-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UXgcRtg/jbBXJduQvk7v18LV7s9yWhtq7SlcHP4V0aRU79BJK/uO22K/nMMvL8/4 vFe5Kk6LBPIFuqwj8l4ORg== 0000950144-97-013490.txt : 19971219 0000950144-97-013490.hdr.sgml : 19971219 ACCESSION NUMBER: 0000950144-97-013490 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19971218 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HOMECOM COMMUNICATIONS INC CENTRAL INDEX KEY: 0001021226 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 582153309 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-42599 FILM NUMBER: 97740584 BUSINESS ADDRESS: STREET 1: BUILDING 14 STE 100 PIEDMONT CTR STREET 2: 3535 PIEDMONT RD CITY: ATLANTA STATE: GA ZIP: 30305 BUSINESS PHONE: 4042374646 MAIL ADDRESS: STREET 1: 3535 PIEDMONT ROAD STREET 2: SUITE 100 CITY: ATLANTA STATE: GA ZIP: 30305 S-1 1 HOMECOM COMMUNICATIONS, INC. 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1997. REGISTRATION NO. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------------ Form S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------------ HOMECOM COMMUNICATIONS, INC. (exact name of registrant as specified in its charter) DELAWARE 7371 58-2153309 (State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer of incorporation Classification Code Number) Identification No.)
BUILDING 14, SUITE 100, 3535 PIEDMONT ROAD ATLANTA, GEORGIA 30305 (404) 237-4646 (Address, including zip code and telephone number, including area code, of Registrant's principal executive offices) ------------------------------------ HARVEY W. SAX CHIEF EXECUTIVE OFFICER HOMECOM COMMUNICATIONS, INC. BUILDING 14, SUITE 100, 3535 PIEDMONT ROAD ATLANTA, GEORGIA 30305 (404) 237-4646 (Name, address, including zip code, and telephone number, including area code, of agent for service) COPIES TO: OBY T. BREWER III, ESQUIRE MORRIS, MANNING & MARTIN, L.L.P. 1600 ATLANTA FINANCIAL CENTER 3343 PEACHTREE ROAD, N.E. ATLANTA, GEORGIA 30326 (404) 233-7000 ------------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time to time after this Registration Statement becomes effective. If the only securities being registered on this Form are being offered pursuant to dividend or interest reinvestment plans, check the following box. [ ] If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] ------------------------------------ CALCULATION OF REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------- PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION OF SECURITIES TO BE REGISTERED REGISTERED(1) PER SECURITY(2) OFFERING PRICE(2) FEE(2) - ---------------------------------------------------------------------------------------------------------------------------- Common Stock, par value $.0001........ 850,000 $8.0625 $6,853,125 $2,021.67 - ----------------------------------------------------------------------------------------------------------------------------
(1) The number of shares of Common Stock registered hereby represents an estimate of the number of shares of Common Stock that will be issuable upon conversion of an aggregate $1,700,000 of the Company's 5% Convertible Debentures due September 22, 2000 (the "Debentures"). Pursuant to a Registration Rights Agreement between the Company and the holders of the Debentures, the Company has agreed to register 850,000 shares of Common Stock. Following conversion in full or repayment of the Debentures, the Company intends to deregister any and all shares of Common Stock registered hereunder that are not issued to a Selling Securityholder upon conversion of the Debentures. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(i) of the Securities Act of 1933, as amended. On December 13, the average of the closing bid and ask price, which is quoted on the Nasdaq SmallCap(TM) Market under the symbol "HCOM," was $8.0625 per share. ------------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THIS REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A) MAY DETERMINE. ================================================================================ 2 PROSPECTUS HOMECOM COMMUNICATIONS, INC. (THE "COMPANY") UP TO 850,000 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF AN AGGREGATE $1,700,000 OF THE COMPANY'S 5% CONVERTIBLE DEBENTURES DUE SEPTEMBER 22, 2000 This Prospectus relates to up to 850,000 shares (the "Conversion Shares") of the Company's Common Stock, $.0001 par value per share ("Common Stock") issuable upon conversion of an aggregate $1,700,000 principal amount of the Company's 5% Convertible Debentures due September 22, 2000 (the "Debentures") under the Securities Act of 1933, as amended (the "Securities Act"). The Debentures were issued and sold in November 1997 (the "Debenture Sale") in transactions exempt from the registration requirements of the Securities Act, to "accredited investors" (as defined in Rule 501(a) under Regulation D of the Securities Act) and/or in compliance with the provisions of Regulation S under the Securities Act. The Common Stock issuable upon conversion thereof may be offered and sold from time to time by the holders named herein or by their transferees, pledgees, donees or their successors (collectively, the "Selling Securityholders") pursuant to this Prospectus. The Registration Statement of which this Prospectus is a part has been filed with the Securities and Exchange Commission pursuant to a Registration Rights Agreement (the "Registration Rights Agreement") between the Company and the Selling Securityholders, entered into in connection with the Debenture Sale. The Debentures are issued pursuant to the terms of a 5% Convertible Debenture Purchase Agreement dated effective as of September 19, 1997 (the "Debenture Agreement"). Principal and interest on the Debentures is payable on September 22, 2000. The Debentures are convertible at the option of the holders. The holders have agreed, however, that they may convert (i) not more than one-third of the aggregate value of the Debentures at any time on or after the date on which this registration statement is declared effective (the "Registration Effective Date"); (ii) not more than an additional one-third of the aggregate value of the Debentures at any time on or after the 30th day following the Registration Effective Date; and (iii) the final one-third of the aggregate value of the Debentures at any time on or after the 60th day following the Registration Effective Date. The Debentures are convertible at a conversion price (the "Conversion Price") which is the lesser of (a) 75% of the average closing bid price of the Common Stock as represented by Nasdaq or on other securities exchanges or markets on which the Common Stock is listed for the three trading days ending on the day preceding notice of conversion, or (b) $4.00. The number of shares issuable upon conversion of the Debentures is equal to the aggregate principal balance of the Debentures divided by the Conversion Price. The Conversion Price is subject to adjustment under certain circumstances. See "Description of Securities-Convertible Debentures." On December 13, 1997, the closing price of the Common Stock, which is quoted on the Nasdaq SmallCap(TM) Market under the symbol "HCOM," was $8.0625 per share. The Selling Securityholders have informed the Company that the Conversion Shares may be offered from time to time in brokerage transactions (which may include block transactions) on any exchange or market on which such securities are listed or quoted, as applicable, in negotiated transactions, through a combination of such methods of sale, or otherwise, at fixed prices that may be changed, at market prices prevailing at the time of sale, at prices related to prevailing market prices or at negotiated prices. The Selling Securityholders may effect such transactions by selling the Conversion Shares directly or to or through broker-dealers, who may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of the Conversion Shares for whom such broker-dealers may act as agents or to whom they may sell as principals, or both (which compensation as to a particular broker-dealer might be in excess of customary commissions). The Selling Securityholders will receive all of the net proceeds from the sale of the Conversion Shares and will pay all underwriting discounts and selling commissions, if any, applicable to the sale of the Conversion Shares. The Company is responsible for payment of all other expenses incident to the offer and sale of the Conversion Shares. The Company will not receive any of the proceeds from the sale of the Conversion Shares by the Selling Securityholders. The Selling Securityholders, and intermediaries through whom such securities are sold, may be deemed underwriters within the meaning of the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered, and any profits realized or commissions received may be deemed underwriting compensation. THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING ON PAGE 5. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SUBJECT TO COMPLETION, DATED , 1997 3 INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. 2 4 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in connection with, (i) the Company's financial statements and notes thereto included elsewhere in this Prospectus; and (ii) the exhibits filed with the registration statement of which this Prospectus is a part including without limitation, the form of Debentures, Debenture Agreement and Registration Rights Agreement. Unless otherwise indicated, the information in this Prospectus does not give effect to the conversion of the Debentures. THE COMPANY................ HomeCom Communications, Inc. ("HomeCom" or the "Company"). HomeCom develops and markets specialized software applications and products and provides services that enable businesses to use the Internet and Intranets to obtain and communicate important business information, conduct commercial transactions and improve business productivity. HomeCom provides Internet/Intranet solutions in three areas: (i) customized software applications design, development and integration including, World Wide Web site development; (ii) Internet outsourcing services; and (iii) security consulting and integration services. HomeCom's objective is to be a leading provider of business communications solutions using Internet standard protocol technologies. THE OFFERING............... Up to 850,000 shares of Common Stock (the "Conversion Shares") are offered hereby by the Selling Securityholders. The Conversion Shares are issuable upon conversion of an aggregate $1,700,000 of the Company's 5% Convertible Debentures due September 22, 2000 (the "Debentures") issued by the Company to the Selling Securityholders. The Selling Securityholders will receive all of the net proceeds from the sale of the Conversion Shares and will pay all underwriting discounts and selling commissions, if any, applicable to the sale of the Conversion Shares. The Company is responsible for payment of all other expenses incident to the offer and sale of the Conversion Shares. The Company will not receive any of the proceeds from the sale of the Conversion Shares by the Selling Securityholders. CONVERSION................. The Debentures are convertible at the option of the holders. The holders have agreed, however, that they may convert (i) not more than one-third of the aggregate value of the Debentures on or after the Registration Effective Date; (ii) an additional one-third of the aggregate value of the Debentures at any time on or after the 30th day following the Registration Effective Date; and (iii) the final one-third of the aggregate value of the Debentures at any time on or after the 60th day following the Registration Effective Date. The Company has received no firm commitment for the conversion of any of the Debentures. Consequently, there can be no assurance that the Debentures will be converted. Pursuant to a Registration Rights Agreement between the Company and the holders of the Debentures, the Company has agreed to register 850,000 shares of Common Stock. Following conversion in full or repayment of the Debentures, the Company intends to deregister any and all shares of Common Stock registered hereunder that are not issued to a Selling Securityholder upon conversion of the Debentures. See "Risk Factors -- No Fixed Number of Shares Issuable Upon Conversion of the Debentures." RISK FACTORS............... An investment in the securities offered hereby involves a high degree of risk. See "Risk Factors." 3 5 NASDAQ SMALLCAP(TM) MARKET SYMBOL............ HCOM
BEFORE OFFERING(1) AFTER OFFERING(1)(2) ------------------ -------------------- COMMON STOCK OUTSTANDING............. 2,956,396 3,381,396
- --------------- (1) Excludes: (i) 600,000 shares reserved for issuance under the Company's Stock Option Plan, of which options to acquire 418,660 shares of Common Stock are issuable upon the exercise of outstanding options granted at exercise prices ranging from $4.06 to $6.13 per share and weighted average exercise price of $4.88 per share; (ii) 300,000 shares reserved for issuance under the Company's Non-Employee Directors Plan, of which options to acquire 10,000 shares of Common Stock are issuable upon the exercise of outstanding options granted at an exercise price of $6.50 per share; (ii) 150,000 shares reserved for issuance under the Company's Stock Purchase Plan, no shares having been issued thereunder; (iv) 100,000 shares of Common Stock reserved for issuance upon the exercise of warrants granted to the underwriter of the Company's initial public offering at an exercise price of $7.20 per share; and (v) 400,000 shares issuable upon the exercise of warrants granted in connection with the Debenture Sale of which warrants to acquire 200,000 shares are exercisable at an exercise price of $4.00 per share and warrants to acquire 200,000 shares are exercisable at an exercise price of $6.00 per share. See "Management -- Incentive Plans," "Description of Capital Stock -- Convertible Debentures" and "Description of Capital Stock -- Warrants." Also excludes shares that may be issued in connection with the Company's August 1996 acquisition of HomeCom Internet Security Services, Inc. See "Certain Transactions." (2) Assumes that all holders of Debentures elect to convert the Debentures into an aggregate 425,000 shares of Common Stock at a Conversion Price of $4.00 which represents the Conversion Price in effect as of the date hereof. See "Description of Securities -- Convertible Debentures." SUMMARY FINANCIAL INFORMATION
DECEMBER 2 NINE MONTHS (INCORPORATION) YEAR ENDED DECEMBER 31, ENDED TO DECEMBER 31, ----------------------- SEPTEMBER 30, 1994 1995 1996 1997 --------------- --------- ---------- ------------- STATEMENT OF OPERATIONS DATA: Net sales.............................. -- $ 327,574 $2,298,855 $ 2,330,975 Operating loss......................... $ (17,452) (1,824) (580,865) (3,391,081) Net loss............................... (17,452) (5,440) (625,583) (3,387,747) Net loss per share..................... $ (.01) $ (.00) $ (.33) $ (1.36) Weighted number of shares of Common Stock and Common Stock equivalents outstanding.......................... 1,850,447 1,850,447 1,879,696 2,483,258
DECEMBER 2 NINE MONTHS ENDED (INCORPORATION) YEAR ENDED DECEMBER 31, SEPTEMBER 30, 1997 TO DECEMBER 31, ------------------------ ------------------------- 1994 1995 1996 ACTUAL PRO FORMA(1) --------------- --------- ------------ ---------- ------------ BALANCE SHEET DATA: Working capital (deficit)..... $ 8,455 $133,792 $(1,304,682) $1,961,870 $1,961,870 Total assets.................. 10,254 247,382 1,726,522 3,723,473 3,595,973 Long-term obligations......... -- 160,792 147,833 1,244,775 111,442 Total liabilities............. -- 242,568 2,347,191 2,118,381 985,048 Stockholders' equity (deficit)................... 10,254 4,814 (620,669) 1,605,092 2,610,925
- --------------- (1) Based on the trading price of the Common Stock as of December 13, 1997 of $8.0625 per share, the Conversion Price would be $4.00 per share. Pro forma balance sheet data reflect conversion of an 4 6 aggregate $1.7 million of Debentures into an aggregate 425,000 shares of Common Stock at the assumed Conversion Price of $4.00 per share. FORWARD LOOKING STATEMENTS This Prospectus contains certain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act, including without limitation, certain statements contained under "Management's Discussion and Analysis of Financial Condition and Results of Operations" concerning the Company'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 Prospectus, the words "believes," "intends," "anticipates" and similar expressions are intended to identify forward-looking statements. All forwarding statements included in this Prospectus are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements. 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 the Company's competitors and business partners, and those discussed under the caption "Risk Factors." 5 7 RISK FACTORS An investment in the securities offered hereby is speculative in nature and involves a high degree of risk. In addition to other information contained in this Prospectus, prospective investors should carefully consider the following risk factors before purchasing the securities offered hereby. LIMITED OPERATING HISTORY; ACCUMULATED DEFICIT; CONTINUING LOSSES. The Company was incorporated in December 1994 and commenced sales in January 1995. Consequently, the Company has only a limited operating history upon which to base an evaluation of the Company and its prospects. The Company's prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving industries. To address these risks, the Company must, among other things, respond to competitive developments, continue to attract, retain and motivate qualified persons, and continue to upgrade and commercialize products and services. There can be no assurance that the Company will be successful in addressing such risks. The Company has incurred net losses since its incorporation and as of September 30, 1997 had an accumulated deficit of approximately $4.0 million. For the year ended December 31, 1996 and the nine months ended September 30, 1997, the Company had negative cash flows from operations of approximately $216,000 and $3.5 million, respectively. The Company continues to incur operating losses and there can be no assurance that the Company will ever achieve or sustain profitability. RECENT REDUCTION OF STAFF AND OTHER EXPENSES; CONTINUING LOSSES. The Company has experienced substantial change and expansion in its business and operations since its incorporation in 1994 and expects to continue to experience periods of rapid change. The Company's recent expansion of operating expenses has placed significant demands on the Company's administrative, operational, financial and other resources. Following completion of its initial public offering, the Company expended considerable resources to expand its marketing and sales programs, its product development staff, its accounting and internal management systems and its other administrative and public relations capabilities. These increases in expenditures were not followed by commensurate increases in revenues, and during the quarter ended September 30, 1997, the Company was forced to engage in substantial reductions in its personnel in order to conserve operating capital. This reduction in staff has affected employee morale and limited the Company's ability to increase sales to desired levels. Notwithstanding the Company's efforts to limit its expenditures, its operating costs continue to exceed revenues. If the Company cannot generate sufficient revenues to offset its operating expenses or the Company's management otherwise fails to manage the Company's growth effectively, the Company's business, financial condition and operating results will be materially and adversely affected. There can be no assurance that current management can operate the Company's business adequately to achieve profitable operations. See "Business -- Employees" and "Management." NEED FOR ADDITIONAL FINANCING. The Company has substantially limited sources of capital and continues to incur substantial operating losses. As of September 30, 1997, the Company had net working capital of approximately $2.0 million. 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. If the Company exhausts its current sources of capital and is not able to obtain additional capital, the Company will be required to undertake certain steps to continue its operations. Such steps may include immediate reduction of the Company's operating costs and other expenditures, including potential reductions of personnel and suspension of salary increases and capital expenditures. If such measures are 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. Any such actions undertaken may limit the Company's opportunities to realize continued increases in sales and the Company may not be able to reduce its costs in amounts sufficient to achieve break-even or profitable operations. If the Company exhausts its sources of capital, and subsequent cost reduction measures are not sufficient to allow the Company to achieve break-even or profitable operations, the Company will be forced to seek protection from its creditors. 