ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-K contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities and Exchange Act, including certain statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" concerning HomeCom's expectations, beliefs, or strategies regarding increased future revenues and operations, and certain statements contained under "Business" concerning the development and marketing of customized internet applications and security consulting services and the effect of market conditions and competition. When used in this Form 10-K, the words "believes," "intends," "anticipates" and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Form 10-K are based on information available to HomeCom on the date hereof, and HomeCom assumes no obligation to update any such forward-looking statements. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected or implied by such forward-looking statements. Such risks and uncertainties include the timing and acceptance of new product introductions, the actions of HomeCom's competitors and business partners, and the factors discussed below.
GENERAL
HomeCom Communications, Inc. is a Delaware corporation, organized in 1994 to provide complex web-based software applications and integration services to businesses seeking to take advantage of the Internet. In the fourth quarter of 1997, the Company made a strategic decision to move away from horizontally focused Internet Web design and hosting services to become a vertically focused Web design, financial applications and solutions provider to the financial services market, including banking, insurance, securities brokerage firms and other financially oriented web portals.
HomeCom Communications, Inc. develops and markets specialized software applications, products and services that enable financial institutions and their customers to use the Internet and intranets/ extranets to obtain and communicate important business information, conduct commercial transactions and improve business productivity. HomeCom's principal mission is to enable financial institutions to establish electronic channels to consumers and conduct business by providing secure, innovative, Internet-based applications to the banking, insurance and brokerage industries. As a B2B (business to business) technology provider to this electronic channel, HomeCom intends to continually enrich the content of its proprietary applications; host and maintain its own as well as third party software applications; and to provide strategic design, consulting, and development services to financial institutions on e-commerce and web marketing. HomeCom derives revenue from professional web development services, software licensing, application development, insurance and securities sales commissions, and hosting and transactions fees. HomeCom has grown to approximately 76 full-time employees and occupies approximately 38,900 square feet of office space with offices in Atlanta, Houston, New York City, and the Chicago area.
HomeCom's proprietary web solutions, which are built around industry standards such as Open Financial Exchange ("OFX"), are designed to enable its clients to increase revenues, achieve distinct competitive advantages, reduce costs, and improve customer support. The Company employs full time multimedia artists, Ph.D. computer programmers, licensed financial brokers and agents, and network engineers. HomeCom provides Internet/intranet solutions in three areas: (i) the design, development and integration of customized software applications, including World Wide Web site development and related network outsourcing; (ii) the development, sale and integration of HomeCom's existing software applications into the client's operations; and, (iii) security consulting and integration services. In
October, 1999, we sold our security consulting and integration services operations and entered into a joint marketing program with the acquiror, Infrastructure Defense Inc.
PRODUCTS AND SERVICES
Businesses such as banks, brokerage firms, and insurance companies can use HomeCom's Personal Internet Banker-TM- and InsureRate-TM- software to allow customers and professionals within these organizations to access and manage accounts and to transact insurance sales and quotes. Its Harvey-TM- software collects demographic information from users for personally tailored marketing efforts. Financial Institutions that integrate their legacy systems, the Personal Internet Banker or InsureRate applications with the Harvey application can create multiple, focused marketing campaigns for client cross-selling initiatives. HomeCom also designs and creates Web sites, custom complex web applications for interactive Web sites, intranets/extranets, sells third party Internet security software, and provides server hosting and outsourcing facilities.
In 1999, HomeCom provided its product and service offerings through four distinct but integrated business units. In 2000, HomeCom will provide its products and services through three distinct business units (due to the sale in October, 1999 of the HomeCom Internet Security Services business unit):
1. HomeComFinancial Applications, Solutions and Technology ("FAST") creates Internet and intranet business applications, solutions and technology focused on the banking, insurance and brokerage client markets. Applications include software programs ranging from simple mathematical calculators to extremely sophisticated intranets/extranets communicating with legacy systems and client/server databases. Significant FAST revenue is generated from the installation, integration and customization of Personal Internet Banker, Harvey and InsureRate within a client's website and e-commerce operations. HomeCom also provides turnkey hosting services for these applications.
2. HomeCom's Financial Solutions (Software Product Group) provides cost effective, one-stop web-based financial service applications to the banking, credit union and brokerage industries that allow its clientele to rapidly deploy competitive e-commerce platforms at far less cost than custom application development. HomeCom's turnkey solutions are targeted to the 14,000 banks and credit unions with assets between $500 million and $20 billion:
- Personal Internet Banker-TM- ("PIB") provides interactive Internet banking including bill payment, balance inquiry, funds transfer, and statement download for checking, savings and credit card accounts.
- Harvey-TM- enables banks to both advertise and market targeted consumers based on demographics and web site browsing preferences. As consumers interact with the financial institution's web site, Harvey-TM-mines the data they enter on application forms, adds information about what they looked at or clicked on and then combines that information with data from a variety of legacy systems to dramatically increase the financial institution's cross selling and profit capability.
- Post on the Fly-TM- Conference is an online bulletin board, collaboration and conferencing system, allowing customers to capture their most valuable property--the living, moving body of knowledge within an organization, its business partners and its customers. Specifically designed for the needs of financial services companies, Conference can run unlimited numbers of investor forums, private analyst meetings, financial planning workshops, or customer support groups.
3. HomeCom's InsureRate-TM- provides turnkey online insurance programs to financial institutions, particularly banks, credit unions, brokerage houses and financial web portals. InsureRate's bundled or unbundled modular approach to insurance programs within a financial institution allows InsureRate's clients to choose appropriate insurance programs for their clientele. Broadly,
InsureRate offers financial institutions the opportunity to use the InsureRate term life, property and casualty or annuity modules at the institution's website and/or for its own agency force within the institution or to outsource these functions to InsureRate's fully licensed agencies and call centers. InsureRate derives its revenues from participation in the sales commissions paid by insurance carriers, website and extranet setup fees, and insurance carrier enrollment fees. InsureRate operates within the regulated environment of securities and insurance sales. In order to participate in this regulated industry, on March 24, 1999, HomeCom acquired First Institutional Marketing, Inc. ("FIMI") and its affiliated insurance agencies and NASD broker dealer and integrated their operations with InsureRate. As a result of this combination of technology and industry expertise, InsureRate brings a state-of-the-art internet platform to financial institutions which (i) provides innovative web-based insurance products and marketing programs for the banking and brokerage industries, (ii) introduces financial institutions to the sale of insurance and investment products, and (iii) trains bank personnel to market and sell leading insurance and investment products to their customers. InsureRate maintains a public website at www.insurerate.com.
HomeCom employs a team of highly trained Internet/intranet software developers and multimedia and graphics professionals who design and develop specialized Internet/intranet software applications.
These applications enable companies to obtain and communicate vital business information, such as sales reports, order status systems, employee directories and client account information. The Company works closely with its customers to analyze and design Internet-based software solutions that facilitate the interactive exchange of business information. Through its experience in designing custom Internet solutions for businesses, HomeCom believes that it has developed and continues to develop in-depth knowledge concerning industry-specific Internet applications and requirements. The Company plans to leverage this knowledge to develop additional Internet-enabled applications targeted for the financial services industry.
The Company's staff of 19 full-time software engineers design and develop custom applications and software products. The Company's software engineers have experience with various computer operating systems, including Sun Solaris, SGI's IRIX, Windows NT, Digitars Unix on the Alpha platform, Intel's Pentium Pro on BSDI Unix, Hewlett Packard's HP 9000 and Apple's Macintosh operating system. The software engineers write software programs using various tools and languages, including Perl, JAVA, CGI Programming, C and C ++. The software engineers also have database expertise in Oracle, Informix, Sybase and SQL, and many software development tools. The Company's multimedia artists and engineers utilize many of the generally available software programs and tools such as Adobe Photoshop, MacroMedia Shockwave, RealAudio and VDOLive.
ACQUISITIONS AND DIVESTITURES
On April 16, 1998, the Company acquired all of the outstanding capital stock of The Insurance Resource Center, Inc. ("IRC") for 351,391 shares of the Company's common stock. IRC provides Internet development and hosting services to the insurance industry and was incorporated into the Company's FAST group. The Company wrote off the remaining goodwill for IRC during 1999.
