Escrow Agreement dated as of January 23, 1998 by and among
InsureRate, Inc., Hamilton Dorsey Alston HomeCom, the Registrant,
Jerome R. Corsi and SunTrust Bank, Atlanta.***
10.32 --Shareholders Agreement dated January 23, 1998 by and among
Hamilton Dorsey Alston HomeCom, the Registrant and InsureRate,
Inc.***
10.33 --Web development and Hosting Services Agreement dated January 23,
1998, by and among InsureRate, Inc. and Hamilton Dorsey Alston
HomeCom.***
10.34 --Form of Warrant to purchase 25,000 shares of Common Stock for an
aggregate purchase price of $92,500 by the Registrant to Hamilton
Dorsey Alston HomeCom.***
10.35 --Loan Agreement dated January 23, 1998 by and between InsureRate,
Inc. and the Registrant.***
10.36 --Form of Master Note issued by the Registrant to InsureRate,
Inc.***
10.37 --Form of Warrant to purchase 50,000 shares of Common Stock issued
by the Registrant to The Malachi Group, Inc.+
10.38 --Letter Agreement, dated April 8, 1998 by and among HomeCom,
Eurofactors International Inc., Blauchamp France, FTS Worldwide
Corporation and COLBO.****
10.39 --Letter Agreement, dated April 8, 1998 by and between First Granite
Securities, Inc. and HomeCom.****
10.40 --Letter Agreement, dated April 17, 1998 by and among Sovereign
Partners, L.P., Dominion Capital Fund and HomeCom.****
10.41 --Agreement and Plan of Reorganization by and among The Insurance
Resource Center, Inc., Tim Strong, James Higham, Cameron M. Harris &
HomeCom and HomeCom, dated as of April15, 1998.***
10.42 --Employment Agreement by and between HomeCom and Tim Higham, dated
as of April 16, 1998.***
10.44 --Asset Purchase Agreement by and between HomeCom and Sage Networks
Acquisition Corp. dated as of June 10, 1998.+
10.45 --Escrow Agreement by and between HomeCom and Sage Networks
Acquisition Corp. dated as of June 10, 1998.+
10.46 --Transitional Services Agreement by and between HomeCom and Sage
Networks Acquisition Corp. dated as of June 10, 1998.+
10.47 --Co-Location Agreement by and between HomeCom and Sage Networks,
Inc. dated as of June 10, 1998.+
10.48 --Agreement and Plan of Merger by and among HomeCom Communications,
Inc, FIMI Securities Acquisitions Corp., Inc., ATF Acquisition
Corp., Inc. and Daniel A. Delity, James Wm. Ellsworth, and David B.
Frank dated as of November 6, 1998, together with exhibits.++
10.50 --Securities Purchase Agreement dated as of March 25, 1999 by and
among HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View
Funds, L.P., and Liberty View Fund, L.L.C.++
10.51 --Registration Rights Agreement dated as of March 25, 1999 by and
among HomeCom Communications, Inc. and CPR (USA), Inc., Liberty View
Funds, L.P., and Liberty View Fund, L.L.C.++
10.52 --Transfer Agent Instructions dated as of March 25, 1999.++
10.53 --Transfer Agent Legal Opinion dated as of March 25, 1999.++
10.54 --Placement Agency Agreement dated as of March 25, 1999 by and
between HomeCom Communications, Inc. and J.P. Turner & Company,
L.L.C.++
10.55 --Stock Purchase Agreement by and among HomeCom Communications, Inc.
and Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario
D'Agostino, Karen Moore, and John Kokinis, dated as of April 23,
1999.+++
10.56 --Employment Agreement Between Ganymede Corporation and Richard L.
Chu, dated as of April 23, 1999.+++
10.57 --Employment Agreement between Ganymede Corporation and John Winans,
dated as of April 23, 1999.+++
10.58 --Employment Agreement between Ganymede Corporation and Joseph G.
Rickard, dated as of April 23, 1999.+++
10.59 --Escrow Agreement by and among HomeCom Communications, Inc. and
Richard L. Chu, Joseph G. Rickard, John R. Winans, Mario D'Agostino,
Karen Moore, and John Kokinis, dated as of April 23, 1999.+++
10.60 --Pledge and Security Agreement by and between HomeCom
Communications, Inc. and Richard L. Chu, Joseph G. Rickard, John R.
Winans, Mario D'Agostino, Karen Moore, and John Kokinis, dated as of
April 23, 1999.+++
10.61 --Warrant Agreement, dated as of March 25, 1999, by and among CPR
(USA), Inc. and HomeCom Communications, Inc.++++
10.62 --Warrant Agreement, dated as of March 25, 1999, by and among
Liberty View Fund, L.L.C. and HomeCom Communications, Inc.++++
10.63 --Warrant Agreement, dated as of March 25, 1999, by and among
Liberty View, Funds, L.P. and HomeCom Communications, Inc.++++
10.64 --Warrant Agreement, dated as of March 25, 1999, by and among J.P.