6 8 PRICE EROSION; CONTINUING DECLINE IN MARGINS. The market for Internet and Intranet products and services is highly competitive and is characterized by pressures to reduce prices, incorporate new capabilities and accelerate completion schedules. Increased competition has resulted in significant price competition, which in turn has resulted in significant reductions in the average selling price of many of the Company's products and services, including its Web site development and hosting services. The Company has not been able to offset the effects of price reductions through an increase in the number of its customers, higher revenue from enhanced services or cost reductions, and the Company expects its margins to continue to decline. INTENSE COMPETITION. The Company's current and prospective competitors include many companies that have longer operating histories, longer customer relationships and substantially greater financial, management, technical, development, sales, marketing and other resources than the Company. Many nationally known companies and regional and local companies across the country are involved in Internet and Intranet applications, including the development and support of Web sites and Internet applications, and the number of these companies is increasing. Companies competing directly or indirectly with the Company include Web site service boutique firms, communications, telephone and telecommunications companies, computer hardware and software companies, established on-line services companies, advertising agencies, direct access Internet and Internet-services and access providers as well as specialized and integrated marketing communication firms. The Company also competes with the internal information technology departments of prospective customers who are choosing whether to outsource design and support. The Company competes on the basis of creative talent, price, reliability of services and responsiveness. The Company's ability to compete in its markets is substantially limited by its available working capital and its continuing operating losses. See "Business -- Competition." NEW AND UNCERTAIN MARKET. The market for Internet and Intranet products and services has only recently developed. Because this market is relatively new and because current and future competitors are likely to introduce competing Internet and Intranet products and services, it is difficult to predict the rate at which the market will grow or at which new or increased competition will result in market saturation. If the Internet and Intranet markets fail to grow, grow more slowly than anticipated or become saturated with competitors, the Company's business, financial condition and operating results will be materially and adversely affected. DEPENDENCE ON THE INTERNET. Although a portion of the sales of the Company's products and services will depend upon growth of private Intranet networks, sales of the Company's Internet related products and services will depend in large part upon an adequate infrastructure for providing Internet access and carrying Internet traffic. The Internet may not prove to be a viable commercial marketplace because of inadequate development of the necessary infrastructure or timely development of complementary products such as high speed modems. Because global commerce and on-line exchange of information on the Internet and other similar open wide area networks are new and evolving, it is difficult to predict with any assurance whether the Internet will prove to be a viable commercial marketplace. There can be no assurance that the infrastructure or complementary products necessary to make the Internet a viable commercial marketplace will be developed, or, if developed, that the Internet will become a viable commercial marketplace. If the necessary infrastructure or complementary products are not developed, or if the Internet does not become a viable commercial marketplace, the Company's business, financial condition and operating results will be materially and adversely affected. RISK OF CHANGING TECHNOLOGY. The Internet software and services markets are characterized by rapid technological change, evolving industry standards, emerging industry competition and frequent new service, software and other product introductions. The Company's future success will depend in significant part on its ability to anticipate industry standards, continue to apply advances in Internet and Intranet technologies, enhance its current services and products, and develop and introduce new services and products on a timely basis. The introduction of services and products embodying new technologies and the emergence of new industry standards can render existing services and products obsolete and unmarketable. There can be no assurance that the Company will be successful in developing and marketing product enhancements or new services and products that respond to technological change or evolving industry standards, that the Company will not experience difficulties that could delay or prevent the successful development, introduction and 7 9 marketing of these services or products, or that its new services and products will adequately meet the requirements of the marketplace and achieve market acceptance. If the Company is unable, for technological or other reasons, to develop and introduce new services or products in a timely and cost-effective manner or to address compatibility, inoperability or other issues raised by technological changes or new industry standards, the Company's business, financial condition and operating results will be materially and adversely affected. See "Business -- Products and Services." DEPENDENCE ON KEY PERSONNEL. The Company depends to a significant extent upon its senior management and the loss of any member of senior management could have a material adverse effect upon the Company's business, financial condition and operating results. No assurance can be given that the Company can retain its senior management or other key personnel. Although the Company has entered into employment agreements with each of its executive officers which contain non-competition and non-disclosure provisions, the Company's ability to benefit from them is uncertain because such provisions typically must be limited in geographic scope to be enforceable. Restrictions limited in geographic scope may not effectively prohibit competition with the Company because of the global nature of the Internet. See "Management." LENGTH OF SALES CYCLE. The development and implementation of interactive Web sites and intranet software applications requires the Company to engage in a lengthy sales cycle. The pursuit of sales leads typically involves an analysis of the prospective customer's needs, preparation of a written proposal, one or more presentations and contract negotiations. The Company often provides significant education to prospective customers regarding the use and benefits of Internet or Intranet technologies and products. Extensive Web site development or licensing of the Company's products may also involve a substantial commitment of capital by potential customers as well as the attendant delays frequently associated with approving larger capital expenditures and reviewing new technologies that affect key operations. If the Company's average sales cycle continues to lengthen, the Company will face increased costs, potentially lower profit margins and a potential inability to achieve targeted sales goals. RISK OF DEFECTS. Web site services and other services based on software and computing systems often encounter development and completion delays and the underlying software may contain undetected errors or failures when introduced and, in the case of Web sites, when the volume of traffic on a site increases. In addition, there can be no assurance that errors found in the software underlying a Web site or other project will not result in delays in completion, commercial release or market acceptance of such Web site or other project. Likewise, there can be no assurance that the Company will not incur unanticipated costs to cure any defect or be obligated to refund money paid to the Company or to pay for damages caused by any delay or defect. Software applications and products as complex as those being developed by the Company may contain undetected errors or failures when first introduced. If software errors are discovered after introduction, the Company could experience delays and lost revenues during the period required to correct these errors. There can be no assurance that, despite testing by the Company and by current and potential customers, errors will not be found in new applications, products or releases after commencement of installation or shipment, resulting in loss of or delay in receiving revenues. SECURITY RISKS. 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. 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. 8 10 LIMITED PROTECTION OF PROPRIETARY TECHNOLOGY. 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," "Post On The Fly(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 primarily 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. An imposition of liability could have a material adverse effect on the Company. See "Business -- Intellectual Property Rights." DILUTION. Purchasers of shares of Common Stock offered hereby will experience immediate and substantial dilution in net tangible book value per share. In addition, the Company will be required to issue a substantial number of additional shares of Common Stock in the future in order to obtain additional financing. The issuance of a material number of such shares will have the effect of increasing the dilution to new investors in this Offering. FLUCTUATIONS IN QUARTERLY RESULTS. As a result of the Company's limited operating history, the Company does not have historical financial data for a significant number of periods on which to base planned operating expenses. Accordingly, the Company's expense levels are based in part on its expectations as to future revenues and to a large extent are fixed. However, the Company typically operates with no significant backlog. As a result, quarterly sales and operating results generally depend on the volume and timing of and ability to perform services requested within the quarter, and are difficult to forecast. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenues shortfall. Accordingly, any significant shortfall of demand for the Company's products and services in relation to the Company's expectations would result in fluctuations in future quarterly operating results. The Company may also experience significant fluctuations in future quarterly operating results as the result of many factors, including demand for the Company's products and services, introduction or enhancement of products by the Company and its competitors, market acceptance of new products and services, mix of products and services sold and general economic conditions. As a result, the Company believes that period-to-period comparisons of its results of operations are not necessarily meaningful and should not be relied upon as any indication of future performance. SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of the offering, the Company will have outstanding 3,381,396 shares of Common Stock (assuming a Conversion Price applicable to the Debentures of $4.00), will have outstanding options to purchase of 428,660 shares of Common Stock pursuant to the Company's stock option plans at a weighted average exercise price of approximately $4.90 per share, and will have outstanding warrants to acquire an aggregate 500,000 shares at a weighted average exercise price of 9 11 approximately $5.44 per share. Of the 3,381,396 shares outstanding after this offering, approximately 1,425,000 shares (including the 425,000 shares assumed to be sold in this offering) will be freely tradable without restriction or further registration under the Securities Act unless they are purchased by "affiliates" of the Company as that term is defined in Rule 144 under the Securities Act. The remaining 1,956,396 outstanding shares of Common Stock may be sold in the public market only if registered or pursuant to an exemption from registration such as Rule 144 or Rule 144(k) promulgated under the Securities Act. In addition, the Company intends to file a Registration Statement on Form S-8 under the Securities Act for the purpose of registering the potential sale of the 600,000 shares reserved for issuance under the Company's Stock Option Plan (of which options to purchase 418,660 shares are outstanding), the 300,000 shares for issuance under the Company's Non-Employee Directors Plan (of which options to purchase 10,000 shares are outstanding) and the 150,000 shares reserved for issuance under the Company's Employee Stock Purchase Plan (of which no shares or purchase rights have yet been granted). After the effective date of that registration statement, except for shares held by affiliates of the Company, shares purchased pursuant to the foregoing stock option and purchase plans generally would be available for resale in the public market. Finally, not later than thirty days following the date on which the Debentures may be fully converted, the Company has agreed to file a registration statement for the sale to the public of the 400,000 shares issuable upon the exercise of warrants granted in connection with the Debenture sale. See "Description of Securities -- Warrants Issued in Connection with Debenture Sale." After the effective date of that registration statement, shares issuable pursuant to any exercise of such warrants generally would be available for resale in the public market. VARIABILITY OF NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF DEBENTURES. The number of shares of Common Stock issuable upon conversion of the Debentures is essentially unlimited. If the price of the Common Stock as reported by the Nasdaq SmallCap(TM) Market, declines to a price significantly less than $4.00 per share, the Company will be required to issue substantially more than the 425,000 shares assumed hereunder to be issuable upon conversion of the Debentures. All shares issuable by the Company upon conversion of the Debentures are required to be registered hereunder. Consequently, all of such shares will be eligible for sale in the market place without restriction, except to the extent that any of the selling Securityholders are deemed to be "affiliates" of the Company at the time of sale. No assurance can be given that the trading price of the Company's Common Stock will not fall significantly below $4.00 per share, or that purchasers in this offering will not suffer significant additional dilution as a result of any such decline in the price of the Common Stock. UNPAID BALANCE OF DEBENTURES ACCELERATES UPON DEFAULT. The unpaid balance of the Debentures accelerates upon any default in the payment of the Debentures. Consequently, if the Company defaults in the payment of any of the principal or interest due or payable on the Debentures the value of the Common Stock may decline. CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO CONVERT DEBENTURES. Holders of the Debentures will only be able to convert the Debentures if (i) a current prospectus under the Securities Act relating to the shares of Common Stock underlying the Debentures is then in effect, and (ii) such shares of Common Stock are qualified for sale or exempt from qualification under the applicable securities laws of the states in which they are offered. There can be no assurance that the Company will be able to maintain the effectiveness of a current prospectus covering the shares of Common Stock issuable upon conversion of the Debentures. See "Description of Securities." SENIORITY OF PREFERRED STOCK; STAGGERED BOARD; POSSIBLE ANTI-TAKEOVER EFFECTS. The Board of Directors has authority to issue up to 1,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of the preferred stock without further vote or action by the Company's stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. While the Company has no present intention to issue shares of preferred stock, such issuance, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of the outstanding voting stock of the Company. See "Description of Capital Stock-Preferred Stock." In addition, the Company's Restated Certificate of Incorporation provides that the Board of Directors be divided into three classes of directors, with each class serving a 10 12 staggered three-year term. The division of the Board of Directors into three classes may tend to discourage a third party from making a tender offer or otherwise attempting to obtain control of the Company and may maintain the incumbency of the Board of Directors, because such a division generally makes it more difficult for stockholders to replace a majority of directors. See "Description of Capital Stock -- Limitations on Liability of Directors." POSSIBLE DELISTING OF SECURITIES FROM NASDAQ SMALLCAP(TM) MARKET; DISCLOSURE RELATING TO LOW-PRICED STOCKS. The Company's Common Stock is listed on The Nasdaq SmallCap(TM) Market. In order to continue to be included in The Nasdaq SmallCap(TM) Market, a company must maintain $2,000,000 in total assets, a $200,000 public float market value and $1,000,000 in total capital and surplus. In addition, continued inclusion requires two market-makers and a minimum bid price of $1.00 per share; provided, however, that if a company falls below such minimum bid price, it will remain eligible for continued inclusion in The Nasdaq SmallCap(TM) Market if the market value of the public float is at least $1,000,000 and the company has $2,000,000 in capital and surplus. Nasdaq has proposed new, more stringent maintenance criteria. These new criteria will apply to the Company commencing in February 1998. These new criteria require (i) either $2,000,000 in net tangible assets (total assets less total liabilities, goodwill and other intangible assets), $35,000,000 in market capitalization or $500,000 in net income for two of the three immediately preceding years; (ii) at least 500,000 shares of public float; (iii) market value of the public float of not less than $4,000,000; (iv) a minimum bid price of not less than $1.00 per share; and (v) a minimum of 300 stockholders. Failure of the Company to meet Nasdaq's current or new maintenance criteria may cause the Common Stock to be delisted from The Nasdaq SmallCap(TM) Market, and trading, if any, in the Common Stock would thereafter be conducted in the over-the-counter market. As a result, an investor may find it more difficult to dispose of, or to obtain accurate quotations as to the market value, of the Common Stock. In addition, if the Common Stock were delisted from trading on The Nasdaq SmallCap(TM) Market and the trading price of the Common Stock was less than $5.00 per share, trading in the Common Stock would also be subject to certain rules promulgated under the Securities Exchange Act of 1934, which require additional disclosure by broker-dealers in connection with any trades involving a stock defined as a "penny stock" (generally, any non-Nasdaq equity security that has a market price of less than $5.00 per share, subject to certain exceptions). Such rules require the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stock to persons other than established customers and accredited investors. For these types of transactions, the broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transactions prior to sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in the Common Stock, which could severely limit the market liquidity of the Common Stock and the ability of stockholders to sell the Common Stock in the secondary market. LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY. The Company's Restated Certificate of Incorporation provides, as permitted by Delaware law, that its directors shall have no personal liability for certain breaches of their fiduciary duties to the Company. In addition, the Company's Restated Bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Delaware law. These limitations on personal liability do not apply to liabilities under federal securities laws. However, these provisions may reduce the likelihood of derivative litigation against directors and may discourage stockholders from bringing a lawsuit against directors for a breach of their fiduciary duties. See "Description of Capital Stock -- Limitations on Liability of Directors." GOVERNMENT REGULATION. The Telecommunications Act of 1996 (the "1996 Telecommunications Act"), which became effective on February 8, 1996, imposes criminal liability on persons sending or displaying in a manner available to minors indecent material on an interactive computer service such as the Internet. The 1996 Telecommunications Act also imposes criminal liability on an entity knowingly permitting facilities under its control to be used for those activities. The constitutionality of these provisions was successfully challenged in federal district court and ultimately found to be unconstitutional by the United States Supreme Court in Reno v. American Civil Liberties Union. Therefore, at the time of this Prospectus, the Company does not believe that it is currently subject to direct regulation by any government agency, other than regulations 11 13 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 and 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, increase the Company's cost of doing business, cause the Company to modify its operations, or otherwise have an adverse effect on the Company's business, financial condition or 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 United States, various states and foreign jurisdictions. Any imposition of liability could have a material adverse effect on the Company. 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, including regulatory changes which directly or indirectly affect use of or access to the Internet or increase the likelihood or scope of competition from regional telephone companies, could have a material adverse effect on the Company. 12 14 USE OF PROCEEDS The Company will not receive any proceeds from the sale of the Common Stock issuable upon conversion thereof by the Selling Securityholders or upon any conversion of the Debentures. PRICE RANGE OF COMMON STOCK 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.