On June 9, 1998, the Company sold substantially all of the assets of its HostAmerica Internet network outsourcing services division to Sage Acquisition Corp. ("Sage") for cash of $4,250,000 and Sage's assumption of approximately $250,000 of unearned revenue. The Company recorded a gain on the sale of approximately $4,402,000. This transaction allowed the Company to further consolidate its business focus on the financial services market.
On November 6, 1998 the Company signed a definitive agreement and plan of merger (the "Merger Agreement") to acquire, among other things, all of the outstanding shares of First Institutional Marketing, Inc. and certain of its affiliates ("FIMI") for 1,252,174 shares of common
stock. In addition, the Company entered into employment agreements for an initial term of 3 years with the three principals of FIMI, calling for them to continue in their current roles for the acquired companies. On March 24, 1999, the Company completed this acquisition.
On April 23, 1999, HomeCom acquired all the outstanding shares of Ganymede Corporation for total consideration of 185,342 shares of common stock and $100,000 cash. Ganymede is a Chicago-based web site developer for financial institutions. In addition, the Company entered into employment agreements with the three principals of Ganymede, calling for them to continue in their current roles for the acquired company.
On October 1, 1999 we sold our security consulting and integration service operations for a $200,000 cash, certain security audit rights and shares of a non-public entity valued at approximately $823,000, and entered into a joint marketing program with the acquiror.
The Company will seek to make additional strategic and tactical acquisitions of companies that have developed specific industry expertise or have existing relationships with large businesses needing Internet/ intranet solutions. However, the Company has not entered into any additional binding agreements or commitments. Moreover, the Company has extremely limited sources of cash. Consequently, the Company has limited resources available to complete an acquisition and no assurance can be given that the Company will be able to successfully complete any additional acquisitions.
SALES AND MARKETING
The Company's products and services have been developed to serve the needs of the financial services market, including banking, insurance, and securities brokerage. The Company markets its products and services through its direct sales force, print advertising and its own Web site. The Company also generates customer leads through its business partner relationships with leading technology companies. The Company also utilizes traditional print and media marketing strategies to enhance Company and product name recognition.
COMPETITION
The market for specialized Internet applications is highly competitive, and the Company expects that this competition will intensify in the future. In providing specialized software application design and development, the Company competes with numerous businesses that also provide software design and development services, companies that have developed and market application specific Internet software products, companies that provide software tools that enable customers to develop specific Internet-enabled software applications and companies that choose to develop Internet application products internally. Andersen Consulting L.L.P., Electronic Data Systems Corporation ("EDS"), International Business Machines Corporation ("IBM"), Proxicom, iXL and Cap Gemini America are significant custom software developers, integrators and resellers whose services include a broad range of Internet and Intranet software applications design and development services. Companies such as Broadvision, Inc., Edify Corporation, Funds Express, Inc., Q UP Systems, Inc., Digital Insights and S1 Network Bank have developed application specific Internet software products that are broadly marketed and licensed and perform such functions as interactive one-to-one marketing, human resources benefits inquiry, enrollment and training and Internet banking. Companies such as InsWeb, Quotesmith and Answer Financial, Inc. compete with InsureRate in the sale of insurance and the implementation of insurance programs in financial institutions. In addition, companies that offer and sell client/server based Internet-enabled software products, such as Netscape and Microsoft, may in the future bundle software capabilities and applications with existing products in a manner which may limit the need for software capabilities and application services such as those offered by the Company. The Company also competes with the information technology departments of significant business enterprises
who may choose to design and develop their Internet applications internally. The emergence of sophisticated software products and tools that enable companies to build customized Internet-enabled software applications internally also may have the effect of encouraging internal development and, thus, may materially reduce the demand for the Company's custom software application services.
The Company believes that the rapid expansion of the market for Internet software applications will foster the growth of many significant competitors performing comparable services and offering comparable products to those offered by the Company. The Company competes on the basis of creative talent, price, reliability of services, and responsiveness. Many of the Company's current and prospective competitors have substantially greater financial, technical, marketing and other resources than the Company. The Company believes that it presently competes favorably with respect to each of its various service offerings. There can be no assurance that the Company's present and proposed products will be able to compete successfully with current or future competitors or that competitive pressures faced by the Company will not have a material adverse effect on the Company's business, financial condition and operating results.
INTELLECTUAL PROPERTY RIGHTS
In accordance with industry practice, the Company relies primarily on a combination of copyright, patent and trademark laws, trade secrets, confidentiality procedures and contractual provisions to protect its proprietary rights. The Company seeks to protect its software, documentation and other written materials principally under trade secret and copyright laws, which afford only limited protection. The Company has a registered service mark for its logo, and has applied for federal registration of the names "HomeCom-TM-," "Post On The Fly-TM-," "InsureRate-TM-," and "Personal Internet Banker-TM-." Despite the Company's efforts to protect its proprietary rights, unauthorized parties may attempt to copy aspects of the Company's products or to obtain and use information that the Company regards as proprietary. There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop competing products and services. In distributing its software products, the Company intends to rely on "shrink wrap" licenses that are not signed by licensees and, therefore, may be unenforceable under the laws of certain jurisdictions. In addition, the laws of some foreign countries do not protect the Company's proprietary rights to as great an extent as the laws of the United States. The Company does not believe that any of its proposed products infringe the proprietary rights of third parties. There can be no assurance, however, that third parties will not claim infringement by the Company with respect to its products. The Company expects that software product developers will increasingly be subject to infringement claims as the number of products and competitors in electronic commerce grows and the functionality of products in different industry segments overlaps. Any such claims, with or without merit, could be time-consuming, result in costly litigation, cause product shipment delays or require the Company to enter into royalty or licensing agreements. Such royalty or licensing agreements, if required, may not be available on terms acceptable to the Company. In addition, Web site developers such as the Company face potential liability for the actions of customers and others using their services, including liability for infringement of intellectual property rights, rights of publicity, defamation, libel fraud, misrepresentation, unauthorized computer access, theft, tort liability and criminal activity under the laws of the United States, various states and foreign jurisdictions. The Company routinely enters into non-disclosure and confidentiality agreements with employees, vendors, contractors, consultants and customers.
There can be no assurance that the Company's means of protecting its proprietary rights will be adequate or that the Company's competitors will not independently develop similar technology. The Company believes that, due to the rapid pace of Internet innovation and related software industries, factors such as the technological and creative skills of its personnel are more important in establishing
and maintaining a leadership position within the industry than are the various legal protections of its technology.
CUSTOMERS
During 1997 and 1998, no customer accounted for more than 10% of the Company's total net sales. During 1999 two customers each accounted for more than 10% of the Company's total revenue. During 1999 HomeCom initiated a plan to win larger, more complex web development projects. As a result, HomeCom has won several contracts whose revenue will be recognized over several quarters. This focus on fewer, but larger clients has also resulted in a concentration of credit risk. The Company's sales to its five largest customers represented approximately 15%, 27% and 51% of the total revenues for 1997, 1998 and 1999, respectively.
EMPLOYEES
At March 15, 2000, the Company employed 76 full-time employees, of whom 28 were technical personnel engaged in maintaining or developing the Company's products or performing related services, 7 were marketing and sales personnel, 29 were involved in the sale and production of insurance products, and 12 were involved in administration and finance.
INSURANCE
The Company maintains liability and other insurance that it believes to be customary and generally consistent with industry practice. The Company believes that such insurance is adequate to cover potential claims relating to its existing business activities.
GOVERNMENT REGULATION
Except with regard to insurance and securities sales, as discussed below, the Company does not believe that it is currently subject to direct regulation by any government agency, other than regulations applicable to businesses generally, and believes that there are currently few laws or regulations directly applicable to Web site service companies. The Federal Communications Commission is studying the possible regulation of the Internet. Any such regulations adopted by the Federal Communications Commission may adversely impact the manner in which the Company conducts its business. It is possible that a number of additional laws and regulations may be adopted with respect to the Internet, covering issues such as user privacy, pricing, characteristics, and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the demand for the Company's products and services and increase the Company's cost of doing business or cause the Company to modify its operations, or otherwise have an adverse effect on the Company's business, financial condition and operating results. Moreover, the applicability to the Internet of existing laws governing issues such as property ownership, libel, and personal privacy is uncertain. The Company cannot predict the impact, if any, that future regulation or regulatory changes may have on its business. In addition, Web site developers such as the Company face potential liability for the actions of customers and others using their services, including liability for infringement of intellectual property rights, rights of publicity, defamation, libel, fraud, misrepresentation, unauthorized computer access, theft, tort liability and criminal activity under the laws of the U.S., various states and foreign jurisdictions. Any imposition of liability could have a material adverse effect on the Company.