Turner & Company, L.L.C and HomeCom Communications, Inc.++++
10.65 --Securities Purchase Agreement dated as of July 23, 1999 by and
among HomeCom Communications, Inc. and MacNab LLC (previously
filed).
10.66 --Registration Rights Agreement dated as of July 23, 1999 by and
among HomeCom Communications, Inc. and MacNab LLC (previously
filed).
10.67 --Transfer Agent Instructions dated as of September 28, 1999
(previously filed).
10.68 --Transfer Agent Legal Opinion dated as of July 23, 1999 (previously
filed).
10.69 --Placement Agency Agreement dated as of July 23, 1999 by and
between HomeCom Communications, Inc. and Greenfield Capital Partners
(previously filed).
10.70 --Warrant Agreement, dated as of July 23, 1999, by and between
HomeCom Communications, Inc. and MacNab LLC (previously filed).
10.71 --Securities Purchase Agreement dated as of September 27, 1999 by
and among HomeCom Communications, Inc. and Jackson LLC (previously
filed).
10.72 --Registration Rights Agreement dated as of September 27, 1999 by
and among HomeCom Communications, Inc. and Jackson LLC (previously
filed).
10.73 --Transfer Agent Instructions dated as of September 28,
1999(previously filed).
10.74 --Transfer Agent Legal Opinion dated as of September 28, 1999
(previously filed).
10.75 --Placement Agency Agreement dated as of September 27, 1999 by and
between HomeCom Communications, Inc. and Greenfield Capital Partners
(previously filed).
10.76 --Warrant Agreement, dated as of September 27, 1999, by and between
HomeCom Communications, Inc. and Jackson LLC (previously filed).
10.77 --Asset Purchase Agreement, dated October 1, 1999, by and between
HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++
10.78 --Bill of Sale and Assignment, dated October 1, 1999, by and between
HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++
10.79 --Non-solicitation and Non-compete Agreement, Dated October1, 1999,
by and between HomeCom Communications, Inc. and Infrastructure
Defense, Inc.+++++
10.80 --Registration Rights Agreement, October 1, 1999, by and between
HomeCom Communications, Inc. and Infrastructure Defense, Inc.+++++
10.81 --Form of Opinion of Purchaser's Counsel.+++++
10.82 --Form of Opinion of Seller's Counsel.+++++
10.83 --Referral and Service Agreement, dated October 1, 1999, by and
between HomeCom Communications, Inc. and Infrastructure Defense,
Inc.+++++
10.84 --Value Added Distributor Agreement, dated October 1, 1999 by and
between HomeCom Communications, Inc. and Infrastructure Defense,
Inc.+++++
10.85 --Resignation Letter of Krishan Puri, dated November 1, 1999.++++++
10.86 --Employment Agreement between the Registrant and Timothy R.
Robinson dated August 1, 2000.
10.87 --Amendment to employment Agreement between Registrant and George
Bokchava dated January 10, 2001.
10.88 --Separation and Release Agreement, dated March 29, 2001, between
HomeCom Communications, Inc. and Harvey Sax******
21.1 --List of Subsidiaries.***
23.1 --Consent of Feldman Sherb, & Co., P.C.
--------------------------------------------------------------------------------
* Incorporated herein by reference to exhibit of the same number in
the Form S-1 Registration Statement of the Registrant (Registration
No. 333-12219).
** Incorporated herein by reference to exhibit of the same number in
the Form 10-K of the Registrant filed with the Commission on March
31, 1998.
*** Incorporated herein by reference to exhibit of the same number in
the Form S-1 Registration Statement of the Registrant (Registration
No. 333-42599).
**** Incorporated herein by reference to exhibit of the same number in
Form 8-K of the Registrant filed with the Commission on April 28,
1998 . + Incorporated herein by reference to exhibit of the same
number in Form 8-K of the Registrant filed with the Commission on
June 25, 1998.
++ Incorporated herein by reference to exhibit of the same number in
Form 8-K of the Registrant filed with the Commission on November 18,
1998.
+++ Incorporated herein by reference to exhibit of the same number in
Form 10-Q/A of the Registrant filed with the Commission on November
17, 1999.
+ Incorporated herein by reference to exhibit of the same number in
Form S-1 Registration Statement of the Registrant(Registration No.
333-45383).
++ Incorporated herein by reference to exhibit of the same number in
Form 10-K of the Registrant filed with the Commission on March 31,
1999.
+++ Incorporated herein by reference to exhibit of the same number in
Form 8-K of the Registrant filed with the Commission on May 10,
1999.
++++ Incorporated herein by reference to Registration Statement on Form
S-3 of the Registrant (Registration No. 333-79761)
+++++ Incorporated herein by reference to exhibit of the same number on
Form 8-K of the Registrant filed with the Commission on October 18,
1999.
++++++ Incorporated herein by reference to exhibit of the same number on
Form 8-K of the Registrant filed with the Commission on November 5,
1999.
***** Incorporated herein by reference to exhibit of the same number of
Form 10-Q of the Registrant filed with the Commission on May 21,
2001.
****** Incorporated herein by reference to Exhibit 10.1 of Form 10-Q of the
Registrant filed with the Commission on May 21, 2001.