1997 HIGH LOW ---- ------- ------- Second quarter (since May 8, 1997)..................... $ 7.25 $ 6.00 Third quarter.......................................... 6.50 2.13 Fourth quarter (through December 13, 1997)............. 10.13 2.63
On December 13, 1997, the last reported sale price of the Common Stock as reported by the Nasdaq SmallCap(TM) Market was $8.0625 per share. As of December 15, 1997, there were 32 holders of record of the Company's Common Stock. DIVIDEND POLICY 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. 13 15 SELECTED FINANCIAL DATA The following selected historical financial data of HomeCom Communications, Inc. for the years ended December 31, 1994, 1995 and 1996 have been derived from the audited financial statements of the Company, including the balance sheets at December 31, 1994, 1995 and 1996 and the related statements of operations and of cash flows for each of the three fiscal years in the period ended December 31, 1996 and the related notes thereto included herein. The financial data as of September 30, 1997 and for the nine months ended September 30, 1997 are derived from unaudited condensed financial statements included herein, which include all adjustments, consisting only of normal recurring adjustments, that the Company considers necessary for a fair presentation of the financial position and the results of operations for these periods. Operating results for the nine months ended September 30, 1997 are not necessarily indicative of results that may be expected for future periods. The data should be read in conjunction with the financial statements, related notes and other financial information included herein.
DECEMBER 2 NINE MONTHS (INCORPORATION) YEAR ENDED DECEMBER 31, ENDED TO DECEMBER 31, ----------------------- SEPTEMBER 30, 1994 1995 1996 1997 --------------- --------- ---------- --------------- UNAUDITED STATEMENT OF OPERATIONS DATA: Net sales: Service sales....................... -- $ 327,574 $2,112,878 $ 2,268,377 Equipment sales..................... -- -- 185,977 62,598 --------- --------- ---------- ----------- Total net sales.................. -- 327,574 2,298,855 2,330,975 --------- --------- ---------- ----------- Cost of Sales: Cost of services.................... -- 59,871 546,409 1,252,507 Cost of equipment sold.............. -- -- 128,938 52,294 --------- --------- ---------- ----------- Total cost of sales.............. -- 59,871 675,347 1,304,801 --------- --------- ---------- ----------- Gross profit.......................... -- 267,703 1,623,508 1,026,174 --------- --------- ---------- ----------- Operating expenses: Sales and marketing................. 1,045 124,253 845,690 1,163,072 Product development................. -- 20,239 78,887 375,977 General and administrative.......... 16,407 121,313 1,194,728 2,739,374 Depreciation and amortization....... -- 3,722 85,068 138,832 --------- --------- ---------- ----------- Total operating expenses......... 17,452 269,527 2,204,373 4,417,255 Operating Loss........................ (17,452) (1,824) (580,865) (3,391,081) Other expenses (income): Interest expense, net............... -- 3,469 51,272 53,665 Other expense (income), net......... -- 147 (6,554) (56,999) --------- --------- ---------- ----------- Loss before income taxes.............. (17,452) (5,440) (625,583) (3,387,747) Income taxes.......................... -- -- -- -- --------- --------- ---------- ----------- Net loss.............................. $ (17,452) $ (5,440) $ (625,583) $(3,387,747) ========= ========= ========== =========== Net loss per share.................... $ (.01) $ (.00) $ (.33) $ (1.36) ========= ========= ========== =========== Weighted average number of shares of Common Stock and Common Stock equivalents outstanding............. 1,850,447 1,850,447 1,879,696 2,483,258 ========= ========= ========== ===========
14 16
DECEMBER 31, SEPTEMBER 30, 1997 --------------------------------- ------------------------ 1994 1995 1996 ACTUAL PRO FORMA ------ -------- ----------- ---------- ---------- UNAUDITED UNAUDITED BALANCE SHEET DATA: Working capital (deficit)........ $8,455 $133,792 $(1,304,682) $1,961,870 $1,961,870 Total assets..................... 10,254 247,382 1,726,522 3,723,473 3,595,973 Long-term obligations............ -- 160,792 147,833 1,244,775 111,442 Total liabilities................ -- 242,568 2,347,191 2,118,381 985,048 Stockholders' equity (deficit) 10,254 4,814 (620,669) 1,605,092 2,610,925
- --------------- (1) Based on the trading price of the Common Stock as of December 13, 1997 of $8.0625 per share, the Conversion Price would be $4.00 per share. Pro forma balance sheet data reflect conversion of an aggregate $1.7 million of Debentures into an aggregate 425,000 shares of Common Stock at the assumed Conversion Price of $4.00 per share. 15 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company was incorporated in December 1994 and commenced sales in January 1995 when it began marketing its Web site development and hosting services. The Company markets its services through a direct sales force, advertisement, referrals, and active business partner relationships with organizations such as AT&T, Microsoft, Netscape and Unisys. The Company generates revenues through Internet and Intranet customized software applications, Web site development, Web site hosting services, computer hardware resales, consulting services (including consulting on internet and intranet security) and fees charged for the maintenance of Web sites. Most customized software application projects are generally completed within six to eight weeks, although certain past, current and future projects have taken and are expected to take longer to complete. Revenues on customized application and Web site projects are recognized using the percentage of completion method. Web site maintenance and hosting revenues represent recurring revenues and are deferred and recognized ratably over the period. Because the Company will continue to develop and market new products and services, the results of operations for the fiscal years ended December 31, 1995 and 1996 and for the nine months ended September 30, 1997 are not necessarily indicative of future operating results. During the first nine months of 1997, custom Internet and Intranet applications and integration services accounted for approximately 56% of the Company's revenues, Internet outsourcing services generated approximately 33% of the Company's revenues and Internet security services generated approximately 8% of the Company's revenues. During 1996 and the first nine months of 1997, expenses substantially exceeded net sales as the Company expanded its products and services, increased its marketing and sales staff and enhanced its operational and administrative support structure to support anticipated increases in revenues. The anticipated increases in revenues have not materialized and the Company has been forced to substantially reduce its operating expenses. In the third quarter of 1997, the Company reduced the number of its employees from approximately 100 to approximately 50. As a result of this substantial reduction in its work force, the Company faces issues involving employee morale and hiring. Notwithstanding these reductions in operating expenses, the Company expects to continue to incur operating losses for an indefinite period. See "Risk Factors -- Recent Reduction of Staff and Other Expenses; Continuing Losses." 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. See "Risk Factors -- Potential Fluctuations in Quarterly 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 quarter are substantially affected by the amount of services requested by its customers. Because the Company is incurring expenses in anticipation of future revenue growth and a high percentage of the Company's expenses are relatively fixed, a small variation in the timing of recognition of specific revenues could cause significant variations in operating results from quarter to quarter. 16 18 RESULTS OF OPERATIONS The following table sets forth certain operating data as a percentage of net revenues for the periods indicated.
DECEMBER 2 NINE MONTHS (INCORPORATION) YEAR ENDED YEAR ENDED ENDED TO DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1994 1995 1996 1997 --------------- ------------ ------------ ------------- Net sales: Service sales....................... -- 100.0% 91.9% 97.3% Equipment sales..................... -- -- 8.1 2.7 ----- ----- ----- ------ Total net sales.................. -- 100.0 100.0 100.0 ----- ----- ----- ------ Cost of sales: Cost of services.................... -- 18.3 23.8 53.8 Cost of equipment sold.............. -- -- 5.6 2.2 ----- ----- ----- ------ Total cost of sales.............. -- 18.3 29.4 56.0 ----- ----- ----- ------ Gross profit.......................... -- 81.7 70.6 44.0 ----- ----- ----- ------ Operating expenses: Sales and marketing................. -- 37.9 36.8 49.9 Product development................. -- 6.2 3.4 16.1 General and administrative.......... -- 37.1 52.0 117.5 Depreciation and amortization....... -- 1.1 3.7 6.0 ----- ----- ----- ------ Total operating expenses......... -- 82.3 95.9 189.5 ----- ----- ----- ------ Operating loss........................ -- (0.6) (25.3) (145.5) ----- ----- ----- ------ Other expenses (income) Interest expense.................... -- 1.1 2.2 2.3 Other expense (income), net......... -- 0.0 (0.3) (2.5) ----- ----- ----- ------ Loss before income taxes.............. -- (1.7) (27.2) (145.3) ----- ----- ----- ------ Income taxes.......................... -- 0.0 0.0 0.0 ----- ----- ----- ------ Net loss.............................. -- (1.7)% (27.2)% (145.3)% ===== ===== ===== ======
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Net Sales. Net sales increased 58.4% from $1,471,324 in the first nine months of 1996 to $2,330,975 in the first nine months of 1997. Revenues from service sales increased 72.0% from $1,318,675 in the first nine months of 1996 to $2,268,377 in the first nine months of 1997. This increase of $949,702 is primarily attributable to increases in hosting revenues of approximately $563,000, Web site development and customized applications revenues of approximately $184,000 and security consulting revenue of approximately $237,000. Revenues from equipment sales were $62,598 during the first nine months of 1997 as compared to $152,649 during the first nine months of 1996. Cost of Sales. Cost of sales for services increased from $271,887, or 18.5% of revenues in the first nine months of 1996 to $1,252,507, or 53.7% of revenues in the first nine months of 1997. This increase reflects the Company's significant increase in payroll costs associated with the hiring of additional technical personnel. Increases in the Company's cost of sales as a percentage of sales reflects the hiring of technical personnel to create available capacity for anticipated revenue growth, which did not occur. The Company increased its technical staff to approximately 60 persons in July 1997. Subsequently, the Company reduced this staff to approximately 30 persons as of September 30, 1997. Gross Profit. Gross profit decreased by $58,711 from $1,084,885 in the first nine months of 1996 to $1,026,174 in the first nine months of 1997. Gross profit margins decreased from 73.7% during the first nine 17 19 months of 1996 to 44.0% during the first nine months of 1997. This decrease as a percentage of net sales primarily reflects increased costs incurred by the Company for technical personnel hired in advance of anticipated revenue growth, which did not occur. Sales and Marketing. Sales and marketing expenses include salaries, variable commissions and bonuses for the sales force, advertisement and promotional marketing materials, travel and telephone charges. Sales and marketing expenses increased 185.0% from $408,131 in the first nine months of 1996 to $1,163,072 in the first nine months of 1997. This increase was primarily attributable to an increase in advertising and marketing expenses. As a percentage of net sales, these expenses increased from 27.7% in the first nine months of 1996 to 49.9% in the first nine months of 1997. During the third quarter of 1997, the Company implemented procedures intended to substantially reduce advertising and marketing expenses. Product Development. Product development expenses consist of personnel costs required to conduct the Company's product development efforts. Management believes that significant continuing investments in product development are required to compete effectively in the Company's industry. As a consequence, the Company has increased expenditures on product development primarily through the employment of additional development personnel. Total expenditures for product development were $405,132, or 17.4% of net sales in first nine months of 1997, of which $29,155 were capitalized. This compares to total product development expenditures of $117,068, or 8.0% of sales, in the first nine months of 1996, of which $53,245 were capitalized. The product development staff was eight persons in July 1997. Subsequently, the Company reduced its product development staff, which was two persons at September 30, 1997. General and Administrative. General and administrative expenses include salaries for administrative personnel, rents, telephone charges, insurance and other administrative expenses. General and administrative expenses increased from $664,244 in the first nine months of 1996 to $2,739,374 in the first nine months of 1997. As a percentage of net sales, these expenses increased from 45.1% in the first nine months of 1996 to 117.5% in the first nine months of 1997. This increase as a percentage of net sales reflects primarily increases for operational and administrative support personnel incurred to support anticipated growth in revenues, which did not occur. During the third quarter of 1997, the Company implemented steps to significantly reduce its general and administrative costs. These steps included: (i) reductions in general and administrative staff; and (ii) reductions in advertising, public relations and other professional services. Depreciation and Amortization. Depreciation and amortization includes depreciation and amortization of computers, network equipment, office equipment and equipment under capital leases. Depreciation and amortization increased from $52,835, or 3.6% of net sales in the first nine months of 1996 to $138,832, or 6.0% in the first nine months of 1997, reflecting increased expenditures on capital equipment. Interest Expense. Interest expense increased from $26,833 in the first nine months of 1996 to $53,655 during the first nine months of 1997, principally reflecting increased debt levels associated with notes payable to investors entered into in 1996. YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net Sales. Net sales increased 601.8% from $327,574 in 1995 to $2,298,855 in 1996. Revenues from service sales increased 545.0% from $327,574 in 1995 to $2,112,878 in 1996. This increase of $1,785,304 is primarily attributable to increases in hosting revenues of $321,278, Web site development and customized applications revenues of $1,159,205, and consulting and maintenance revenues of $112,779. Revenues from equipment sales were $185,977 during 1996. Cost of Sales. Cost of sales for services includes salaries for programmers, technical staff and customer support. Cost of sales for services increased from $59,871, or 18.3% of net sales in 1995 to $546,409, or 23.8% of net sales in 1996. This increase reflects the Company's significant increase in payroll costs associated with the hiring of additional technical personnel in 1996. Increases in the Company's personnel costs as a percentage of sales also reflects higher costs incurred to attract and retain Internet software development professionals, and a change in the mix of products and services sold. 18 20 Gross Profit. Gross profit increased by $1,355,805 from $267,703 in 1995 to $1,623,508 in 1996. Gross profit margins decreased from 81.7% during 1995 to 70.6% during 1996. This decrease as a percentage of net sales primarily reflects increased costs incurred by the Company for technical personnel and a change in the mix of products and services sold. Sales and Marketing. Sales and marketing expenses increased 580.6% from $124,253 in 1995 to $845,690 in 1996. This increase was primarily attributable to an increase in the size of the Company's sales force. As a percentage of net sales, these expenses decreased from 37.9% of net sales in 1995 to 36.8% of revenues in 1996. Product Development. Total expenditures for product development were $163,069, or 7.1% of net sales in 1996, of which $84,182, or 51.6%, were capitalized. This compares to total product development expenditures of $20,239, or 6.2% of net sales, in 1995, none of which were capitalized. General and Administrative. General and administrative expenses increased from $121,313 in 1995 to $1,194,728 in 1996. As a percentage of net sales, these expenses increased from 37.1% in 1995 to 52.0% in 1996. This increase as a percentage of net sales reflects primarily increases for operational and administrative support personnel incurred to support anticipated growth. Depreciation and Amortization. Depreciation and amortization increased from $3,722 in 1995 to $85,068 in 1996, or 1.1% of revenues during 1995 to 3.7% of revenues in 1996, reflecting increased expenditures on capital equipment. Interest Expense. Interest expense increased from $3,469 in 1995 to $51,272 during 1996, principally reflecting increased debt levels associated with notes payable to investors entered into in 1996. Income Taxes. The Company has not paid income taxes to date because it has not had taxable income. Net operating loss carryforwards are recorded as a deferred tax asset with a full valuation allowance. YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994 Net Sales. The Company was formed on December 2, 1994, and recognized no revenues during 1994. During 1995, the Company had net sales of $327,574, with associated cost of sales of $59,871. Operating Expenses. For the year ended December 31, 1994, the Company had operating expenses of $17,452, which consisted of $1,045 in marketing expenses and $16,407 in general and administrative expenses. Operating expenses during 1995 were $269,527. QUARTERLY RESULTS OF OPERATIONS The following table presents the Company's net sales, gross profit, operating loss and net loss for each of the seven quarters beginning January 1, 1996 and ending September 30, 1997. In the opinion of management, this information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation. The results of operations data for any quarter are not necessarily indicative of the results to be expected for any future period.