In addition, the Company's network services are transmitted to its customers over dedicated and public telephone lines. These transmissions are governed by regulatory policies establishing charges and terms for communications. Changes in the regulatory environment relating to the telecommunications and media industry could have an effect on the Company's business, including regulatory changes which
directly or indirectly affect use or access of the Internet or increase the likelihood or scope of competition from regional telephone companies, could have a material adverse effect on the Company.
HomeCom owns and operates a NASD regulated broker/dealer and is affiliated with various insurance agencies. These subsidiaries and affiliates are subject to federal and state regulation of their operations, including but not limited to, the Securities Act of 1933, the Securities and Exchange Act of 1934 and various comparable state securities and insurance laws and regulations. Securities and insurance sales over the internet are new environments for these industries and the regulatory bodies governing such activities are currently promulgating new rules and regulations that may significantly affect HomeCom's securities and insurance businesses.
ITEM 2.
ITEM 2. PROPERTIES
The Company occupies approximately 17,000 square feet in two office buildings in Atlanta, Georgia under leases expiring in March 2001 and October 2002. These facilities serve as the Company's headquarters and computer center. The Company also has an office in New York City occupying approximately 3,400 square feet under a lease expiring in January 2003 and an office in Chicago, IL occupying approximately 1,000 square feet under a lease expiring in 2004. The Company houses its InsureRate operations in Houston, TX occupying approximately 17,500 sq. ft. under a lease expiring in 2004.
The Company's computer center is maintained in its key-card access-secured, dual Leibert air-conditioned Network Operations Center ("NOC") in Class A office space near the Company's principal offices. Company personnel monitor server and network functions on a 24 hour per day, 7 days per week basis. Back-up servers replace production servers in the event of failure or down time. Tape back-ups are performed on a daily basis and transported to secure off-site storage. Each server is Simple Network Management Protocol ("SNMP") managed and utilizes devices located on a separate network to notify network personnel by pager in the event of problems that are not otherwise detected by HomeCom's own SNMP.
All power supplied to the NOC computer room is supplied by two separate power substations through American Power Conversion Matrix UPS lines, with back-up battery power. Telecommunications are provided to the computer room through multiple leased T1 and T3 lines directly connected to the T3 Internet provided by interexchange carriers. Each T1 and T3 line is provisioned on separate local carrier fiber optics using the latest Synchronous Optical Network ("SONET") and Fiber Distributed Data Interface ("FDDI") technology. Telecommunications lines are provided through two physically diverse entrance facilities. The Company has acquired and installed multiple Cisco routers for connection to the Internet, which automatically redistribute traffic load in the event of telecommunications failure.
The Company believes that the properties which it currently has under lease are adequate to serve the Company's business operations for the foreseeable future. The Company believes that if it were unable to renew the lease on either of these facilities, it could find other suitable facilities with no material adverse effect on the Company's business.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to any material legal proceedings. From time to time, the Company is involved in various routine legal proceedings incidental to the conduct of its business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq SmallCap-TM- Market under the symbol "HCOM." The following table shows for the periods indicated the high and low sale prices for the Common Stock as reported by the Nasdaq SmallCap-TM- Market.
The Company has not paid any cash dividends on its capital stock to date. The Company currently anticipates that it will retain all future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends in the foreseeable future.
ITEM 6.
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.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Except for historical information contained herein, some matters discussed in this report constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company notes that a variety of risk factors could cause the Company's actual results and experience to differ
materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. Reference is made in particular to the discussion set forth in the Company's Registration Statements on Forms S-1 (File Nos. 333-12219, 333-42599, 333-45383, 333-86837, 333-88491, and 333-56795) and S-3 (333-73123 and 333-81581).
GENERAL
HomeCom Communications, Inc. develops and markets specialized software applications, products and services that enable financial institutions and their customers to use the Internet and intranets/ extranets to obtain and communicate important business information, conduct commercial transactions and improve business productivity. HomeCom provides Internet/intranet solutions in three areas: (i) the design, development and integration of customized software applications, including World Wide Web site development and related network outsourcing; (ii) the development, sale and integration of HomeCom's existing software applications into the client's operations; and, (iii) security consulting and integration services. In October, 1999, we sold our security consulting and integration services operations and entered into a joint marketing program with the acquiror. HomeCom derives revenue from professional web development services, software licensing, application development, insurance and securities sales commissions, hosting fees and transactions fees.
On November 6, 1998, HomeCom signed a definitive agreement and plan of merger to acquire, among other things, all of the outstanding shares of the First Institutional Marketing companies, a group of insurance agencies and a NASD broker/dealer (the "FIMI Companies"), for 1,252,174 shares of common stock. On March 24, 1999, HomeCom completed this acquisition. Pursuant to the Merger and Plan of Reorganization the FIMI Companies continue as separate subsidiaries of HomeCom. On April 23, 1999, HomeCom acquired all the outstanding shares of Ganymede Corporation for total consideration of 185,342 shares of common stock and $100,000 cash. Ganymede was a Chicago-based web site developer for financial institutions. Pursuant to the Merger and Plan of Reorganization of Ganymede, Ganymede was merged into HomeCom and has ceased to exist as a separate corporation. Its revenues have been included in the FAST group.
In August 1996, HomeCom acquired all of the outstanding capital stock of HomeCom Internet Security Services, Inc. (HISS), a Delaware corporation formed in July 1996 to provide internet and Intranet security system consulting services. In October, 1999 we sold HISS for $200,000, certain security audit and reseller rights and shares of a non-public entity valued at approximately $823,000, and entered into a joint marketing program with the acquiror. The Board of Directors of the Company determined to dispose of the HISS unit on September 1, 1999. Accordingly, results of operations from the discontinued HISS unit have been shown as a discontinued operation in the Statement of Operations for the year ended December 31, 1999. This discontinued operations presentation results in certain revenue and expense reclassifications for the periods presented.
The Company's revenues and operating results have varied substantially from period to period, and should not be relied upon as an indication of future results. The Company historically has operated with no significant backlog because its services are provided as requested by customers. As a result, revenues in any period are substantially affected by the amount of services requested by its customers. An unanticipated termination of a major project, a client's decision not to pursue a new project or proceed to succeeding stages of a current project, or the completion during a quarter of several major client projects, could require the Company to pay underutilized employees and could therefore have a material adverse effect on the Company's results of operations, financial condition, and cash flows.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Revenues increased 161.1% from $2,510,689 in 1998 to $6,556,173 in 1999. This increase of $4,045,484 is primarily attributable to the contribution of FIMI ($2,438,168 in 1999) and an increase in high-end website development revenue of $1,562,408.
COST OF REVENUES. Cost of revenues includes commissions for financial institutions and agents, salaries for programmers, technical staff, sales staff and customer support, as well as a pro-rata allocation of telecommunications, facilities and data center costs. Cost of revenues increased from $2,231,757, or 88.9% of revenues in 1998 to $4,555,337, or 69.5% of revenues in 1999. This increase reflects increased costs associated with its insurance operations. The decrease in cost of revenues as a percentage of revenues is due to increased margins in its FAST Group and the margin economies brought by the acquisition of the FIMI Companies.
GROSS PROFIT. Gross profit increased by $1,721,904 from $278,932 in 1998 to $2,000,836 in 1999. Gross profit margins also increased from 11.1% during 1998 to 30.5% during 1999. This increase as a percentage of net sales is due to an increase in billing rates associated with the higher margin web development projects and the acquisition of the FIMI Companies.
SALES AND MARKETING. Sales and marketing expenses include salaries, variable commissions, and bonuses for the sales force, advertising and promotional marketing materials, and a pro-rata allocation of telecommunications, facilities and data center costs. Sales and marketing expenses increased $2,731,884 from $1,221,908 in 1998 to $3,953,792 in 1999. This increase was primarily attributable to the addition of the FIMI Companies and higher advertising and promotional marketing costs. As a percentage of net sales, these expenses increased from 48.7% in 1998 to 60.3% in 1999 as a result of the ramp up of PIB and InsurRate sales efforts and the significant implementation time required to generate revenues from these initiatives.
PRODUCT DEVELOPMENT. Product development costs consist of personnel costs required to conduct the Company's product development efforts, and a pro-rata allocation of telecommunications, facilities and data center costs. Management believes that continuing investment in product development is required to compete effectively in the Company's industry. Total expenditures for product development were $1,020,264, or 15.6% of net sales in 1999. This compares to total product development expenditures of $677,590, or 27.0% of net sales in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include salaries for administrative personnel, insurance and other administrative expenses, as well as a pro-rata allocation of telecommunications, and facilities and data center costs. General and administrative expenses increased from $3,098,095 in 1998 to $5,082,979 in 1999. This increase is due to the acquisition of the FIMI companies and the increased administrative burden associated with financings, mergers, acquisitions and divestitures. As a percentage of net sales, these expenses decreased from 123.4% in 1998 to 77.5% in 1999. The percentage decline is a result of operating efficiencies.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes depreciation and amortization of computers, network equipment, office equipment, equipment under capital leases, and intangible assets. Depreciation and amortization increased from $542,269, or 21.6% of net sales in 1998 to $1,837,647, or 28.0% in 1999, reflecting the amortization of intangible assets associated with the IRC, FIMI and Ganymede acquisitions.
OTHER INCOME. In 1999 and 1998 the Company recorded other income of $103,551 and $166,942, respectively; due primarily to lower balances in interest bearing cash accounts.
INTEREST EXPENSE. Interest expense decreased from $445,216 in 1998 to $32,669 during 1999, due to the absence of the amortization of the discount on a convertible debenture converted to common stock during 1998.
DISCONTINUED OPERATIONS. The Company recorded a gain of $1,144,591 on the sale of its HomeCom, Internet Security Services ("HISS") division in 1999. In addition, HISS recorded losses of approximately $498,000 and $67,000 in 1999 and 1998, respectively. During 1998, the Company recorded a gain on the sale of its HostAmerica division of $4,402,076 (see Note 12).
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales increased 0.3% from $2,503,185 in 1997 to $2,510,689 in 1998. Revenues from service sales decreased 0.8% from $2,484,459 in 1997 to $2,463,490 in 1998. Revenues from equipment sales increased from $18,726 in 1997 to $47,199 during 1998.
COST OF SALES. Cost of sales includes salaries for programmers, technical staff and customer support, as well as a pro-rata allocation of telecommunications, facilities and data center costs. Cost of sales for services increased from $2,129,968, or 85.1% of revenues in 1997 to $2,208,820, or 88.0% of revenues in 1998. This increase reflects increased costs for technical personnel hired in advance of anticipated revenue growth, offset by costs eliminated due to the sale of HostAmerica in June 1998. The increase in cost of sales as a percentage of revenue is due to the mix of products and services sold.
GROSS PROFIT. Gross profit decreased by $84,271 from $363,203 in 1997 to $278,932 in 1998. Gross profit margins also decreased from 14.5% during 1997 to 11.1% during 1998. This decrease as a percentage of net sales is due to the mix of products and services sold.
SALES AND MARKETING. Sales and marketing expenses include salaries, variable commissions, and bonuses for the sales force, advertising and promotional marketing materials, and a pro-rata allocation of telecommunications, facilities and data center costs. Sales and marketing expenses decreased 15.1% from $1,440,002 in 1997 to $1,221,908 in 1998. This decrease was primarily attributable to a decrease in advertising and promotional marketing materials. As a percentage of net sales, these expenses decreased from 57.5% in 1997 to 48.7% in 1998.
PRODUCT DEVELOPMENT. Product development costs consist of personnel costs required to conduct HomeCom's product development efforts, and a pro-rata allocation of telecommunications, facilities and data center costs. Management believes that continuing investment in product development is required to compete effectively in HomeCom's industry. Total expenditures for product development were $677,590, or 27.0% of net sales in 1998, of which none were capitalized. This compares to total product development expenditures of $683,488, or 27.3% of net sales in 1997, of which $168,833 were capitalized.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include salaries for administrative personnel, insurance and other administrative expenses, as well as a pro-rata allocation of telecommuncations, and facilities and data center costs. General and administrative expenses increased from $2,538,229 in 1997 to $3,098,095 in 1998. As a percentage of net sales, these expenses increased from 101.4% in 1997 to 123.4% in 1998. These increases reflect additional expenditures for operational and administrative support personnel incurred to support anticipated growth, professional services for public and investor relations, and accounting and legal support for HomeCom's securities filings and divestiture activities.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization includes depreciation and amortization of computers, network equipment, office equipment, equipment under capital leases, and goodwill increased from $238,537, or 9.5% of net sales in 1997 to $542,269, or 21.6% in 1998, reflecting
increased expenditures on capital equipment and the amortization of goodwill associated with The Insurance resource Center acquisition.
OTHER INCOME. During 1998, HomeCom recorded a gain on the sale of its HostAmerica division of $4,402,076 (see Note 11 to the Financial Statements).
INTEREST EXPENSE. Interest expense decreased from $543,420 in 1997 to $445,216 during 1998, due to lower amortization of the discount associated with the convertible debentures issued in September 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS
On June 15, 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS 133). FAS 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000 (January 1, 2001 for the Company). FAS 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designated as part of a hedge transaction and, if it is, the type of hedge transaction. Management of the Company anticipates that, due to its limited use of derivative instruments, the adoption of FAS 133 will not have a significant effect on the Company's results of operations or its financial position.
In December 1999 the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, Revenue Recognition in financial statements ("SAB 101"). This bulletin summarizes certain of the staff's views in apply generally accepted accounting principles to revenue recognition in financial statements. Management of the Company does not believe that SAB 101 will have a significant effect on the Company's results of operations.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
The Company has substantially limited sources of capital. As of December 31, 1999, the Company had net working capital of approximately $1,033,802. Management has undertaken steps to address the Company's ongoing cash requirements including concentrating the Company's market focus, identifying additional operational and administrative efficiencies, and actively managing working capital. The Company intends to continue to raise additional capital through additional debt and equity offerings.
Because the Company expects to continue to incur substantial operating losses, the Company will continue to use substantial sums of cash in its operations for an indefinite period. Accordingly, the Company will be required to obtain additional capital. No assurance can be given that the Company will be successful in its efforts to obtain additional capital, or that capital will be available on terms acceptable to the Company or on terms that will not significantly dilute the interests of existing stockholders.
On September 7, 1999, we announced a restructuring of our business consistent with our core internet banking, insurance offerings, and professional services operations. This restructuring resulted in a reduction of expenses in 1999 of approximately $750,000 and a reduction in our personnel by about 60 employees.
If the Company were to exhaust its current sources of capital and is not able to obtain additional capital, the Company would be required to undertake additional steps to continue its operations. Such steps might include further reduction of the Company's operating costs and other expenditures, including reductions of personnel and suspension of salary increases and capital expenditures. If such measures were not sufficient, the Company may elect to implement other cost reduction actions as the Company may determine are necessary and in the Company's best interests, including the possible sale of certain of the Company's business lines. Any such actions undertaken might limit the Company's opportunities to realize continued increases in sales and the Company might not be able to reduce its costs in amounts sufficient to achieve break-even or profitable operations. If the Company were to exhaust its sources of capital, and subsequent cost reduction measures are not sufficient to allow the Company to achieve positive cash flows, the Company would be forced to seek protection from its creditors. The aforementioned factors raise substantial doubt about the Company's ability to continue as a going concern. The financial statements included herein have been prepared assuming the Company is a going concern and do not include any adjustments that might result should the Company be unable to continue as a going concern.