QUARTER ENDED: ------------------------------------------------------------------------------------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1996 1996 1996 1997 1997 1997 --------- -------- ------------- ------------ --------- -------- ------------- (IN THOUSANDS) Net sales.............. $ 272 $ 546 $ 654 $ 828 $ 909 $ 708 $ 713 Gross profit........... 225 396 464 539 568 345 113 Operating income (loss)............... 12 (50) (66) (477) (355) (903) (2,133) Net income (loss)...... 10 (65) (77) (495) (375) (917) (2,096)
The Company's operations and related revenues historically have varied substantially from quarter to quarter, and the Company expects these variations to continue. Unanticipated variations in the number and timing of the Company's projects or in employee utilization rates may cause significant variations in revenues 19 21 in any particular quarter. 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 therefore have a material adverse effect on the Company's results of operations and financial condition. See "Risk Factors -- Potential Fluctuations in Quarterly Results." LIQUIDITY AND CAPITAL RESOURCES GENERAL Following completion of its initial public offering, the Company increased its expenses in anticipation of potential increased sales which did not occur. During the quarter ended June 30, 1997, the Company realized that sales had not increased at the rate anticipated. In response, the Company took efforts during the quarter ended September 30, 1997 to reduce its general and administrative costs. These efforts included (i) a reduction in staff from a high of approximately 100 persons in July 1997 to approximately 50 persons at September 30, 1997; and (ii) reductions in advertising, public relations and other professional services. The Company has substantially limited sources of capital. As of September 30, 1997, the Company had net working capital of approximately $2.0 million. Because the Company expects to continue to incur substantial operating losses, the Company will continue to use substantial sums of cash in its operations throughout the remainder of this calendar year, and possibly for an indefinite period thereafter. 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. If the Company exhausts its current sources of capital and is not able to obtain additional capital, the Company will be required to undertake certain steps to continue its operations. Such steps may include immediate reduction of the Company's operating costs and other expenditures, including potential reductions of personnel and suspension of salary increases and capital expenditures. If such measures are 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 assets. Any such actions undertaken may limit the Company's opportunities to realize continued increases in sales and the Company may not be able to reduce its costs in amounts sufficient to achieve break-even or profitable operations. If the Company exhausts its sources of capital, and subsequent cost reduction measures are not sufficient to allow the Company to achieve break-even or profitable operations, the Company will be forced to seek protection from its creditors. Net cash used in operating activities was $3,487,770 for the nine month period ended September 30, 1997. The Company has primarily financed its operations to date through public and private sales of equity securities and loans from its principal stockholders and affiliates. Net cash provided by financing activities was $5,726,490 and $439,712 during the nine month periods ended September 30, 1997 and 1996, respectively. 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 $4,700,000. 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 the Debentures resulting in net proceeds to the Company of approximately $1.5 million. The Company spent $364,265 and $329,569 during the nine month periods ended September 30, 1997 and 1996, 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 September 30, 1997 consist primarily of leases on its Atlanta and Washington, DC facilities. At September 30, 1997, there were no material commitments for capital expenditures. Accounts receivable, net of allowance for doubtful accounts, totaled $657,163 as of September 30, 1997. 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 20 22 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. HISS ACQUISITION 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 the transaction, the former holders of HISS's capital stock received the right to receive their pro rata share of four annual earnout payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each, an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal to 30% of HISS's gross revenues for the 12 month period ending December 31, 1997; provided, however, that (i) the amount of each Annual Earnout will be limited to an amount (the "Profit Cap") equal to HISS's net profits for the 12-month period ended December 31 immediately preceding the payment date; (ii) amounts not paid in a year as a result of the Profit Cap will be carried forward to the subsequent year; and (iii) amounts not paid in the fourth year as a result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in whole or in part in cash or, at HomeCom's option, in shares of Common Stock based upon the average trading price of the Common Stock for the ten trading days immediately preceding payment of the Annual Earnout. An Annual Earnout will not be paid if the recipient is then in violation of the non-solicitation and non-competition provisions contained in the Stock Purchase Agreement to which the former holders of HISS's capital stock are subject. Roger Nebel, Vice President and a director of the Company, owned 48% of HISS's outstanding capital stock and will be entitled to receive 48% of the Annual Earnouts. HISS was merged with and into the Company on September 11, 1996. The Company currently anticipates that any and all amounts earned under this Agreement shall be paid in the form of shares of the Company's common stock, rather than cash. HISS's gross revenues for the nine months ended September 30, 1997 were approximately $237,000. RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997, Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("FAS 130") was issued. FAS 130 establishes standards for reporting and display of comprehensive income and its components. FAS 130 is effective for fiscal years beginning after December 15, 1997. The effect on the Company's financial statements will be immaterial. The Company will adopt FAS 130 on its effective date. In June 1997, Statement of Financial Accounting Standards No. 131 "Disclosures about Segments of an Enterprise and Related Information" ("FAS 131") was issued. FAS 131 is designed to improve the information provided in financial statements about the different types of business activities in which the enterprise engages and economic environments in which the enterprise operates. FAS 131 is effective for fiscal years beginning after December 15, 1997. Earlier application is encouraged. The Company will adopt FAS 131 on its effective date. Such adoption will have no effect on net income of the Company. 21 23 BUSINESS GENERAL HomeCom develops and markets specialized software applications and products and provides services that enable businesses to use the Internet and Intranets to obtain and communicate important business information, conduct commercial transactions and improve business productivity. HomeCom provides Internet/Intranet solutions in three areas: (i) customized software applications design, development and integration including, World Wide Web site development; (ii) Internet outsourcing services; and (iii) security consulting and integration services. HomeCom's objective is to be a leading provider of business communications solutions using Internet standard protocol technologies. 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 vertical industries, including banking and financial services, and telecommunications. The Company believes that it has established a reputation as a provider of sophisticated interactive Web sites. The Company has developed more than 100 Web sites for clients in many diverse industries, including sites for AT&T, Synovus Financial Corporation ("Synovus"), SouthTrust Bank Corporation ("SouthTrust"), Norwest Corporation ("Norwest"), Marine Midland Bank ("Marine Midland"), Rainforest Cafe, Incorporated ("Rainforest"), Excalibur Group, a joint venture between Time Warner Cable and Time, Inc. ("Time Warner"), Brinker International ("Brinker"), Executrain Corporation ("Executrain"), American International Underwriters ("AIG"), and American Family Life Assurance Corporation ("AFLAC"). The Company has a highly trained staff that is able to design Web sites ranging from basic "inquiry only" sites to complex, interactive sites capable of providing on-line commerce, database integration and manipulation and sophisticated graphics, animation, sound and video. The Company uses its proprietary Post On The Fly(TM) software in designing and developing many of its Web sites. HomeCom also provides Internet outsourcing services and presently hosts more than 2,900 Web sites for clients in approximately 45 countries. HomeCom establishes and maintains the resources and facilities necessary to create and support a customer's Internet server. As a provider of Internet outsourcing services, HomeCom (i) advises its clients as to the appropriate hardware, including servers and routers, and software necessary to create an Internet server; (ii) coordinates the purchase of this hardware and software, including operating system and Internet server software; and (iii) provides the facilities to house and maintain the server. HomeCom provides network management, including all network functions, the maintenance of an environmentally conditioned, secure facility and access to the Internet. The Company has developed advanced software products that it presently includes in its custom applications. The Company has developed software, called Post On The Fly(TM), which enables non-technical users to add, retrieve and update information through the Internet or an Intranet using standard browser software. Post On The Fly(TM) Conference permits intuitive and easy conferences among employees, customers and business partners. The product uses database technology to archive the user's data, ideas and innovations for later retrieval and review. The Company's Marketplace product facilitates the creation and updating of an on-line store or catalog. HomeCom is also developing a suite of software modules known as the Personal Internet Banker (TM), Under the terms of the Company's business partner agreement with Unisys, HomeCom's suite of Personal Internet Banker (TM) software will be marketed as optional software available to purchasers of Unisys' Computer Systems Group enterprise server hardware. At the heart of HomeCom's banking applications suite is its 22 24 Personal Internet Banker (TM) software, a scaleable financial software package that maintains a customer's personal banking history and preferences for Internet banking. HomeCom's Internet security division provides security consulting services and solutions for businesses connecting to the Internet. The Company plans to develop and integrate advanced value-added security features into its custom software applications and products, and to provide consulting and integration services to companies seeking to communicate and transact business securely over the Internet. The Company markets its 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 such as AT&T, Microsoft, Netscape and Unisys. The Company's staff of 26 full-time software engineers design and develop custom applications as well as run the Company's outsourcing services and design Web sites. The Company's software engineers have experience with various computer operating systems, including Sun Solaris, SGI's IRIX, Windows NT, Digital's 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. INDUSTRY OVERVIEW THE INTERNET AND THE WORLD WIDE WEB The Internet represents a global network of thousands of interconnected computers and computer networks. By using the Internet, businesses, individuals, educational institutions and government agencies communicate electronically to access and share information and conduct business. Open communications on the Internet are enabled by TCP/IP, an inter-networking protocol software standard. Advances in microprocessor technology and the development of Web technologies, such as Hypertext Markup Language ("HTML") technology (which allows users to move directly from one Web site to another) and advanced graphical user interface browser and search engine software, have made the Internet easier to navigate and more accessible to a larger number of users and for a broader range of applications. These recent technological advances have led to dramatic increases in the use of the Internet by businesses and individuals. The World Wide Web is a worldwide network of computer services that uses a special communications protocol, Hypertext Transfer Protocol ("HTTP"), that links different servers throughout the Internet and enables non-technical users to move from Web site to Web site easily and to access information using browser software. The development of the Web and Internet-based technologies has allowed fundamental and structural changes in the way information is published, distributed and retrieved, thereby lowering the cost of publishing information and expanding its potential reach. By facilitating the publishing and exchange of information, the Web dramatically increases the amount of information available to users. Businesses are increasingly recognizing that the Internet can enhance the delivery and exchange of information, both among their geographically dispersed locations and employees and with their business partners and customers. Businesses are also realizing that the Internet can facilitate relatively inexpensive, standards-based and easy-to-use methods for accessing and delivering business information, such as sales, marketing and distribution data. As a result, many businesses are using Web sites as a new medium for advertising, promotion, conferencing, technical support and exchange of information. WEB SITES A Web site is a collection of one or more electronic documents or "Web pages," which may contain graphics, text, audio and video information, which is available to a visitor accessing the Web site. Web sites can contain from one to hundreds of pages, and can be searched, retrieved and viewed through the use of widely available "browsers," such as Netscape Navigator or Microsoft Internet Explorer. Using Web browser 23 25 software, computer users can connect to a Web site by entering the site's unique electronic Web address, known as its Universal Resource Locator ("URL"). Users can navigate the Web sites by utilizing hypertext link capabilities contained in Web pages. Hypertext links are active areas on a Web page which, when selected by a user, automatically identify and display a specific page, which can be located anywhere else on the Web, thus enabling users to move from one Web page to another without specifying the underlying URL address. Web sites can vary significantly in complexity and interactivity. A simple Web site may display only text, and more complex sites may display colored text, graphics, pictures, sound, animation, video and database information. The Company believes that increased processor speed, higher telecommunications bandwidth (resulting in increased transmission speed) and the development of software standards have led to the growing acceptance of the Internet as a communications tool. As a result, many businesses are choosing to re-engineer their distribution, logistics, customer service and marketing functions into "Information Depots" accessible through their Web sites. Consequently, the Company believes that there is an expanding market for developers of sophisticated, graphically enhanced, interactive Web sites. ENTERPRISE NETWORKS AND INTRANETS As network technology has advanced, business-wide networking has evolved. Organizations have developed local area networks ("LANs") and have connected geographically dispersed LANs into wide area networks ("WANs"). Many LANs employ proprietary communications software, such as Novell NetWare. Today, in addition to proprietary protocols, an increasing number of businesses are using the Internet protocol TCP/IP for communications. TCP/IP facilitates communications over internal networks using Internet software tools and applications. An Intranet is a TCP/IP network inside a company that links the company's people and information in a way that makes information more accessible and facilitates navigation through all the resources and applications of the company's computing environment. Enterprise networks have increasingly used high-cost leased data lines to create private and secure LANs and WANs. Internet protocol network software now allows organizations to use the Internet for a lower-cost communications system by reducing long distance and leased line charges. Businesses now can expand the reach of and access to their internal information systems and enterprise applications to allow geographically dispersed facilities, remote offices, mobile employees, customers and business partners to access their networks through the Internet at lower communications costs. The integration of LANs and WANs through the Internet, plus the advancement of encryption security capabilities, has promoted the use of high-speed virtual private networks ("VPNs"), which may be maintained at a fraction of the operating cost of dedicated, leased line networks. VPNs that facilitate Internet banking, sales entry and express delivery shipment tracking services are examples of this fast-growing segment of the computing industry. The rapid growth of Intranets and VPNs has increased the need for specialized software applications that facilitate information delivery and communication using TCP/IP protocol. INTERNET SECURITY An integral part of developing Internet based software applications for businesses is protecting against unauthorized access to enterprise networks and corporate data. Examples of valuable corporate data include financial results, medical records, personnel files, research and development projects, marketing plans and credit information. Businesses are vulnerable to unauthorized access to this information both by employees and outside persons. Unauthorized access may go undetected by the computer user or network administrator. The Company believes that concerns about the security of data transmitted over the Internet have limited growth in the Internet's commercial use. As a result, the Company believes that there is a rapidly expanding need for the services of Internet security specialists. THE INTERNET-ENABLING PRODUCTS AND SERVICES MARKET The explosive growth of the Internet and World Wide Web has led to the rapid development of increasingly sophisticated and advanced TCP/IP-enabled software applications such as Web browsers and 24 26 HTML compatible server software. These Internet tools enable users to obtain and communicate information more efficiently and effectively. The Company believes that there is a rapidly growing need for businesses to expand and integrate their existing information and communications systems to take advantage of the global communications framework and advanced graphics capabilities of Internet-enabled systems. The Company also believes that businesses today face a paradigm shift from proprietary protocol based local area networks and wide area networks to Internet-enabled global communications systems. However, the Company believes that there is a need for high quality software applications designed to support these new systems. THE HOMECOM SOLUTION HomeCom was established to provide advanced software applications and integration services to businesses seeking to take advantage of the Internet. Integration of existing business operations with new Internet technologies is a costly and complex undertaking which the Company believes requires a high level of expertise to complete effectively. HomeCom believes that many businesses do not have the in-house experience and expertise to establish effective Internet-based communications in order to increase their productivity and compete more effectively in the marketplace. Also, HomeCom believes that the growth of electronic commerce over the Internet has been impeded by the perceived lack of effective security components. Finally, the Company believes that there presently is a lack of specialized software applications to support the growing Internet market. Therefore, the Company believes that businesses will engage specialized firms like HomeCom to implement Internet solutions. HomeCom believes it is well positioned to become a leading Internet solutions provider for the following reasons: - HomeCom focuses on creating Internet "Information Depots" for clients, including sophisticated database integrated software applications and interactive Web sites, to provide valuable information to business' customers, prospects, employees, stockholders and business partners. This is in contrast to the public relations material that represents much of the content currently on Web sites. - The Company has assembled a team of professional programmers, database experts and graphic artists that is able to create advanced interactive Web sites with database integration that function as effective Information Depots. Through developing specialized Internet applications for clients in vertical industries, HomeCom's team attains valuable knowledge about industry specific Internet needs and solutions, which it uses to provide efficient, value-added services to its customers. - HomeCom's Internet security division furthers the Company's knowledge of, and expertise in, Internet security. As a result, the Company is able to include advanced security features to create a more comprehensive Internet solution. - The Company provides businesses with a "one stop shop" for Internet communications applications. The Company can provide applications development, Web site creation, Internet security and Web server outsourcing. By combining its advanced programming, database and security expertise with outsourcing capabilities, the Company intends to create next generation Internet business solutions. HOMECOM BUSINESS STRATEGY The Company's objective is to be a leading provider of business communications solutions using Internet standard protocol technologies. The Company intends to achieve this position by implementing the following key elements of its growth strategy: DEVELOP AND MARKET INDUSTRY-SPECIFIC APPLICATIONS The Company develops specialized software applications and markets these applications to large businesses. The Company intends to focus on industry-specific applications such as banking, insurance and real estate sales force data systems, financial institution client account access systems, inventory order entry systems, human resources information directories, and collaborative and groupware environments. The Company's goal is to develop a reputation as a leading full-service Internet applications developer for specific vertical industries, including banking and financial services, and telecommunications. 