Net cash used in operating activities was $7.7 million for the year ended December 31, 1999. The Company has primarily financed its operations to date through public and private sales of debt and equity securities and loans from its principal stockholders and affiliates. During May 1997, the Company completed an initial public offering of its common stock, issuing 1,000,000 shares at a price of $6.00 per share. The net proceeds to the Company from the initial public offering were approximately $4.7 million. The Company has repaid all outstanding principal amounts loaned to the Company by stockholders and affiliates. During September 1997, the Company completed the issuance of an aggregate $1.7 million principal amount of the Company's 5% convertible debentures due September 22, 2000. Net proceeds from the sale of the debentures was approximately $1.5 million. In December 1997, the Company issued 20,000 shares of Series A preferred stock for aggregate net proceeds of approximately $1.8 million. During 1998, the Company's 5% convertible debentures and its Series A preferred stock were converted into 961,460 and 711,456 shares of common stock, respectively. In June 1998, the Company sold its HostAmerica division to Sage Acquisition Corp., for net proceeds of approximately $4,500,000. In March 1999, the Company issued 125 shares of its Series B preferred stock for aggregate net proceeds of approximately $2.3 million. On July 28, 1999, the Company sold 175 shares of its Series C Preferred Stock for net proceeds of approximately $3.3 million. On
September 28, 1999, HomeCom sold 75 shares of its series D preferred stock for net proceeds of approximately $1.4 million.
The Company spent $507,117 and $362,689 during 1999 and 1998, respectively, for the purchase of capital equipment. These amounts were expended primarily for computer equipment, communications equipment and software necessary for the Company to increase its presence in the Internet and Intranet applications marketplace. The Company's commitments as of December 31, 1999 consist primarily of leases on its Atlanta, Georgia; Houston, Texas; Chicago, Illinois; and New York City facilities and equipment leases.
Accounts receivable, net of allowance for doubtful accounts, totaled $1,160,114 as of December 31, 1999. Trade receivables are monitored by the Company through ongoing credit evaluations of its customers' financial conditions. The allowance for doubtful accounts is considered by management to be an adequate reserve for known and estimated bad debts of the Company. A revision in this reserve due to actual results differing from this estimate could have a material impact on the results of operations, financial position and liquidity of the Company.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of HomeCom Communications, Inc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of changes in stockholders' equity (deficit) and of cash flows present fairly, in all material respects, the financial position of HomeCom Communications, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has experienced recurring losses and negative cash flows since its inception and has an accumulated deficit. The Company is dependent on continued financing from investors to sustain its activities and there is no assurance that such financing will be available. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Atlanta, Georgia March 29, 2000
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
The accompanying notes are an integral part of these consolidated financial statements.
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOMECOM COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
During 1999, the Company issued 1,252,174 shares of common stock for the net assets of First Institutional Marketing, Inc. and certain of its affiliates.
During 1999, the Company issued 185,342 shares of common stock for the net assets of Ganymede Corporation.
During 1999, 47 shares of preferred stock were converted into 344,777 shares of common stock.
During 1998, the Company issued 351,391 shares of common stock for the net assets of The Insurance Resource Center, Inc.
During 1998, 1,700,000 of convertible debentures were converted into 961,460 shares of common stock.
The accompanying notes are an integral part of these consolidated financial statements.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
HomeCom Communications, Inc. (the "Company") develops and markets specialized software applications, products and services that enable financial institutions and their customers to use the Internet and intranets/extranets to obtain and communicate important business information, conduct commercial transactions and improve business productivity. HomeCom derives revenue from professional web development services, software licensing, application development, insurance and securities sales commissions, hosting fees and transactions fees. HomeCom Financial Applications, Solutions and Technology ("FAST") creates Internet and intranet business applications, solutions and technology focused on the banking, insurance and brokerage client markets. HomeCom's Software Products Group provides cost effective, one-stop web-based financial service applications to the banking, credit union and brokerage industries that allow its clientele to deploy competitive e-commerce platforms at far less cost than custom application development. HomeCom's InsureRate-TM- provides turnkey online insurance programs to financial institutions, particularly banks, credit unions, brokerage houses and financial web portals.
BASIS OF PRESENTATION--GOING CONCERN
The Company's financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplate the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred significant losses since its incorporation, resulting in an accumulated deficit at December 31, 1999 of approximately $15.9 million. The Company continues to experience negative cash flows from operations and is dependent on continued financing from investors to sustain its activities. There is no assurance that such financing will be available. These factors raise substantial doubt about the Company's ability to continue as a going concern. During 1999, the Company completed a workforce reduction and the sale of its security division in order to reduce its expenses. The Company's continued existence as a going concern is dependant upon adequate future debt or equity funding and successful commercialization of its products and services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, subsequent to acquisition, after the elimination of all significant intercompany accounts and transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, management considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RESTRICTED CASH
Under the terms of the sale of the Company's HostAmerica division in June, 1998, $250,000 of the proceeds of the sale were to be held in escrow until May 1, 1999 for the purpose of indemnifying the Purchaser for representations and warranties made by the Company under the Asset Purchase Agreement. During the year ended December 31, 1999 these restricted funds were released from escrow to the Company.
ACCOUNTS RECEIVABLE, NET
Accounts receivable are shown net of the allowance for doubtful accounts. The allowance was approximately $95,000 and $215,000 at December 31, 1998 and 1999, respectively. Write-offs were approximately $233,000 and $108,000 for the year ended December 31, 1998 and 1999, respectively.
Concentration of credit risk with respect to trade accounts receivable is generally diversified due to the large number of entities comprising and the quality of its customer base. The Company provides an allowance for accounts which are estimated to be uncollectible. The Company's sales to its five largest customers represented approximately 15%, 27% and 51% of total revenues for the years ended December 31, 1997, 1998 and 1999, respectively. During 1999, two customers each accounted for more than 10% of the revenues of the Company. No customer accounted for more than 10% of the revenues of the Company in 1998 or 1997.
FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment are recorded at cost less accumulated depreciation, which is computed using the straight-line method over the estimated useful lives of the related assets. Furniture and fixtures are depreciated over a 5 year life; computer equipment is depreciated over a 3 year life. Assets recorded under capital leases are amortized over the shorter of their useful lives or the term of the related leases using the straight-line method. Maintenance and repairs are charged to expense as incurred. Upon sale, retirement or other disposition of these assets, the cost and the related accumulated depreciation are removed from the respective accounts and any gain or loss on the disposition is included in income.
SOFTWARE DEVELOPMENT COSTS, NET
The Company capitalizes internal software development costs in accordance with Statement of Financial Accounting Standards No. 86, "Accounting For Costs of Computer Software To Be Sold, Leased, or Otherwise Marketed". The capitalization of these costs begins when a product's technological feasibility has been established and ends when the product is available for general release to customers. Amortization is computed on an individual product basis and is the greater of (a) the ratio of current gross revenues for a product to the total current and anticipated future growth revenues for the product or (b) the straight-line method over the estimated economic life of the product. Amortization of capitalized software development costs totaled approximately $219,000 and $32,000 in 1997 and 1998, respectively. These expenses are included in cost of sales. At December 31, 1998, capitalized software development costs had been fully amortized.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INTANGIBLE ASSETS
Intangible assets represent identifiable and unidentifiable intangible assets relating to acquired businesses. Amounts assigned to certain relationships and licenses are amortized on a straight-line basis over three years; amounts assigned to retail insurance operations are amortized on a straight-line basis over seven years costs in excess of net tangible and identifiable intangible assets acquired are recorded as goodwill and are amortized on a straight-line basis over periods ranging from three to five years. The lives established for these assets are a composite of many factors which are subject to change because of the nature of the Company's operations. This is particularly true for costs in excess of net assets acquired which reflect value attributable to the going concern nature of the acquired businesses, the stability of their operations, market presence and reputation. Accordingly, at each balance sheet date, a determination is made by management to ascertain whether the intangible assets have been impaired based on several criteria, including, but not limited to, sales trends and undiscounted cash flows.
Impairment of value, if any, is recognized in the period in which it is determined. The Company does not believe there are any facts or circumstances indicating impairment of intangible assets at December 31, 1999.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments approximates fair value.
REVENUE RECOGNITION
The Company recognizes revenues on web site development and specialized software application contracts using the percentage-of-completion method. Earned revenue is based on the percentage that incurred hours to date bear to total estimated hours after giving effect to the most recent estimates of total hours. Earned revenue reflects the original contract price adjusted for agreed upon claim and change order revenue, if any. If estimated total costs on any of these contracts indicate a loss, the entire amount of the estimated loss is recognized immediately. Revenues related to other services are recognized as the services are performed. Revenues related to insurance product commissions are recognized upon receipt. Revenues from equipment sales and related costs are recognized when products are shipped to the customer. Unearned revenue, as reflected on the accompanying balance sheet, represents the amount of billings recorded on contracts in advance of services being performed.
ADVERTISING EXPENSES
Advertising costs are expensed when incurred. Advertising expenses were approximately $724,000, $263,000, and $1,147,000 for the years ended December 31, 1997, 1998 and 1999, respectively.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method as described by Statement of Financial Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES ("SFAS No. 109").
Under SFAS 109 the liability method is used in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
The Company provides a valuation allowance for deferred tax assets which are determined by management to be below the threshold for realization established by SFAS 109.
BASIC AND DILUTED LOSS PER SHARE
Basic and diluted loss per share are calculated according to the provisions of Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"). Due to the net loss position of the Company for each of the three years in the period ending December 31, 1999, the numerator and denominator are the same for both basic and diluted loss per share.
The table below illustrates the calculation of the loss per share amounts attributable to continuing and discontinued operations applicable to common shareholders.
The Company has not declared or paid any dividends to the shareholders of the Preferred Stock. However, the Preferred Stock possess conversion rights (the "Beneficial Conversion Feature") that are analogous to dividends. Accordingly, the Beneficial Conversion Feature is accounted for as a Deemed Preferred Stock Dividend. (See footnotes 7, 8, and 9.)
OTHER MATTERS
Certain prior year amounts have been reclassified to conform to current year presentation.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FURNITURE, FIXTURES AND EQUIPMENT, NET
Furniture, fixtures and equipment, net, are comprised of the following as of:
3. INTANGIBLE ASSETS
Intangible assets consist of the following at December 31, 1998 and 1999:
Amortization expense relating to intangible assets was $0, $108,190 and $1,337,655 for the years ended December 31, 1997, 1998 and 1999, respectively.
4. SEGMENT INFORMATION
During 1998, HomeCom reorganized into five separate business units, organized on the basis of products and services. Prior to that time, the Company operated in a single business segment. The Company has determined that its reportable segments are those that are based on the Company's method of internal reporting, which disaggregates its business by product and service category into business units. HomeCom's reportable segments are: custom Web development (FAST), Internet outsourcing services (HostAmerica), Internet security services (HISS), software products, and InsureRate/FIMI. On June 9, 1998, the Company sold substantially all of the assets of its HostAmerica Internet outsourcing services business unit to Sage Acquisition Corp. On October 1, 1999 the Company sold all of the assets of its HISS unit to Infrastructure Defense, Inc.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION (CONTINUED) The table below presents information about the reported business unit income for HomeCom Communications, Inc. for the years ended December 31, 1998 and 1999 (in thousands):
The Company evaluates the performance of its segments based on segment revenue and identifiable segment direct expenses, consisting primarily of salaries and wages, travel and other costs of segment operating and sales personnel. Common expenses for general and administrative costs, facilities, equipment, telecommunications, and depreciation and amortization expenses are not allocated to the business segments but are included in Corporate expenses.
Revenues for the years ended December 31, 1997 were as follows:
For the year 1997, operating income (loss) by segment is not presented as the information is not available.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. SEGMENT INFORMATION (CONTINUED) Asset information by reportable segment is not reported since the Company does not produce such information internally.
5. COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under noncancelable operating lease agreements expiring through 2004. The Company has entered into capital leases of computer equipment.
Future minimum lease payments under capital and operating leases are as follows as of December 31, 1999:
The Company leases office space in New York City, Chicago, Houston, and Atlanta. The total amount of the base rent payments is being charged to expense on a straight-line method over the term of these leases. The Company has recorded a deferred credit to reflect the excess of rent expense over cash payments since inception of the leases.
Rental expense under operating leases was approximately $507,000, $440,000 and $588,000 for the years ended December 31, 1997, 1998, 1999 respectively.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Various legal proceedings may arise in the normal course of business. Additionally, the Company's software and equipment are vulnerable to computer viruses or similar disruptive problems caused by customers or other Internet users. Computer viruses or problems caused by third parties could lead to interruptions, delays or cessation in service to the Company's customers. Moreover, customers of the Company could use computer files and information stored on or transmitted to Web server computers maintained by the Company to engage in illegal activities that may be unknown or undetectable by the Company, including fraud and misrepresentation, and unauthorized access to computer systems of others. Furthermore, inappropriate use of the Internet by third parties could also jeopardize the security of customers' confidential information that is stored in the Company's computer systems. Any such actions could subject the Company to liability to third parties. The Company does not have errors and omissions, product liability or other insurance to protect against risks caused by computer viruses or other misuse of software or equipment by third parties. The Company does maintain errors and omissions to protect it from malfunctions or nonmerchantability of its software products and from potential market conduct liabilities relating to its insurance and securities operations. Although the Company attempts to limit its liability to customers for these types of risks through contractual provisions, there can be no assurance that these provisions will be enforceable. Management does not believe that there are currently any asserted or unasserted claims that will have a material adverse effect on the financial position, results of operations or cash flows of the Company.
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS
In May 1997, the Company completed an initial public offering of its common stock. The Company issued 1,000,000 shares at an initial public offering price of $6.00 per share. The total proceeds of the offering, net of underwriting discounts, commissions and offering expenses, were approximately $4,700,000. The Company used a portion of the proceeds from the initial public offering to repay outstanding principal amounts of approximately $1,300,000 loaned to the Company by stockholders and affiliates plus accrued interest of approximately $65,000. The Company issued 33,333 shares of common stock as payment in full of the outstanding principal balance of a $200,000 loan from an investor.
In connection with the completion with the Company's initial public offering, the Company granted its underwriter warrants to acquire 100,000 shares of the Company's common stock at an exercise price of $7.20 per share. The exercise price is subject to adjustment under certain circumstances. These warrants expire on May 12, 2002 if not earlier exercised.
In September 1997, the Company issued $1,700,000 of 5% convertible debentures due September 22, 2000. Net proceeds to the Company from the issuance of the debentures totaled approximately $1,500,000. During 1998, the full principal amount of the debentures was fully converted into 961,460 shares of common stock. As of December 31, 1999, $44,596 of interest has been accrued for the debentures, and is payable on September 22, 2000. Due to the beneficial conversion feature of the debentures, a portion of the proceeds ($566,667) was allocated to additional paid-in capital. The corresponding discount on the debentures was amortized in 1998 as a non-cash charge to interest expense.
In connection with the issuance of the debentures, the Company issued to a broker designated by the purchaser of the debentures three-year warrants to acquire an aggregate 400,000 shares of common stock. These warrants were issued in October 1997. Of these warrants, 43,125 and 200,000 at exercise
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. EQUITY AND CONVERTIBLE DEBT TRANSACTIONS (CONTINUED) prices of $4.00 and $6.00 per share, respectively, are outstanding at December 31, 1999. If not earlier exercised, the warrants expire on October 27, 2000.
In December 1997, the Company issued 20,000 shares of its Series A preferred stock for an aggregate purchase price of $2,000,000. Net proceeds to the Company from the Series A preferred stock issuance were approximately $1,800,000. As of December 31, 1998, the preferred stock had been fully converted into 711,456 shares of common stock. A discount of $666,667 results from an allocation of the proceeds to the beneficial conversion feature. This discount is analogous to a dividend and was recognized as a return to the Series A preferred holders over the period the preferred stock was outstanding.
In connection with the issuance and sale of the Series A preferred stock, the Company granted the Series A preferred warrants to acquire an aggregate of 75,000 shares of Common Stock, with warrants to purchase 62,500 shares of common stock having an exercise price per share equal to $14.50625 and warrants to purchase 12,500 shares of common stock having an exercise price per share equal to $15.825. The Company also granted 50,000 warrants to a placement agent at an exercise price of $15.825 per share. The Series A preferred stock warrants will expire on December 31, 2000.
At December 31, 1998, 600,000 warrants were outstanding at a weighted average exercise price of $7.51. At December 31, 1999, 1,261,960 warrants are outstanding at a weighted average exercise price of $6.30.
On April 16, 1998, the Company issued 351,391 shares of common stock to acquire all of the outstanding capital stock of The Insurance Resource Center, Inc.