25 27 DEVELOP AND INTEGRATE ADVANCED SECURITY SERVICES HomeCom's Internet security division provides advanced security integration consulting services and develops Internet applications with high levels of integrated security. HomeCom's Internet security division is staffed by Internet software and integration security consultants with a broad range of Internet and Intranet security applications and integration experience to both commercial and government users. HomeCom intends to market these advanced services and applications both as part of a total package of Internet conversion services and as a single service. The Company's objective is to become a leading provider of integrated security services and applications to large business enterprises and to government agencies. EXPAND BY ACQUISITION The Internet/Intranet products and services market is highly fragmented. The Company is one of numerous Internet software applications and advanced multimedia developers who design, develop and provide Internet software products and services. In addition, a substantial number of client/server developers, database systems integrators and resellers provide services to established clients but do not provide Internet-based solutions for those clients. The Company will seek to make strategic 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 agreement or commitment and is not a party to any negotiations for any such acquisition. Moreover, the Company has extremely limited sources of cash. Consequently, the Company has limited resources available to it to complete an acquisition and no assurance can be given that the Company will be able to successfully complete any acquisition. PRODUCTS AND SERVICES HomeCom provides Internet/Intranet solutions in three integrated areas: custom software applications design, development and integration; Internet outsourcing services; and security consulting and integration services. CUSTOMIZED SOFTWARE APPLICATIONS FOR THE INTERNET HomeCom designs and develops specialized software applications that enable companies to obtain and communicate important business information through Internet standard protocol communications. To date, the Company has completed custom applications projects for clients such as Data Track Systems, Inc., Coverdell Insurance, Inc., AFLAC and Vital Integration Solutions, Inc. The Company works closely with its customers to analyze and design specifications for Internet standard software applications. To begin a custom applications project, the Company's customers generally either request a proposal from the Company or meet with Company personnel to discuss their Internet/Intranet communications needs. The Company generally analyzes the customers' present system and provides a recommendation and a quotation. A typical quotation specifies a fixed fee for significant design and development activities, a variable fee for maintenance support services, and includes pricing for equipment, software and communications. Criteria for pricing these services include the complexity of the project, the amount of custom programming required, the anticipated usage and traffic and the level of security required. The Company's custom application projects have generated fees ranging from approximately $40,000 to approximately $200,000. HomeCom is an established provider of advanced Web site design and implementation services, having developed more than 100 Web sites for clients in many industries. The Company has a highly trained staff able to design Web sites ranging from basic "inquiry only" sites to complex, interactive sites capable of providing on-line commerce, data base integration and manipulation, sophisticated graphics, animation, sound and other multimedia content. The Company has developed a standard process for the design and implementation of Web sites. Initially, the Company's creative director and project manager meet with the customer to discuss its current methods 26 28 for serving its customers, employers and suppliers, as well as its objectives and marketing needs. Prices for the design of Web sites currently range from $5,000 to more than $100,000. The Company's staff of software engineers uses a variety of computer operating systems, tools and language to develop Web sites. In particular, the Company's software engineers have developed a high level of expertise using C, C++, Perl, JAVA and CGI programming languages. These programmers write complex computer programs to create special features on a Web site. In addition, they regularly assess new applications and tools that may assist the Company in providing leading edge Web site services. The Company's graphics designers create sophisticated Web sites which include functions such as interactive on-line commerce, 3-D modeling, virtual reality and audio and video creation and editing. The Company's staff of professional artists, multimedia programmers and graphic designers develops Web sites to meet the customers' creative needs. HomeCom and its clients have won several awards for Web sites created by HomeCom, including the MGM-UA "Top 10," Point "Top 5% of All Web Sites" and Magellan "Four Star Site." The Company intends to continue to recruit the best available multimedia artistic talent. During the first nine months of 1996 and 1997, custom Internet and Intranet applications and integration services (including hardware resales) accounted for approximately 74% and 56%, respectively, of the Company's net sales. INTERNET OUTSOURCING SERVICES HomeCom provides full service Internet network outsourcing services, consisting of Web site and Internet application hosting and facilities, which it markets both as an integrated part of its full-service Internet solution and as a separate service. HomeCom's customers utilize the Company to maintain the customers' Internet servers and network functions at facilities located at HomeCom's Network Operations Center ("NOC"). HomeCom presently hosts approximately 2,900 Web sites. HomeCom's NOC is housed in Class A office space with 24-hour manned on-premises security. Access to the NOC computer room is key-card secured. HomeCom provides its Internet outsourcing services through multiple leased T1 and T3 data lines. See "Facilities." Because the Company is an established provider of these services, conducts its operations using sophisticated technologies and operates in Class A office space, it believes it can compete effectively to provide Internet outsourcing services for large businesses. At the same time, because the Company prices its outsourcing services competitively, it believes it can compete effectively for the hosting services of small business and individuals. The Company maintains the file servers for a customer's Web site for a monthly fee. Presently, the monthly fees range from approximately $25 to $3,000. Pricing levels vary depending on the amount of storage used on the file server. The Company also provides ongoing maintenance, problem correction and periodic updates, as well as outsourcing services for customers who own their own equipment. During the first nine months of 1996 and 1997, Internet outsourcing services generated approximately 14% and 33%, respectively, of the Company's total revenues. INTERNET SECURITY SERVICES In August 1996, HomeCom acquired an Internet security division to provide security solutions for businesses connecting to the Internet. See "Certain Transactions." The Company plans to develop and integrate advanced value-added security features into its custom software applications and products, and provide consulting and integration services to companies seeking to communicate securely and transact business over the Internet. The Company's objective is to provide its customers with a comprehensive family of integrated network security solutions. The Internet security division will assess the customer's needs and recommend and install "firewalls," encryption and authentication applications, other repudiation techniques and secured networks. 27 29 Management of the Internet security division has experience in performing Internet security services for the federal government. During the first nine months of 1996 and 1997, Internet security services generated approximately 0% and 8%, respectively, of the Company's net sales. SALES AND MARKETING The Company markets its 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 such as AT&T, Microsoft, Netscape and Unisys. The Company is focusing its marketing on large businesses with industry-specific applications needs in areas such as insurance and real estate sales force data systems, financial institution client account access systems, inventory order entry systems, parts databases and collaborative and groupware environments. The Company also utilizes traditional print and media marketing strategies to enhance Company and product name recognition. CUSTOMERS During 1996 and the first nine months of 1997, no customer accounted for more than 10% of the Company's total net sales. Because substantially all of the Company's customers have retained the Company for a single project, customers from whom the Company generated substantial revenue in one quarter generally have not been a substantial source of revenue in a subsequent quarter. FACILITIES 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 Vienna, Virginia occupying approximately 6,000 square feet under a lease expiring in June 2002. The Company's Internet services are maintained in its key-card access-secured, dual Leibert air-conditioned 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 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 SONET and 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. 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 design and development, the Company competes with numerous businesses that also provide software design and development services, 28 30 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") 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 and Security First 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. 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's Web site development services face competition from a variety of sources, from small operations to large global competitors like EDS and Computer Sciences Corporation. The Company believes Web site development presently is a fragmented market, with no business commanding a dominant share. HomeCom believes that as Web sites increase in interactivity and complexity, Web site development companies will increasingly need to maintain an integrated team of Intranet-enabled software engineers, advanced graphics programmers, multi-media artists and Internet security experts in order to compete effectively for large business customers. Consequently, HomeCom believes that it will need to continue to expand its personnel and work to maintain leading edge technology capabilities in order to remain competitive. Although there is likely to be a continuing market for individual Web site development, the Company intends to continue to focus its Web site development services on large businesses with complex interactive requirements. The Company's Internet outsourcing services face competition from numerous large and small competitors that provide comparable outsourcing services. Such competition includes BBN Planet, AT&T, MCI Communications Corporation ("MCI"), IBM, EDS and WorldCom, Inc., as well as numerous regional Internet outsourcing services providers. The Company's security services division faces competition from many sources, including companies that provide security consulting services and companies that market specific Internet-based security solutions. Such competitors include Digital Equipment Corporation, IBM, Andersen Consulting, L.L.P. and EDS. In addition, many companies currently market Internet-based application-specific software products that incorporate security and confidentiality features and functions. 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. 29 31 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)" 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 primarily 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. EMPLOYEES At November 20, 1997, the Company employed 40 full-time employees, of whom 27 were technical personnel engaged in maintaining or developing the Company's products or performing related services, three were marketing and sales personnel and ten 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 The Telecommunications Act of 1996 (the "1996 Telecommunications Act"), which became effective on February 8, 1996, imposes criminal liability on persons sending or displaying in a manner available to minors indecent material on an interactive computer service such as the Internet. The 1996 Telecommunications Act also imposes criminal liability on an entity knowingly permitting facilities under its control to be used for those activities. The constitutionality of these provisions was successfully challenged in federal district 30 32 court and ultimately found unconstitutional by the United States Supreme Court in Reno v. American Civil Liberties Union. Except for the 1996 Telecommunications Act, 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 and 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. LEGAL PROCEEDINGS The Company is not a party to any material legal proceedings. 31 33 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The names of the directors and executive officers of the Company, their ages as of September 30, 1997 and certain information about them are set forth below.
NAME AGE POSITION ---- --- -------- Harvey W. Sax........................ 46 President, Chief Executive Officer and Director Nat Stricklen........................ 54 Senior Vice President and Director Krishan Puri......................... 32 Executive Vice President and Director Gia Bokuchava, Ph.D.................. 32 Chief Technical Officer and Director Roger Nebel.......................... 43 Vice President and Director Carl W. Peede........................ 49 Senior Vice President and Chief Operating Officer Norm H. Smith........................ 34 Chief Financial Officer Gregory Abowd, Ph.D.(1).............. 33 Director
- --------------- (1) Member of the Audit and Compensation Committees. HARVEY W. SAX is a founder of the Company and has served as President and Chief Executive Officer of the Company since January 1995 and as Chairman of the Board of Directors since September 1997. He was Secretary of the Company from December 1994 until January 1995. From October 1994 until December 1995, when he began working as a full-time employee of the Company, Mr. Sax served as a Vice President of Oppenheimer & Co., Inc. From February 1993 until September 1994, Mr. Sax served as a Senior Vice President of D. Blech & Co. From July 1992 until February 1993, Mr. Sax was a Vice President of PaineWebber, Inc. From January 1989 until July 1992, Mr. Sax was a Vice President of Bear, Stearns & Co. Inc. Mr. Sax received a Bachelor of Arts degree from Emory University in 1972. Mr. Sax has been a member of the Board of Directors since December 1994. NAT STRICKLEN has served as Senior Vice President of the Company since January 1996. Mr. Stricklen was President of the Company from December 1994 until January 1995, and Vice President and Secretary of the Company from January 1995 until January 1996. For more than 25 years prior to joining the Company in December 1994, Mr. Stricklen was employed by IBM where from 1988 until November 1994 he was the senior product manager for the IBM Link product used for electronic communication for IBM employees and business partners. Mr. Stricklen was a member of the team that developed the original IBM Internet home page. Mr. Stricklen received a Bachelor of Science degree in Data Processing and Application Systems Design from Washington University in 1975. Mr. Stricklen has been a member of the Board of Directors since December 1994. KRISHAN PURI has served as Executive Vice President of the Company since February 1996, and was a member of its former Board of Advisors from May 1995 until August 1996. From March 1994 until January 1996, Mr. Puri was a Senior Management Consultant with Deloitte & Touche Consulting Group in its telecommunications practice. From March 1992 until March 1994, Mr. Puri served as a Senior Engineer for International Communications Network Services for British Telecom and MCI's Concert joint venture in Atlanta, Georgia. From March 1990 until March 1992, Mr. Puri was a network analyst with Sprint Corporation, a long distance telecommunications company. Mr. Puri received a Bachelor of Science degree in Electrical Engineering from Georgia Institute of Technology in 1987 and a Master of Business Administration degree from Georgia State University in 1992. Mr. Puri has been a member of the Board of Directors since September 1996. GIA BOKUCHAVA, PH.D., has served as the Company's Chief Technical Officer since August 1995. Dr. Bokuchava served as a visiting professor at Emory University from September 1994 until August 1995 and was employed by the National Library of Medicine, assisting in the development of Internet based applications, from January 1995 until August 1995. From July 1990 until September 1994, Dr. Bokuchava was the Director of The Computer Center at the Institute of Mechanical Engineering at Georgia Technical University, Tblisi, Georgia (formerly a part of the Soviet Union). Dr. Bokuchava has taught computer science 32 34 as a visiting associate professor at the Universities of Moscow and China. Dr. Bokuchava received a doctorate in theoretical physics from Georgia Technical University, Tblisi, in 1990. Dr. Bokuchava has been a member of the Board of Directors since September 1996. ROGER NEBEL has served as Vice President of the Company since August 1996. From May 1991 until July 1996, Mr. Nebel was a Department Manager (May 1991 to February 1993) and Senior Manager -- Enterprise Assurance (March 1993 to July 1996) for PRC, Inc., a subsidiary of Litton Industries, Inc., which provides information technology consulting and systems integration services for governments and businesses. Mr. Nebel received a Bachelor of Science degree in Engineering from California Coast University in 1990 and a Master of Science degree in Management from National-Louis University in 1993. Mr. Nebel has been a member of the Board of Directors since September 1996. CARL W. PEEDE has served as Senior Vice President and Chief Operating Officer of the Company since November 1997. Mr. Peede joined HomeCom in June 1997 as Senior Vice President and General Manager of Software Products. From June 1996 to April 1997, Mr. Peede was employed by NetManage, Inc., located in Cupertino, California, where he was the Senior Vice President of Worldwide Marketing. From September 1994 to May 1996, Mr. Peede was the Vice President of Worldwide Marketing at Attachmate/DCA in Bellevue, Washington prior to joining NetManage, Inc. From January 1993 to September 1994, Mr. Peede managed the marketing effort for Wall Data, Inc., a high-growth company in Redmond, Washington. He began his career in 1970 with AT&T Western Electric in Atlanta as a Project Manager after graduating with a BSEE from Georgia Institute of Technology and an MBA from Georgia State University, both in Atlanta, Georgia. NORMAN H. SMITH has served as Chief Financial Officer of the Company since May 1997. Before joining the Company, Mr. Smith was employed by First Image Management Company, a division of First Data Corporation, from January 1990 to May 1997. Mr. Smith served in a number of accounting and finance positions with First Image, most recently as Executive Director of Finance for the Data Acquisition Division based in Lexington, Kentucky. Prior to that, Mr. Smith was employed by Deloitte & Touche as a Senior Accountant in its audit practice. Mr. Smith received a Master of Business Administration from Xavier University in 1991 and a Bachelor of Business Administration from Eastern Kentucky University in 1985. GREGORY ABOWD, PH.D., has been an assistant professor in the College of Computing at the Georgia Institute of Technology since August 1994, where he is a member of the Software Systems Design Group. From October 1989 until August 1994, Dr. Abowd held post-doctoral positions with the Human Computer Interaction Group at the University of York in England (October 1989 until September 1992) and with the Software Engineering Institute and Computer Science Department at Carnegie Mellon University (September 1992 until August 1994). From October 1989 until September 1992, Dr. Abowd was a student at the University of Oxford, where he attended as a Rhodes Scholar. Dr. Abowd received a Bachelor of Science degree in Mathematics from the University of Notre Dame in 1986 and a Master of Science degree in Computation and a Doctorate of Philosophy in Computation from the University of Oxford in 1987 and 1991, respectively. Dr. Abowd has been a member of the Board of Directors since September 1996. The Company's Board of Directors is divided into three classes. The Class I director (Dr. Abowd) serves until the 1998 Annual Meeting of Stockholders, the Class II directors (Dr. Bokuchava and Messrs. Puri and Nebel) serve until the 1999 Annual Meeting of Stockholders and the Class III directors (Messrs. Sax and Stricklen) serve until the 2000 Annual Meeting of Stockholders. Upon election, each class serves a three-year term. The classification of the Board of Directors could have the effect of making it more difficult for a third party to acquire control of the Company. Officers are elected at the first Board of Directors meeting following the stockholders meeting at which directors are elected, and officers serve at the discretion of the Board of Directors. Each executive officer of the Company was chosen by the Board of Directors and serves at the pleasure of the Board of Directors until his or her successor is appointed or until his or her earlier resignation or removal in accordance with applicable law. There are no family relationships between any of the directors or executive officers of the Company. 33 35 BOARD COMMITTEES The Board of Directors has two standing committees: a Compensation Committee and an Audit Committee. The Compensation Committee provides recommendations to the Board of Directors concerning salaries and incentive compensation for officers and employees of the Company. The Audit Committee recommends the Company's independent auditors and reviews the results and scope of audit and other accounting-related services provided by such auditors. As a result of the September 1997 resignation of Winn Schwartau from the Board of Directors., Dr. Abowd serves as the sole current member of the Compensation and Audit Committees. The Company intends to replace Mr. Schwartau with a nonemployee member in the near future. DIRECTOR COMPENSATION Directors do not receive any cash compensation for their services as members of the Board of Directors but are reimbursed for their reasonable travel expenses in attending Board of Directors and committee meetings. Directors who are not employees of the Company are eligible to receive automatic grants of stock options under the Company's Non-Employee Directors Stock Option Plan, and may receive additional grants of options under such plan at the discretion of the Compensation Committee of the Board of Directors. See "Stock Option Plan -- Non-Employee Directors Stock Option Plan." The Company may in the future establish a policy for compensating members of the Board of Directors for attending Board of Directors or committee meetings. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1995, compensation of executive officers of the Company was determined by Harvey W. Sax, the Company's President and Chief Executive Officer. In September 1996, the Company established a Compensation Committee to review the performance of executive officers, establish overall employee compensation policies and recommend salaries and incentive compensation for officers and employees of the Company. No member of the Compensation Committee is or will be an executive officer of the Company. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by the Company in 1996 for its Chief Executive Officer and each executive officer of the Company whose total annual salary and bonuses determined at December 31, 1996 exceeded $100,000 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