On October 7, 1998, the Company issued 18,959 shares of common stock to the former holders of HISS's capital stock as an earnout payment, which was recorded as compensation expense. In October, 1999, in connection with the sale of the HISS business unit, the Company issued 18,959 shares of common stock to the former shareholders of HISS as an earnout payment. In addition, the Company committed to issue another 18,959 shares of common stock to the former shareholders of HISS in the event that the Company's equity stake in the acquiring entity becomes worth over $5 million and is freely tradable.
During 1999, the Company issued 1,252,174 shares of common stock for the net assets of First Institutional Marketing, Inc. and certain of its affiliates.
During 1999, the Company issued 185,342 shares of common stock for the net assets of Ganymede Corporation.
7. ISSUANCE OF SERIES B PREFERRED STOCK
The Company issued Series B Preferred Stock totaling $2,500,000 on March 25, 1999 (the "Issuance Date"). The Series B Preferred Stock investors were issued 125 shares of preferred stock, having a stated value of $20,000 per share, and 225,000 warrants to purchase common stock at $5.70 per share. The Company paid offering costs of $216,250 cash plus 25,000 warrants to purchase common stock at $5.70 per share, resulting in net proceeds to the Company of $2,283,750 for the preferred shares and warrants.
The Series B Preferred Stock bears no dividends and is convertible at the option of the holder at the earlier of 90 days after issuance or the effective date of a registration statement covering the shares. The warrants are exercisable at any time and expire five years from the date of issuance.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. ISSUANCE OF SERIES B PREFERRED STOCK (CONTINUED) The Series B Preferred Stock is convertible into common stock at a conversion price equal to the lower of (a) the average of the closing price for four consecutive trading days in the twenty-five consecutive trading days ending one day prior to the conversion date ($4.86 at the Issuance date) and (b) $5.23. The number of common shares into which the Series B Preferred Stock is convertible is determined by dividing the stated value of the Series B Preferred Stock, increased by 5% annually, by the conversion price. As the Series B Preferred Stock is automatically convertible on March 24, 2002, the most beneficial conversion ratio was determined to include the additional common shares attributable to the 5% annual increase for the three year period ending in 2002. After adjustment for this additional benefit the $4.86 conversion price is reduced to $4.23, the most beneficial conversion price at the Issuance Date.
In determining the accounting for the beneficial conversion feature, the Company first allocated the net proceeds of $2,283,750 to the preferred stock and the warrants based on their relative fair values at the Issuance Date, resulting in $1,766,217 assigned to the preferred stock and $517,533 assigned to the warrants as of March 24, 1999. The Company then allocated $899,284 of the Series B net proceeds to additional paid in capital for the beneficial conversion feature. The beneficial conversion feature will be recognized as a deemed dividend to the preferred shareholders over the minimum period in which the preferred shareholders can realize that return. Approximately $792,000 of the beneficial conversion was amortized in 1999. The balance of the beneficial conversion feature will be recognized through March, 2002. During 1999, 10 shares of Series B Preferred Stock were converted into 63,317 shares of common stock.
The Company has the option to redeem the Series B Preferred Stock after 110 days for 120% of face value. Additionally, if the Company has issued common stock upon conversion of the Series B Preferred Stock such that 19.99% of the common stock outstanding is held by the preferred shareholders, the Company must obtain approval of the shareholders before any more preferred shares can be converted. If such approval is not obtained within 60 days of notice, the preferred shareholders may require the Company to repurchase the remaining Series B Preferred Stock at 120% of face value. The Series B Preferred Stock is presented outside of permanent equity as the outcome of the shareholder vote, and possible redemption, is outside of the control of the Company.
8. ISSUANCE OF SERIES C PREFERRED STOCK
On July 28, 1999, the Company completed a private placement of $3,500,000 principal amount of the Company's Series C Convertible Preferred Stock, par value $.01 per share (the "Series C Preferred Stock") and warrants to acquire up to 59,574 shares of Common Stock (the "Series C Preferred Warrants"). The Series C Preferred Stock has an initial stated value of $20,000 per share, which stated value increases at the rate of 6% per year (such stated value, as increased from time to time, is referred to as the "Series C Stated Value"). Each Series C Preferred Share is convertible, from and after 120 days following the date of issuance, at the option of the holder, into such number of shares of Common Stock as is determined by dividing the Series C Stated Value by the lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for the five trading days preceding the date of conversion. Any Series C Preferred Stock issued and outstanding on July 22, 2002 will automatically be converted into Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature, the Company first allocated the net proceeds of $3,323,748 to the preferred stock and the warrants based on their relative fair values at the Issuance Date, resulting in $3,170,904 assigned to the preferred stock and $152,844
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. ISSUANCE OF SERIES C PREFERRED STOCK (CONTINUED) assigned to the warrants as of July 27, 1999. The Company then allocated $1,678,505 of the Series C net proceeds to additional paid in capital for the beneficial conversion feature. The beneficial conversion feature will be recognized as a deemed dividend to the preferred shareholders over the minimum period in which the preferred shareholders can realize that return. Approximately $1,485,000 of the beneficial conversion was amortized in 1999. The balance of the beneficial conversion feature will be recognized through July, 2002. During 1999, 37 shares of Series C Preferred Stock were converted into 281,460 shares of common stock.
The Company has the right, in its sole discretion, to redeem, from time to time, any or all of the Series C Preferred Stock; provided that certain conditions are met, including the availability of cash, credit or standby underwriting facilities available to fund the redemption at 120% of the original purchase price.
The Series C Preferred Warrants expire on July 27, 2004 and have an exercise price of $7.34 per share, subject to adjustment under certain circumstances.
9. ISSUANCE OF SERIES D PREFERRED STOCK
On September 28, 1999, the Company completed a private placement of $1,500,000 principal amount of the Company's Series D Convertible Preferred Stock, par value $.01 per share (the "Series D Preferred Stock") and warrants to acquire up to 25,000 shares of Common Stock (the "Series D Preferred Warrants"). The Series D Preferred Stock has an initial stated value of $20,000 per share, which stated value increases at the rate of 6% per year (such stated value, as increased from time to time, is referred to as the "Series D Stated Value"). Each Series D Preferred Share is convertible, from and after 120 days following the date of issuance, at the option of the holder, into such number of shares of Common Stock as is determined by dividing the Series D Stated Value by the lesser of (a) $5.875, and (b) 82.5% of the average of the closing bid prices for the five trading days preceding the date of conversion. Any Series D Preferred Stock issued and outstanding on September 22, 2002 will automatically be converted into Common Stock at the conversion price then in effect.
In determining the accounting for the beneficial conversion feature, the Company first allocated the net proceeds of $1,423,750 to the preferred stock and the warrants based on their relative fair values at the Issuance Date, resulting in $1,387,477 assigned to the preferred stock and $36,273 assigned to the warrants as of September 28, 1999. The Company then allocated $642,084 of the Series D net proceeds to additional paid in capital for the beneficial conversion feature. The beneficial conversion feature will be recognized as a deemed dividend to the preferred shareholders over the minimum period in which the preferred shareholders can realize that return. Approximately $280,000 of the beneficial conversion was amortized in 1999. The balance of the beneficial conversion feature will be recognized through September, 2002.
The right of the holders of the Series D Preferred Stock to convert their shares is also subject to the following restrictions: (i) during the period beginning on the issuance date through the following 90 days, each holder may not convert more than 25% of the Series D Preferred Stock purchased by such holder; (ii) during the period beginning on the issuance date through the following 120 days, each holder may not convert more than 50% of the Series D Preferred Stock purchased by such holder; and (iii) during the period beginning on the issuance date through the following 150 days, each holder may not convert more than 75% of the Series D Preferred Stock purchased by such holder. At any time after the issuance date, the Company shall have the right, in its sole discretion, to redeem, from time
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. ISSUANCE OF SERIES D PREFERRED STOCK (CONTINUED) to time, any or all of the Series D Preferred Stock; provided that certain conditions are met, including the availability of cash, credit or standby underwriting facilities available to fund the redemption. The redemption price will be calculated as (i) 105% of the original purchase price for the first 30 days following the issuance date; (ii) 110% of the original purchase price for the next 90 days thereafter and (iii) 120% of the original purchase price after 120 days from the issuance date.