LONG-TERM ANNUAL COMPENSATION COMPENSATION AWARDS ------------------- -------------------- NUMBER OF SECURITIES ALL OTHER NAME AND PRINCIPAL POSITION(1) SALARY BONUS UNDERLYING OPTIONS COMPENSATION ------------------------------ --------- ------ -------------------- ------------ Harvey W. Sax............................ $100,000 $0 -0- -0- President, Chief Executive Officer
- --------------- (1) Other than its President and Chief Executive Officer, the Company had no executive officer whose salary and bonuses exceeded $100,000 in 1996. As of September 30, 1997, the annual salaries for the Company's executive officers were as follows: Harvey W. Sax, President and Chief Executive Officer ($135,000); Nat Stricklen, Senior Vice President ($75,000); Norm Smith, Chief Financial Officer ($67,500); Krishan Puri, Executive Vice President ($100,000); Gia Bokuchava, Ph.D., Chief Technical Officer ($90,000); Roger Nebel, Vice President ($100,000); and Carl Peede, Chief Operating Officer ($115,000). Pursuant to the employment agreements with Dr. Bokuchava and Mr. Puri, each is eligible to receive cash bonuses to repay certain promissory notes issued by them to the Company in connection with their purchase of shares of Common Stock from the Company in August 1996. See "Certain Transactions." Each of the Company's executive officers also is 34 36 eligible to receive cash bonuses to be awarded at the discretion of the Compensation Committee of the Board of Directors. OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information concerning options granted to the Named Executive Officer during the year ended December 31, 1996: INDIVIDUAL GRANTS
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF NUMBER OF PERCENT OF STOCK PRICE SECURITIES TOTAL EXERCISE APPRECIATION FOR UNDERLYING GRANTED TO OR BASE OPTION TERM(2) OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------- EXECUTIVE OFFICER GRANTED(1) FISCAL YEAR SHARE DATE 5% 10% ----------------- ---------- ----------- --------- ---------- ------- ------- Harvey W. Sax......................... -0- -- -- -- -- --
OPTION EXERCISES IN LAST FISCAL AND YEAR-END OPTION VALUES The following table sets forth the aggregate dollar value of all options exercised, and the total number of unexercised options held, on December 31, 1996 by the Named Executive Officer:
NUMBER OF SECURITIES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT SHARES DECEMBER 31, 1996 DECEMBER 31, 1996(1) ACQUIRED VALUE --------------------------- --------------------------- EXECUTIVE OFFICER ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------------- ----------- -------- ----------- ------------- ----------- ------------- Harvey W. Sax.................. -0- -- -- -- -- --
EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Harvey W. Sax, its President and Chief Executive Officer, which provides a five year term commencing on January 1, 1996, subject to automatic extension for an additional one year on each one-year anniversary of the agreement. This employment agreement is subject to early termination as provided therein, including termination by the Company "for cause" (as defined in the employment agreement). The employment agreement provides for an annual base salary of $150,000 (which is currently reduced to $135,000 by voluntary agreement of Mr. Sax), and for bonus compensation to be awarded at the discretion of the Compensation Committee of the Board of Directors. STOCK OPTION PLANS Employee Stock Option Plan. The Company's Stock Option Plan (the "Stock Option Plan") was adopted by the Company's stockholders in September 1996. The purpose of the Stock Option Plan is to provide incentives for officers and key employees to promote the success of the Company, and to enhance the Company's ability to attract and retain the services of such persons. The Company has reserved 600,000 shares of Common Stock for issuance under the Stock Option Plan. Options granted under the Stock Option Plan may be either (i) options intended to qualify as "incentive stock options" under Section 422 of the Code or (ii) non-qualified stock options. Stock options may be granted under the Stock Option Plan for all employees of the Company, or of any present or future subsidiary or parent of the Company. The Stock Option Plan is administered by the Compensation Committee of the Board of Directors. The Compensation Committee has the authority to determine exercise prices applicable to the options, the eligible employees or consultants to whom options may be granted, the number of shares of Common Stock subject to each option and the terms upon which options are exercisable. The Compensation Committee has the authority to interpret the Stock Option Plan and to prescribe, amend and rescind the rules and regulations pertaining to the Stock Option 35 37 Plan. No option is transferable by the optionee other than by will or the laws of descent and distribution, and each option is exercisable during the lifetime of the optionee only by such optionee. Any incentive stock option that is granted under the Stock Option Plan may not be granted at a price less than the fair market value of the Common Stock on the date of grant (or less than 110% of fair market value in the case of holders of 10% or more of the total combined voting power of all classes of stock of the Company or a subsidiary or parent of the Company). Non-qualified stock options may be granted at the exercise price established by the Compensation Committee, which will not be less than 85% of the fair market value of the Common Stock on the date of grant. Each option granted under the Stock Option Plan is exercisable for a period not to exceed ten years from the date of grant (or five years in the case of a holder of 10% or more of the total combined voting power of all classes of stock of the Company or a subsidiary or parent of the Company) and shall lapse upon expiration of such period, or earlier upon termination of the recipient's employment with the Company, or as determined by the Compensation Committee. As of November 20, 1997, options to purchase approximately 418,660 shares of Common Stock were outstanding under the Stock Option Plan at exercise prices ranging from $4.06 to $6.13 per share and at a weighted average exercise price of $4.88 per share. All outstanding options vest 25% per year from their date of grant. Non-Employee Directors Stock Option Plan. The Company's Non-Employee Directors Stock Option Plan (the "Non-Employee Directors Plan") was adopted by the Company's stockholders in September 1996 and amended in October 1996. The Company has reserved 300,000 shares of Common Stock for issuance under the Non-Employee Directors Plan. The Non-Employee Directors Plan provides for the automatic granting of non-qualified stock options to directors who are not officers or employees of the Company ("Non-Employee Directors"). Each Non-Employee Director who is first appointed or elected to the Board of Directors is granted an option to purchase 10,000 shares of Common Stock. Also, each Non-Employee Director automatically receives an option to purchase 5,000 shares of Common Stock on the date of each annual meeting of the Company's stockholders. The Non-Employee Directors Plan also allows the Compensation Committee to make extraordinary grants of options to Non-Employee Directors. All options granted under the Non-Employee Directors Plan vest 50% per year of service by the Non-Employee Director on the Board of Directors. No option is transferable by the optionee other than by will or laws of descent and distribution, and each option is exercisable, during the lifetime of the optionee, only by such optionee. The exercise price of all options will be the fair market value of the shares of Common Stock on the date of grant, and the term of each option may not exceed seven years. The Non-Employee Directors Plan will continue in effect for a period of ten years unless sooner terminated by the Board of Directors. During September 1996, Dr. Abowd was granted an option under the Non-Employee Directors Plan to purchase 10,000 shares of Common Stock at an exercise price of $6.50 per share. Employee Stock Purchase Plan. The Company's Employee Stock Purchase Plan (the "Stock Purchase Plan") became effective on March 1, 1997. A total of 150,000 shares of Common Stock have been reserved for issuance under the Stock Purchase Plan. The Stock Purchase Plan is intended to qualify under sec. 423 of the Code. The purpose of the Stock Purchase Plan is to encourage and enable employees of the Company to acquire a proprietary interest in the Company through ownership of shares of Common Stock. Eligible employees of the Company will purchase shares of Common Stock at 85% of fair market value and the Company will partially subsidize purchases under the Stock Purchase Plan and will pay the expenses of its administration. An employee electing to participate in the Stock Purchase Plan must authorize a stated dollar amount or percentage of the employee's regular pay to be deducted by the Company from the employee's pay during each of four quarterly payroll deduction periods (each a "Purchase Period"). Purchase Periods begin on January 1, April 1, July 1 and October 1 of each calendar year during which the Stock Purchase Plan is in effect. The Company is deemed on the last day of each Purchase Period to have granted a purchase right to 36 38 each participant as of the first day of the Purchase Period to purchase as many full and fractional shares of Common Stock as can be purchased with the participant's payroll deductions. On the last day of the Purchase Period, the participant will be deemed to have exercised this option, at the option price, to the extent of such participant's accumulated payroll deductions. In no event, however, may the participant purchase Common Stock having a fair market value (measured on the first business day of the Purchase Period) of greater than $25,000 during a calendar year. The option price under the Stock Purchase Plan is equal to 85% of the fair market value of the Common Stock on either the first business day or the last business day of the applicable Purchase Period, whichever is lower. The initial Purchase Period under the Stock Purchase Plan will begin at a date to be determined by the Board of Directors (the "Initial Purchase Period"). With respect to the Initial Purchase Period, an employee electing to participate in the Stock Purchase Plan may authorize a stated dollar amount of the employee's regular pay to be deducted by the Company from the employee's pay during the Initial Purchase Period, or the employee may make a direct cash contribution to his or her account under the Stock Purchase Plan. On the last day of the Initial Purchase Period, the Company will be deemed to have granted a purchase right to each participant to purchase as many full and fractional shares of Common Stock as can be purchased with the participant's payroll deductions and cash contributions, as of the first business day after the date of this Prospectus. Employees of the Company who have completed six full months of service with the Company and whose customary employment is more than 20 hours per week and five or more months per calendar year are eligible to participate in the Stock Purchase Plan. An employee may not be granted an option under the Stock Purchase Plan if after the granting of the option such employee would be deemed to own 5% or more of the combined voting power of value of all classes of stock of the Company. As of September 30, 1997, approximately 40 employees would have been eligible to participate in the Stock Purchase Plan. An employee's rights under the Stock Purchase Plan may not be assigned, transferred, pledged or otherwise disposed of, except by will or the laws of descent and distribution. An employee's rights under the Stock Purchase Plan terminate upon termination of his or her employment for any reason, including retirement. Upon such termination, the Company will refund the employee's payroll deductions or contributions made during the Purchase Period. An employee may not sell shares of Common Stock purchased under the Stock Purchase Plan until the later of: (i) 180 days after the date of this Prospectus; or (ii) the first day of the second Purchase Period following the Purchase Period in which the option for such shares was granted. The Stock Purchase Plan is administered by the Compensation Committee. No member of the Board of Directors will be eligible to participate in the Stock Purchase Plan during the period he or she serves as a member of the Compensation Committee. The Compensation Committee may terminate or amend the Stock Purchase Plan at any time. However, any termination or amendment may not affect or change purchase rights previously granted under the Stock Purchase Plan without the consent of the affected participants. Also, any amendment that materially increases the benefits or number of shares under the Stock Purchase Plan (except for adjustments due to changes in the Company's capital structure) or that materially modifies the eligibility requirements of the Stock Purchase Plan will be subject to stockholder approval. If not sooner terminated by the Compensation Committee, the Stock Purchase Plan will terminate at the time that all authorized shares of Common Stock reserved for grant under the Stock Purchase Plan have been purchased. 401(k) Profit Sharing Plan. The Company's Board of Directors has approved the adoption of a 401(k) Profit Sharing Plan (the "401(k) Plan") which is intended to be a tax-qualified defined contribution plan under Section 401(k) of the Code. This plan has not yet been implemented. In general, all employees of the Company who have completed one year of service and 1,000 hours of service will be eligible to participate. The 401(k) Plan will include a salary deferral arrangement pursuant to which participants may contribute, subject to certain Code limitations, a maximum of 15% of their first $15,000 in salary on a pre-tax basis. Subject to certain Code limitations, the Company may make a matching contribution of up to $1,000 of the salary deferral contributions of participants at a rate of 50% of the participant's contributions, up to 4% of the participant's salary. The Company may also make an additional contribution to the 401(k) Plan each year at 37 39 the discretion of the Board of Directors. A separate account will be maintained for each participant in the 401(k) Plan. The portion of a participant's account attributable to his or her own contributions will be 100% vested. The portion of the account attributable to Company contributions (including matching contributions) will vest after 5 years of service with the Company. Distributions from the 401(k) Plan may be made in the form of a lump-sum cash payment or in installment payments. AGREEMENTS WITH EMPLOYEES Principal employees of the Company, including executive officers, are required to sign an agreement with the Company (i) restricting the ability of the employee to compete with the Company during his or her employment and for a period of eighteen months thereafter, (ii) restricting solicitation of customers and employees following employment with the Company, and (iii) providing for ownership and assignment of intellectual property rights to the Company. 38 40 CERTAIN TRANSACTIONS During the period December 1994 through December 1995, Harvey W. Sax, the Company's President and Chief Executive Officer, loaned a total of approximately $63,497 to the Company pursuant to a promissory note payable by the Company on September 12, 2000, which accrues interest at the prime rate plus 1% per annum. The Company used approximately $56,000 of the net proceeds of its initial public offering to repay the remaining outstanding amounts owed under this promissory note. In February 1996, in connection with a recapitalization of the Common Stock, the Company issued 787,844 shares of Common Stock to Harvey W. Sax, its President and Chief Executive Officer and then its sole stockholder, for $.001 per share. In December 1994, the Company granted Nat Stricklen, a co-founder and director of the Company, an option to acquire, for an aggregate exercise price of $10.00, shares of Common Stock which, when issued, would represent approximately 10% of the issued and outstanding Common Stock. Mr. Stricklen exercised this option in February 1996 and received 93,070 shares of Common Stock. In February 1996, the Company (i) sold for $.0001 per share 335,052 shares to Margery Germain; and (ii) issued to Mark Germain for $200,000 an unsecured promissory note due September 1997 in the principal amount of $200,000 and bearing interest at the rate of 8% per annum. Pursuant to the terms of the promissory note with Mr. Germain, in May, 1997 the Company issued Mr. Germain 33,333 shares of Common Stock in repayment of the $200,000 outstanding principal balance of this note. Mr. David A. Blech, Mrs. Esther Blech and the Edward A. Blech Trust (collectively the "Blech Interests") have agreed in writing with the Nasdaq Stock Market, Inc. that, for a period of three years from the date of their original purchases of securities from the Company, none of them will sell, transfer, assign, pledge or hypothecate any shares of Common Stock. Gifts of shares of the Common Stock are permitted provided that the recipient of such gift agrees in writing to be bound by the terms of the agreement. The Blech Interests further agreed that while the Common Stock is listed on any Nasdaq market, there will be no financial relationship between David Blech or any of the foregoing Blech Interests, on the one hand, and the Company, on the other hand; that the direct or indirect ownership of shares of Common Stock held by Mr. David A. Blech and/or the Blech Interests may not exceed 5% of the Common Stock; and that there may be no advisory relationship between Mr. David A. Blech and the Company. To the best of the Company's knowledge and belief, the Blech Interests beneficially own less than 5% of the Common Stock. In August 1996, Harvey W. Sax, the Company's President and Chief Executive Officer, contributed 3,956 shares of Common Stock to the Company. In August 1996, the Company issued and sold to six of its employees an aggregate of 102,855 shares of Common Stock for a total of $468,004, payable through the issuance of promissory notes payable in four equal annual installments, bearing interest at 8% per annum and secured by the shares of Common Stock purchased therewith. Also in August 1996, the Company entered into employment agreements with such persons which provide that for each of the first four years of employment, the Company will issue a bonus to the employee in the amount necessary to repay the annual amount due under such promissory note (plus the taxes due by the employee as a consequence of receiving such bonus). Pursuant to the terms of the employment agreements, the Company will continue to make these annual payments if the employee is terminated other than "for cause," as defined in the employment agreements. Pursuant to the terms of the subscription agreements for such shares, if the employee's employment is terminated within such four-year period, the Company has the right to repurchase that percentage of the shares purchased by the employee which shall equal the percentage of the promissory note which is not yet due, payment for such repurchase to be made by canceling the applicable outstanding amount of the promissory note. Gia Bokuchava, Ph.D., Chief Technical Officer and a director, and Krishan Puri, Executive Vice President and a director, purchased 39,559 and 29,669 shares of Common Stock, respectively, in this transaction. Mr. Vinod Keni, a former director, purchased 3,955 shares in this transaction. The Company has agreed with Mr. Keni that all 11,865 options to acquire Common Stock held by Mr. Keni (at a weighted average exercise price of $5.16 per share) shall continue to vest as if Mr. Keni were still employed by the Company. The Company also agreed to cancel and forgive indebtedness of approximately $18,000 represented by the promissory note given by Mr. Keni to purchase such 3,955 shares 39 41 and to give Mr. Keni a cash payment to cover Mr. Keni's estimated tax liability from such cancellation of indebtedness. In August 1996, Krishan Puri, Executive Vice President and a director, exercised a warrant to purchase 9,307 shares of Common Stock for a total exercise price of $1.00. Mr. Puri was granted the warrant in June 1995 in connection with his agreeing to serve on the Company's former Board of Advisors. 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 the transaction, the former holders of HISS's capital stock received the right to receive their pro rata share of four annual earnout payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each, an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal to 30% of HISS's gross revenues for the 12 month period ending December 31, 1997; provided, however, that (i) the amount of each Annual Earnout will be limited to the amount of HISS's net profits for the 12-month period ended December 31 immediately preceding the payment date (the "Profit Cap"), (ii) amounts not paid in a year as a result of the Profit Cap will be carried forward to the subsequent year, and (iii) amounts not paid in the fourth year as a result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in whole or in part in cash or, at HomeCom's option, in shares of Common Stock based upon the average trading price of the Common Stock for the ten trading days immediately preceding payment of the Annual Earnout. An Annual Earnout will not be paid if the recipient is then in violation of the non-solicitation and non-competition provisions contained in the Stock Purchase Agreement to which the former holders of HISS's capital stock are subject. Roger Nebel, Vice President and a director of the Company, owned 48% of HISS's outstanding capital stock and will be entitled to receive 48% of the Annual Earnouts. HISS was merged with and into the Company on September 11, 1996. 40 42 PRINCIPAL AND SELLING STOCKHOLDERS The following table sets forth, with respect to (i) each stockholder known by the Company to be the beneficial owner of more than 5% of the Common Stock; (ii) each director; (iii) all executive officers and directors as a group; and (iv) the Selling Securityholders, certain information with respect to the beneficial ownership of the Common Stock as of November 20, 1997.
PERCENTAGE NUMBER OF PERCENTAGE COMMON OF COMMON SHARES OF COMMON OF COMMON STOCK STOCK COMMON STOCK STOCK BENEFICIALLY BENEFICIALLY STOCK BENEFICIALLY BENEFICIALLY OWNED BEFORE OWNED BEFORE OFFERED OWNED AFTER OWNED AFTER NAME OF BENEFICIAL OWNER (1) OFFERING(2) OFFERING HEREBY OFFERING(2) OFFERING ---------------------------- ------------ ------------ --------- ------------ ------------ Harvey W. Sax(3)..................... 844,744 28.6% -- 844,744 25.0% Nat Stricklen(4)..................... 93,170 3.2 -- 93,170 2.8 Krishan Puri(5)...................... 43,976 1.5 -- 43,976 1.3 Gia Bokuchava, Ph.D. (6)............. 40,059 1.4 -- 40,059 1.2 Roger Nebel(7)....................... 850 * -- 850 * Gregory Abowd, Ph.D.(8).............. 5,000 * -- 5,000 * Carl W. Peede(9)..................... -- * -- -- * First Granite Securities, Inc.(10)... 400,000 11.9 -- 400,000 10.6 Mark Germain(11)..................... 335,052 11.3 -- 335,052 9.9 Margery Germain(12).................. 335,052 11.3 -- 335.052 9.9 FTS Worldwide Corporation(13)........ 200,000 6.3 200,000 0 * Euro Factors International, Inc.(14)........................... 87,500 2.9 87,500 0 * Beauchamp Finance(15)................ 75,000 2.5 75,000 0 * Colbo(16)............................ 62,500 2.1 62,500 0 * All executive officers and directors as a group (7 persons)............. 1,027,799 34.7% -- 1,027,799 30.4%
- --------------- * Less than 1%. (1) Except as otherwise noted, the street address of the named beneficial owner is Building 14, Suite 100, 3535 Piedmont Road, Atlanta, Georgia 30305. (2) Unless otherwise indicated below, the persons and entities named in the table have sole voting and sole investment power with respect to all shares of Common Stock beneficially owned, subject to community property laws where applicable. Shares of Common Stock subject to options that are currently exercisable or exercisable within sixty days of December 13, 1997 are deemed to be outstanding and to be beneficially owned by the person holding such options for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. (3) Excludes 10,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $4.06 per share which is not currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. (4) Excludes 10,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $4.06 per share which is not currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. (5) Excludes 20,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $4.06 per share which is not currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. 41 43 (6) Excludes 20,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $4.06 per share which is not currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. (7) Excludes 10,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $4.06 per share which is not currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. Also excludes an indeterminate number of shares of Common Stock which may be issued in connection with the Company's acquisition of HISS. See "Certain Transactions." (8) Includes 5,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $6.50 per share which is currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. Excludes 5,000 shares of Common Stock issuable upon the exercise of an option outstanding as of November 20, 1997 at an exercise price of $6.50 per share which is not currently exercisable and which becomes exercisable more than 60 days following the date of the date of this prospectus. (9) Excludes 60,000 shares of Common Stock issuable upon the exercise of options outstanding as of November 20, 1997 at exercise prices ranging from $4.06 per share to $6.13 per share which are not currently exercisable and which become exercisable more than 60 days following the date of the date of this prospectus. (10) The address of this security holder is 1276 50th Street, Brooklyn, NY 11219. Includes 400,000 shares of Common Stock issuable upon the exercise of currently exercisable warrants at an exercise price of $4.00 per share for 200,000 of the shares of Common Stock issuable thereunder and $6.00 per share for the remaining 200,000 shares of Common Stock issuable thereunder. (11) The address of this stockholder is 81 Main Street White Plains, NY 10601. Includes 335,052 shares of Common Stock owned by Margery Germain, the wife of Mr. Germain, as to which shares Mr. Germain disclaims beneficial ownership. (12) The address of this stockholder is 6 Olmstead Road Scarsdale, NY 10583. Includes 15,833 shares of Common Stock owned by Mark Germain. (13) The address of this Selling Securityholder is 24 Route de Malagnov, Geneva, Switzerland, CH 1208. Represents shares of Common Stock issuable upon conversion of an aggregate $800,000 of Debentures held by this Selling Securityholder. The number of shares of Common Stock represented as beneficially owned by this Selling Securityholder is estimated based upon an assumed Conversion Price of $4.00 per share. (14) The address of this Selling Securityholder is 140 Birmensdorferstrasse, Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable upon conversion of an aggregate $350,000 of Debentures held by this Selling Securityholder. The number of shares of Common Stock represented as beneficially owned by this Selling Securityholder is estimated based upon an assumed Conversion Price of $4.00 per share. (15) The address of this Selling Securityholder is 140 Birmensdorferstrasse, Zurich, Switzerland, CH 8003. Represents shares of Common Stock issuable upon conversion of an aggregate $300,000 of Debentures held by this Selling Securityholder. The number of shares of Common Stock represented as beneficially owned by this Selling Securityholder is estimated based upon an assumed Conversion Price of $4.00 per share. (16) The address of this Selling Securityholder Selling is Szigetszentmiklos, Gyari Ut. Hungary H-2310. Represents shares of Common Stock issuable upon conversion of an aggregate $250,000 of Debentures held by this Selling Securityholder. The number of shares of Common Stock represented as beneficially owned by this Selling Securityholder is estimated based upon an assumed Conversion Price of $4.00 per share. 42 44 DESCRIPTION OF SECURITIES The Company's authorized capital stock consists of 15,000,000 shares of Common Stock, $.0001 par value, and 1,000,000 shares of preferred stock, $.01 par value. As of December 15, 1997, the Company had issued and outstanding 2,956,396 shares of Common Stock. As of such date, there were 32 holders of record of shares of Common Stock. No shares of preferred stock have been issued. As of September 30, 1997, the Company had outstanding an aggregate $1,700,000 of its Debentures. COMMON STOCK Holders of shares of Common Stock are entitled to one vote per share for the election of directors and all matters to be submitted to a vote of the Company's stockholders. Subject to the rights of any holders of preferred stock which may be issued in the future, the holders of shares of Common Stock are entitled to share ratably in such dividends as may be declared by the Board of Directors out of funds legally available therefor. In the event of dissolution, liquidation or winding up of the Company, holders of shares of Common Stock are entitled to share ratably in all assets remaining after payment of all liabilities and the aggregate liquidation preference of outstanding shares of preferred stock. Holders of shares of Common Stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Common Stock are, and the shares of Common Stock to be issued by the Company in this offering will be, duly authorized, validly issued, fully paid and nonassessable. PREFERRED STOCK The Company's Restated Certificate of Incorporation authorizes the issuance of preferred stock with designations, rights and preferences determined from time to time by the Board of Directors. Accordingly, the Board of Directors is empowered, without stockholder approval, to issue preferred stock with dividends, liquidation, conversion, voting and other rights that could adversely affect the voting power or other rights of the holders of Common Stock. In the event of issuance, the preferred stock could be used, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of the Company. CONVERTIBLE DEBENTURES GENERAL The Debentures were issued under the Debenture Agreement between the Company and the Selling Securityholders. The following summaries of certain provisions of the Debentures and the Debenture Agreement do not purport to be complete and are subject to, and are qualified in their entirety by reference to, all the provisions of the Debentures and the Debenture Agreement, including the definitions therein of certain terms which are not otherwise defined in this Prospectus and those terms made a part of the Debenture Agreement. The Debentures represent general unsecured debt obligations of the Company and are convertible into Common Stock as described below under "-- Conversion of Debentures." The Debentures will mature on September 22, 2000, unless earlier converted into shares of Common Stock at the option of the holders upon written notice to the Company. Upon maturity, the Company will pay the principal amount of, and all accrued but unpaid interest on, the Debentures in cash or Conversion Shares, at its option. The Debentures bear interest from the date of original issue at the annual rate of 5%, payable on September 22, 2000. CONVERSION OF DEBENTURES The Debentures are convertible at the option of the holders. The holders have agreed, however, that they may convert (i) not more than one-third of the aggregate value of the Debentures at any time on or after the Registration Effective Date; (ii) not more than an additional one-third of the aggregate value of the Debentures at any time on or after the 30th day following the Registration Effective Date; and (iii) the final one-third of the aggregate value of the Debentures at any time on or after the 60th day following the Registration Effective Date. The Debentures are convertible into Common Stock at a conversion price (the 43 45 "Conversion Price") equal to the lessor of (a) a 25% discount from the closing bid price of the Common Stock as reported by Nasdaq or other securities exchanges or markets on which the Common Stock is listed for the previous three trading days ending on the day preceding notice of conversion, or (b) $4.00 per share. The Conversion Price is subject to equitable adjustment by the Company upon the occurrence of certain events, including, but not limited to: (i) forward and reverse stock splits; (ii) dividend payments on shares of Common Stock; (iii) subdivision of shares of Common Stock; (iv) combinations or reclassifications of Common Stock; and (v) issuance of rights, warrants, options or the like. The Company is not required to issue fractional shares of Common Stock upon conversion of the Debentures; instead, the number of shares issuable shall be rounded to the nearest whole share, with the fraction paid in cash at the discretion of the Company. EVENTS OF DEFAULT AND REMEDIES An Event of Default is defined in the Debentures as being the occurrence of one or more of the following: (i) any of the representations or warranties made by the Company under the Debentures or the Debenture Agreement shall have been incorrect when made in any material respect; (ii) the Company shall fail to perform or observe in any material respect to any other covenant, term, provision, condition, agreement or obligation of the Company under the Debentures, the Registration Agreements and the Debenture Agreement, and such failure shall continue uncured for a period of seven days after written notice from the holder of the Debentures specifically describing such failure; (iii) a trustee, liquidator or receiver shall be appointed for the Company or for a substantial part of its property or business without its consent and shall not be discharged within thirty days after such appointment; (iv) any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the Company and shall not be dismissed thirty calendar days thereafter; (v) bankruptcy reorganization, insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief of debtors shall be instituted by or against the Company, and if instituted against the Company, the Company shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or (vi) the Company's Common Stock is delisted from trading on The Nasdaq SmallCap(TM) Market unless it is there upon admitted to trading on a national stock exchange. The Debentures provide that if any Event of Default shall have occurred and be continuing, and in each and every such case, unless such Event of Default shall have been waived in writing by the Holder of the Debentures (which waiver shall not be deemed to be a waiver of any subsequent Event of Default) at the option of the Holder and in Holder's sole discretion, the Holder may consider the Debentures immediately due and payable, without presentment, demand, protest or notice of any kind, all of which are expressly waived by the Company, and the Holder may immediately, and without expiration of any period of grace, enforce any and all of the Holder's rights and remedies provided in the Debentures or any other rights or remedies afforded by law. SATISFACTION AND DISCHARGE The Debentures will cease to be of further effect at the earlier to occur of when: (i) the Company has paid or caused to be paid the principal of, and interest on the Debentures when the same has become due and payable upon maturity; or (ii) all outstanding Debentures have been fully converted into Conversion Shares. MODIFICATIONS OF THE DEBENTURES The Debentures provide that the Debentures nor any terms thereof shall be amended, waived, discharged or terminated other than by a written instrument signed by the Company and the holders of the Debentures. GOVERNING LAW The Debentures provide that they shall be governed by, and construed in accordance with, the laws of the State of New York. 44 46 UNDERWRITER WARRANT In connection with the completion with the Company's initial public offering, the Company granted its underwriter, Ladenburg Thalman & Co. Inc., a warrant 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. This warrant expires on May 12, 2002 if not earlier exercised. WARRANTS ISSUED IN CONNECTION WITH THE DEBENTURE SALE In connection with the completion of the Debenture Sale, the Company issued to First Granite Securities, Inc. (the "Warrant Holders"), an entity designated by the Selling Securityholders, warrants to acquire an aggregate 400,000 shares. Of these warrants, warrants to acquire an aggregate 200,000 shares are exercisable at a price of $4.00 per share, and warrants to acquire an aggregate 200,000 are exercisable at a price of $6.00 per share. The exercisable price of the warrants is subject to adjustment. If not earlier exercised, the warrants expire on October 27, 2000. In connection with the issuance of the warrants to the Warrant Holders, the Company has granted the Warrant Holders certain rights to require the Company to file a registration statement with respect to the sale of the Common Stock issuable upon exercise of the warrants. Under the terms of the agreement between the Company and the holders of the warrants, if the Company proposes to register any of its securities under the Securities Act, either for its own account or for the account of other security holders exercising registration rights, such holders are entitled to notice of such registration and are entitled to include therein the shares of Common Stock issuable upon exercise of the warrants by them. Additionally, such holders are entitled to require the Company to file a registration statement with respect to such shares of Common Stock not later than 30 days after the date that the Debentures become fully convertible in accordance with the terms of the agreements governing the Debentures. It is anticipated that the Company will file such registration in March 1998. LIMITATIONS ON LIABILITY OF DIRECTORS The Company's Restated Certificate of Incorporation contains provisions which eliminate the personal liability of its directors for monetary damages resulting from breaches of their fiduciary duty, other than liability for a breach of the duty of loyalty, acts or omissions not in good faith that constitute a breach of the director's duty to the Company, acts that involve intentional misconduct or a knowing violation of the law, transactions in which the director receives an improper benefit and acts or omissions for which liability is expressly provided by an applicable statute. While the Restated Certificate of Incorporation provides directors with protection from awards for monetary damages for breach of duties to the Company, it does not eliminate those duties. Accordingly, the Restated Certificate of Incorporation should not affect the availability of equitable remedies, such as injunction or rescission, based on a director's breach of the duty of care. However, equitable remedies may not provide stockholders adequate monetary compensation for damages caused by breach of duties to the Company. The Company's Restated Bylaws contain provisions requiring the indemnification of the Company's directors and officers, and persons serving at the request of the Company as a director or officer of another corporation, to the fullest extent permitted under the Delaware General Corporation Law. These provisions do not apply to liabilities under federal securities laws. The Company believes that these Restated Certificate of Incorporation and Bylaws provisions are necessary to attract and retain qualified persons as directors and officers of the Company. STATUTORY BUSINESS COMBINATION PROVISION Upon completion of the offering, the Company will be subject to the provisions of Section 203 of the Delaware General Corporation Law ("Section 203"). Section 203 provides, with certain exceptions, that a Delaware corporation may not engage in any of a broad range of business combinations with a person, or affiliate or associate of such person, who is an "interested stockholder" for a period of three years from the date that such person became an interested stockholder unless: (i) the transaction resulting in a person becoming an interested stockholder, or the business combination, is approved by the board of directors of the corporation before the person becomes an interested stockholder, (ii) the interested stockholder acquired 85% or more of the outstanding voting stock of the corporation in the same transaction that makes it an interested 45 47 stockholder (excluding shares owned by persons who are both officers and directors of the corporation and shares held by certain employee stock ownership plans) or (iii) on or after the date the person becomes an interested stockholder, the business combination is approved by the corporation's board of directors and by the holders of at least 66% of the corporation's outstanding voting stock at an annual or special meeting, excluding shares owned by the interested stockholder. Under Section 203, an "interested stockholder" is defined (with certain limited exceptions) as any person that is (i) the owner of 15% or more of the outstanding voting stock of the corporation or (ii) an affiliate or associate of the corporation that was the owner of 15% or more of the outstanding voting stock of the corporation at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such person is an interested stockholder. A corporation may, at its option, exclude itself from the coverage of Section 203 by amending its certificate of incorporation or bylaws by action of its stockholders to exempt itself from coverage, provided that such charter or bylaw amendment shall not become effective until twelve months after the date it is adopted. Neither the Restated Certificate of Incorporation nor the Restated Bylaws of the Company contains any such exclusion, although the Board of Directors has excluded the stockholders of the Company prior to the offering from the coverage of Section 203. 