The Series D Preferred Warrants expire on September 27, 2004 and have an exercise price of $7.34 per share, subject to adjustment under certain circumstances.
10. STOCK OPTION PLANS
The Company's Employee Stock Option Plan (the "Stock Option Plan") was adopted by the Company's stockholders in September 1996. Shares of common stock may be sold or awarded to officers, key employees and consultants. On March 3, 1999 at a Special Meeting of Stockholders, the Company's stockholders approved an amendment to the Stock Option Plan which increased the number of shares reserved for issuance under the Stock Option Plan to 2,000,000. Options granted under the Stock Option Plan may be either (i) options intended to qualify as "incentive stock options" under Section 422 of the Internal Revenue Code or (ii) non-qualified stock options.
The options granted to purchase shares under the Stock Option Plan. The options vest 25% per year and expire ten years after the grant date. The exercise price of the options was at or above the fair market value of the stock on the grant date.
The Company's Non-Employee Directors' Stock Option Plan (the "Directors' Plan") was adopted by the Company's stockholders in September 1996. Shares of common stock may be sold or awarded to directors who are not officers or employees of the Company ("Non-Employee Directors"). The Company has reserved 300,000 shares of common stock for issuance under the Directors' Plan.
The Directors' Plan provides for the automatic granting of an option to purchase 10,000 shares of common stock to each Non-Employee Director who is first appointed or elected to the Board of Directors. Also, each Non-Employee Director is automatically granted an option to purchase 5,000 shares of common stock on the date of each annual meeting of the Company's stockholders. Furthermore, the Directors' Plan allows the Board of Directors to make extraordinary grants of options to Non-Employee Directors.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("FAS 123") requires that companies with stock-based compensation plans either recognize compensation expense based on new fair value accounting method or continue to apply the provisions of Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB 25") and disclose pro forma net income and earnings per share assuming the fair value method had been applied.
The Company has elected to follow APB 25 and related interpretations in accounting for its employee stock options. The Company has recognized no compensation expense for options issued to employees and non-employee directors. For the years ended December 31, 1998 and 1999, the Company recognized approximately $5,000, $36,000, and $0, respectively, in expense for stock issued to non-employees.
Pro forma information regarding loss per share is required by FAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement.
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED) The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
Had compensation cost for the Company's stock-based compensation plans been determined under the provisions consistent with FAS 123, the Company's net loss and loss per share for the years ended December 31, 1997, 1998 and 1999 would have been the pro forma amounts listed below:
Option activity under all of the stock option plans is summarized as follows:
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTION PLANS (CONTINUED) The following table summarizes information about fixed options outstanding at December 31, 1999.
11. ACQUISITIONS AND DIVESTITURES
On April 16, 1998, the Company acquired all of the outstanding capital stock of The Insurance Resource Center, Inc. ("IRC") for total consideration of approximately $571,000, consisting of 351,391 shares of the Company's common stock. IRC provides Internet development and hosting services to the insurance industry. The Company accounted for this acquisition as a purchase transaction. Approximately $460,000 was recorded as an intangible asset. At December 31, 1998, the net unamortized balance of this intangible asset was $351,000, net of $109,000 of accumulated amortization. As of December 31, 1999, the intangible assets related to IRC had been fully amortized.
On June 9, 1998, the Company sold substantially all of the assets of its HostAmerica Internet network outsourcing services division to Sage Acquisition Corp. ("Sage") for cash of $4,250,000 and Sage's assumption of approximately $250,000 of unearned revenue. The Company recorded a gain on the sale of approximately $4,402,000. The assets sold consisted of computer network equipment and service contracts.
On March 24, 1999, the Company acquired First Institutional Marketing, Inc., and certain of its affiliates ("FIMI") of Houston, Texas for total consideration of $4,236,104, consisting of 1,252,174 shares of common stock. The acquisition has been accounted for as a purchase transaction. The value of the shares was determined by using the average closing stock price of the two days before and after the definitive agreement was publicly announced. The resulting intangible assets will be amortized over a period of approximately 3 to 7 years. Results of operations for FIMI are included with those of the Company subsequent to the date of acquisition. Prior to the closing of the acquisition, the Company loaned the shareholders of FIMI $370,000. The note is due in 2000 and bears interest of 9%. The loan may be repaid in cash or common stock. In connection with the acquisition, the principal shareholders of FIMI were granted 300,000 warrants to acquire HomeCom common stock at an exercise price of $3.74 per share. Vesting of the warrants is contingent upon FIMI meeting certain operating goals as defined in the agreement. If the operating results are obtained, the warrants vest ratably over a three-year period on the anniversary date of the acquisition.
On April 23, 1999, the Company acquired all of the outstanding shares of Ganymede Corporation ("Ganymede") for total consideration of $1,348,186, consisting of 185,342 shares of common stock and $100,000 cash. The number of shares was determined by dividing the total non-cash consideration by the average closing price of the Company's stock for the 20 trading days prior to April 9, 1999. The value of the shares was determined by using the average closing stock price of the two days before and after the definitive agreement was publicly announced. In addition, the Company entered into employment agreements with the three principals of Ganymede, calling for them to continue in their
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. ACQUISITIONS AND DIVESTITURES (CONTINUED) current roles for the acquired company. The acquisition has been accounted for as a purchase transaction. The purchase price has been allocated to assets acquired and liabilities assumed based on their estimated fair values. The resulting intangible assets will be amortized over a period of approximately 3 to 5 years. Results of operations for Ganymede have been included with those of the Company for periods subsequent to the date of acquisition.
The following unaudited pro forma information for the years ended December 31, 1998 and 1999 have been prepared to reflect adjustments to the Company's historical results of operations to give effect to the acquisition of FIMI and Ganymede and the divestiture of HostAmerica and HISS as if each transaction had occurred on January 1, 1998.
This pro forma information is not necessarily indicative of the results of operations which would have been attained had each of the aforementioned transactions been consummated on the dates indicated or which may be attained in the future.
12. DISPOSITION OF INTERNET SECURITY SERVICES DIVISION
On October 1, 1999, the Company sold substantially all of the assets of its HomeCom Internet Security Services ("HISS") division to Infrastructure Defense, Inc. ("iDefense") for $823,175 in common stock of the non-public acquiror, certain security audit rights and $200,000 cash, paid in January, 2000. The purchase price was established through arms' length negotiations between the Company and iDefense.
The Company has removed the results of this discontinued operation from the continuing operations of the Company for all periods presented. The Company recorded a gain of approximately $1.14 million on the sale of the HISS unit in 1999.
13. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax
HOMECOM COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. INCOME TAXES (CONTINUED) purposes. Significant components of the Company's deferred tax assets and liabilities are as follows, as of:
At December 31, 1999, the Company had net operating loss carryforwards for income tax purposes of approximately $13,300,000 which begin to expire in 2011. Realization of these assets is contingent on having future taxable earnings. In addition, certain stock transactions during 1997 resulted in the Company incurring an ownership change as defined in Internal Revenue Code Section 382. The result of this ownership change is to substantially limit the future utilization of the Company's net operating loss carryforwards as of the change date. Certain stock transactions occurring in 1998 and 1999 may have resulted in the Company incurring an ownership change, which may result in a limitation on the Company's future utilization of net operating loss carryforwards generated in 1998 and 1999. Based on the cumulative losses in recent years and the limitation and the use of the company's net operating losses management believes that a full valuation allowance should be recorded against the deferred tax asset.
The income tax benefit differs from the amounts computed by applying the Federal statutory rate of 34% to loss before taxes principally as a result of the recording of the valuation allowance.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. FINANCIAL STATEMENTS
The consolidated financial statements, notes thereto and report of independent accountants thereon, filed as part hereof, are listed in Item 8.
2. FINANCIAL STATEMENT SCHEDULES
Financial Statement scheduled have been omitted as the required information is not applicable or the required information has been incorporated in the consolidated financial statements and related notes incorporated by reference herein.
3. Exhibits
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(B) REPORTS ON FORM 8-K
On October 18, 1999, the Company filed a report on Form 8-K under Item 2 with respect to the sale of HISS.
On November 5, 1999 the Company filed a report on Form 8-K under Item 6 with respect to the resignation of Kris Puri from the Company's Board of Directors.
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.
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.