46 48 PLAN OF DISTRIBUTION The Company will not receive any of the proceeds of the sale of the Conversion Shares offered hereby. The Conversion Shares may be sold from time to time to purchasers directly by the Selling Securityholders. Alternatively, the Selling Securityholders may from time to time offer the Conversion Shares through brokers, dealers or agents who may receive compensation in the form of discounts, concessions or commissions from the Selling Securityholders and/or the purchasers of the Conversion Shares for whom they may act as agent. The Selling Securityholders and any such brokers, dealers or agents who participate in the distribution of the Conversion Shares may be deemed to be "underwriters," and any profits on the sale of the Conversion Shares by them and any discounts, commissions or concessions received by any such brokers, dealers or agents might be deemed to be underwriting discounts and commissions under the Securities Act. To the extent the Selling Securityholders may be deemed to be underwriters, the Selling Securityholders may be subject to certain statutory liabilities of, including, but not limited to, Sections 11, 12 and 17 of the Securities Act and Rule 10b-5 under the Exchange Act. The Selling Securityholders have advised the Company that the Conversion Shares offered hereby may be sold from time to time in one or more transactions at fixed prices, at prevailing market prices at the time of sale, at varying prices determined at the time of sale or at negotiated prices. The Conversion Shares may be sold by one or more of the following methods, without limitation: (a) a block trade in which the broker or dealer so engaged will attempt to sell the Conversion Shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to this Prospectus; (c) ordinary brokerage transactions and transactions in which the broker solicits purchasers; (d) an exchange distribution in accordance with the rules of such exchange; (e) face-to-face transactions between sellers and purchasers without a broker-dealer; (f) through the writing of options; and (g) other. At any time a particular offer of the Conversion Shares is made, a revised Prospectus or Prospectus Supplement, if required, will be distributed which will set forth the aggregate amount and type of Conversion Shares being offered and the terms of the offering, including the name or names of any underwriters, dealers or agents, any discounts, commissions, concessions and other items constituting compensation from the Selling Securityholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers. Such Prospectus Supplement and, if necessary, a post-effective amendment to the Registration Statement of which this Prospectus is a part, will be filed with the Commission to reflect the disclosure of additional information with respect to the distribution of the Securities. In addition, the Conversion Shares covered by this Prospectus may be sold in private transactions or under Rule 144 rather than pursuant to this Prospectus. To the best knowledge of the Company, there are currently no plans, arrangement or understandings between any Selling Securityholders and any broker, dealer, agent or underwriter regarding the sale of the Conversion Shares by the Selling Securityholders. There is no assurance that any Selling Securityholders will sell any or all of the Conversion Shares offered by it hereunder or that any such Selling Securityholders will not transfer, devise or gift such Conversion Shares by other means not described herein. The Selling Securityholders and any other person participating in such distribution will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including, without limitation, Regulation M which may limit the timing of purchases and sales of any of the Conversion Shares by the Selling Securityholders and any other such person. Furthermore, Regulation M of the Exchange Act may restrict the ability of any person engaged in the distribution of the Conversion Shares to engage in market-making activities with respect to the particular Conversion Shares being distributed for a period of up to five business days prior to the commencement of such distribution. All of the foregoing may affect the marketability of the Conversion Shares and the ability of any person or entity to engage in market-making activities with respect to the Securities. Pursuant to the Registration Agreement entered into in connection with the offer and sale of the Debentures by the Company, each of the Company and the Selling Securityholders will be indemnified by the other against certain liabilities, including certain liabilities under the Securities Act, or will be entitled to contribution in connection therewith. 47 49 The Company has agreed to pay substantially all of the expenses incidental to the registration, offering and sale of the Conversion Shares to the public other than commissions, fees and discounts of underwriters, brokers, dealers and agents. LEGAL MATTERS The validity of the Common Stock being offered hereby will be passed upon for the Company by Morris, Manning & Martin a Limited Liability Partnership, Atlanta, Georgia. EXPERTS The balance sheets as of December 31, 1995 and 1996 and the statements of operations, stockholders' equity (deficit) and cash flows for the period from December 2, 1994 (date of incorporation) to December 31, 1994 and the years ended December 31, 1995 and 1996, included in this Registration Statement, have been included herein in reliance on the report, which includes an explanatory paragraph relating to the uncertainty of the Company's ability to continue as a going concern, of Coopers & Lybrand L.L.P., independent accountants, given on the authority of that firm as experts in accounting and auditing. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance therewith files reports, proxy and information statements, and other information with the Securities and Exchange Commission (the "Commission"). Such reports, proxy and information statements, and other information filed by the Company can be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, as well as the regional offices of the Commission located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, Suite 1300, New York, New York 10048. Copies of such material can be obtained from the Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Such reports, proxy statements and other information can also be inspected at the offices of the National Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006. The Commission maintains a World Wide Web site that contains reports, proxy and information statements, and other information that are filed through the Commission's Electronic Data Gathering, Analysis and Retrieval System. This Web site can be accessed at http://www.sec.gov. The Company has filed with the Commission a Registration Statement on Form S-1 (together with all amendments and exhibits thereto, the "Registration Statement") under the Securities Act with respect to the Debentures and Common Stock offered hereby. This Prospectus does not contain all of the information set forth in the Registration Statement and the exhibits and schedules thereto, certain parts of which are omitted in accordance with the rules and regulations of the Commission. For further information with respect to the Company, the Debentures and the Common Stock, reference is made to the Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents of any contract or other document are not necessarily complete and, in each instance, reference is made to the copy of such contract or document filed as an exhibit to the Registration Statement, each such statement being qualified in all respects by such reference. Copies of the Registration Statement, including all exhibits thereto, may be obtained from the Commission's principal office in Washington, D.C. upon payment of the fees prescribed by the Commission, or may be examined without charge at the offices of the Commission described above. 48 50 HOMECOM COMMUNICATIONS, INC. INDEX TO FINANCIAL STATEMENTS
PAGE ---- FINANCIAL STATEMENTS: Report of Independent Accountants........................... F-2 Balance Sheets as of December 31, 1995 and 1996............. F-3 Statements of Operations for the period from December 2, 1994 (date of incorporation) to December 31, 1994 and the years ended December 31, 1995 and 1996.................... F-4 Statements of Stockholders' Equity (Deficit) for the period from December 2, 1994 (date of incorporation) to December 31, 1994 and the years ended December 31, 1995 and 1996... F-5 Statements of Cash Flows for the period from December 2, 1994 (date of incorporation) to December 31, 1994 and the years ended December 31, 1995 and 1996.................... F-6 Notes to Financial Statements............................... F-7 UNAUDITED INTERIM FINANCIAL STATEMENTS: Balance Sheets as of December 31, 1996 and September 30, 1997...................................................... F-16 Statements of Operations for the Three and Nine Month Periods Ended September 30, 1996 and 1997............................... F-17 Statements of Cash Flows for the Nine Months Ended September 30, 1996 and 1997......................................... F-18 Notes to Financial Statements............................... F-19
F-1 51 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of HOMECOM COMMUNICATIONS, INC. We have audited the accompanying balance sheets of HomeCom Communications, Inc. as of December 31, 1995 and 1996, and the related statements of operations, stockholders' equity (deficit) and cash flows for the period from December 2, 1994 (date of incorporation) to December 31, 1994 and for the years ended December 31, 1995 and 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of HomeCom Communications, Inc. as of December 31, 1995 and 1996, and the results of its operations and its cash flows for the period from December 2, 1994 (date of incorporation) to December 31, 1994 and for the years ended December 31, 1995 and 1996, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred net losses from operations since its incorporation and has an accumulated deficit that raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters, as described in Note 1, include raising additional capital through a public offering. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. COOPERS & LYBRAND L.L.P. Atlanta, Georgia February 21, 1997 F-2 52 HOMECOM COMMUNICATIONS, INC. BALANCE SHEETS AS OF DECEMBER 31, 1995 AND 1996
DECEMBER 31, DECEMBER 31, 1995 1996 ------------ ------------ ASSETS: CURRENT ASSETS: Cash and cash equivalents................................... $129,095 $ 332,377 Account receivable, net of allowance for uncollectible accounts of $2,485 and $106,845 as of December 31, 1995 and 1996, respectively.................................... 86,325 488,254 Other current assets........................................ 148 621 -------- ---------- Total current assets.............................. 215,568 821,252 FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 30,015 359,260 SOFTWARE DEVELOPMENT COSTS, NET............................. -- 81,520 DEPOSITS.................................................... 1,799 57,527 DEFERRED OFFERING COSTS..................................... -- 406,963 -------- ---------- Total assets...................................... $247,382 $1,726,522 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): CURRENT LIABILITIES: Accounts payable and accrued expenses....................... $ 14,287 $ 649,794 Accrued salaries and payroll taxes payable.................. 25,010 309,377 Accrued vacation............................................ -- 14,935 Current portion of notes payable to stockholders............ -- 989,904 Current portion of note payable to bank..................... -- 13,614 Unearned revenue............................................ 42,479 133,170 Current portion of obligations under capital leases......... -- 15,140 -------- ---------- Total current liabilities................................... 81,776 2,125,934 NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 160,792 55,677 NOTE PAYABLE TO BANK........................................ -- 47,032 OTHER LIABILITIES........................................... -- 73,424 OBLIGATIONS UNDER CAPITAL LEASES............................ -- 45,124 -------- ---------- Total liabilities................................. 242,568 2,347,191 -------- ---------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock, no par value at December 31, 1995; $.0001 par value at December 31, 1996; 1,500 shares authorized and 1,000 shares issued and outstanding at December 31, 1995; 15,000,000 shares authorized, 1,923,063 shares issued and outstanding at December 31, 1996.......................... 27,706 192 Additional paid-in capital.................................. -- 472,726 Subscriptions receivable.................................... -- (468,004) Accumulated deficit......................................... (22,892) (625,583) -------- ---------- Total stockholders' equity (deficit).............. 4,814 (620,669) -------- ---------- Total liabilities and stockholders' equity (deficit)....................................... $247,382 $1,726,522 ======== ==========
The accompanying notes are an integral part of these Financial Statements. F-3 53 HOMECOM COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION) TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
DECEMBER 2 TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 ------------- ------------ ------------ NET SALES: Service sales........................................ $ -- $ 327,574 $2,112,878 Equipment sales...................................... -- 185,977 --------- --------- ---------- Total net sales................................. -- 327,574 2,298,855 --------- --------- ---------- COST OF SALES: Cost of services..................................... -- 59,871 546,409 Cost of equipment sold............................... -- -- 128,938 --------- --------- ---------- Total cost of sales............................. -- 59,871 675,347 --------- --------- ---------- GROSS PROFIT......................................... -- 267,703 1,623,508 --------- --------- ---------- OPERATING EXPENSES: Sales and marketing.................................. 1,045 124,253 845,690 Product development.................................. -- 20,239 78,887 General and administrative........................... 16,407 121,313 1,194,728 Depreciation and amortization........................ -- 3,722 85,068 --------- --------- ---------- Total operating expenses........................ 17,452 269,527 2,204,373 --------- --------- ---------- OPERATING LOSS....................................... (17,452) (1,824) (580,865) OTHER EXPENSES (INCOME) Interest expense..................................... -- 3,469 51,272 Other expense (income), net.......................... -- 147 (6,554) --------- --------- ---------- LOSS BEFORE INCOME TAXES............................. (17,452) (5,440) (625,583) INCOME TAXES......................................... -- -- -- --------- --------- ---------- NET LOSS............................................. $ (17,452) $ (5,440) $ (625,583) ========= ========= ========== NET LOSS PER SHARE................................... $ (.01) $ (.00) $ (.33) ========= ========= ========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING........................................ 1,850,447 1,850,447 1,879,696 ========= ========= ==========
The accompanying notes are an integral part of these Financial Statements. F-4 54 HOMECOM COMMUNICATIONS, INC. STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION) TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
COMMON STOCK ADDITIONAL TOTAL --------------------- PAID-IN SUBSCRIPTIONS ACCUMULATED STOCKHOLDERS' SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT EQUITY (DEFICIT) --------- --------- ---------- ------------- ----------- ---------------- ISSUANCE OF STOCK, December 2, 1994........ 1,000 $ 27,706 $ 27,706 Net Loss.................. -- -- $ (17,452) (17,452) --------- --------- --------- --------- BALANCE, December 31, 1994.................... 1,000 27,706 (17,452) 10,254 Net Loss.................. -- -- (5,440) (5,440) --------- --------- --------- --------- BALANCE, December 31, 1995.................... 1,000 27,706 (22,892) 4,814 Termination of S Corporation............. $(22,892) 22,892 -- Issuance of stock......... 19,663 468,104 $(468,004) 100 Net Loss.................. (625,583) (625,583) 93.07-for-one stock split and recapitalization.... 1,902,400 (495,618) 495,618 --------- --------- -------- --------- --------- --------- BALANCE, December 31, 1996.................... 1,923,063 $ 192 $472,726 $(468,004) $(625,583) $(620,669) ========= ========= ======== ========= ========= =========
The accompanying notes are an integral part of these Financial Statements. F-5 55 HOMECOM COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS FOR THE PERIOD FROM DECEMBER 2, 1994 (DATE OF INCORPORATION) TO DECEMBER 31, 1994 AND THE YEARS ENDED DECEMBER 31, 1995 AND 1996
DECEMBER 2 TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 ------------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net loss............................................ $(17,452) $ (5,440) $(625,583) Adjustments to reconcile net loss to cash used in operating activities: Depreciation...................................... -- 3,722 79,064 Amortization...................................... -- -- 8,666 Provision for bad debts........................... -- 2,485 104,360 Deferred rent expense............................. -- -- 73,424 Change in operating assets and liabilities: Accounts receivable............................ -- (88,810) (506,289) Other current assets........................... -- (148) (473) Deposits....................................... (1,799) -- (55,728) Accounts payable and accrued expenses.......... -- 14,287 316,641 Accrued salaries and payroll taxes payable..... -- 25,010 284,367 Accrued vacation............................... -- -- 14,935 Unearned revenue............................... -- 42,479 90,691 -------- --------- --------- Net cash used in operating activities.......... (19,251) (6,415) (215,925) -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture, fixtures and equipment....... -- (33,737) (349,646) Software development costs.......................... -- -- (84,182) -------- --------- --------- Net cash used in investing activities.......... -- (33,737) (433,828) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of common stock............................ 27,706 -- 100 Payment of deferred offering costs.................. -- -- (88,096) Proceeds from note payable.......................... -- -- 70,000 Repayment of note payable........................... -- -- (9,354) Proceeds from notes payable to stockholders......... -- 163,497 889,904 Repayment of notes payable to stockholders.......... -- (2,705) (5,115) Repayment of capital lease obligations.............. -- -- (4,404) -------- --------- --------- Net cash provided by financing activities...... 27,706 160,792 853,035 -------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS........... 8,455 120,640 203,282 CASH AND CASH EQUIVALENTS at beginning of period.... 0 8,455 129,095 -------- --------- --------- CASH AND CASH EQUIVALENTS at end of period.......... $ 8,455 $ 129,095 $ 332,377 ======== ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON CASH INVESTING AND FINANCING ACTIVITIES: Cash paid during the period for interest............ $ 0 $ 3,469 $ 6,277 ======== ========= =========
During the year ended December 31, 1996, capital lease obligations of $64,667 were incurred when the Company entered into leases on computer equipment. The accompanying notes are an integral part of these Financial Statements F-6 56 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: DESCRIPTION OF BUSINESS HomeCom Communications, Inc. (the "Company") develops and markets specialized software applications and products and provides services that enable businesses to use the Internet and Intranets to obtain and communicate important business information, conduct commercial transactions and improve business productivity. HomeCom provides Internet/Intranet services in one business segment in five integrated areas: customized software applications design, development and integration; World Wide Web site development; Internet outsourcing services; specialized Internet-enabled software products; and security consulting and integration services. 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 net losses from operations since its incorporation, and has an accumulated deficit at December 31, 1996. Management believes that a public offering of its common stock and the conversion of certain debt to equity and successful commercialization of its products and services will generate the required capital necessary to continue as a going concern. CASH AND CASH EQUIVALENTS For purposes of the statement of cash flows, management considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. ACCOUNTS RECEIVABLE, NET Accounts receivable are shown net of the allowance for doubtful accounts. The allowance was $2,485 and $106,845 at December 31, 1995 and 1996, respectively. 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 (three to five years). 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. INCOME TAXES Prior to February 9, 1996, the Company qualified as an S Corporation for federal and state income tax purposes. Accordingly, no provision was made for income taxes for its operations prior to February 9, 1996. Individual stockholders report their share of the Company's taxable income or loss on their respective individual income tax returns. The Company's taxable income or loss allocated to the stockholders differs from book income primarily due to the use of accelerated methods for depreciating furniture, fixtures and equipment for income tax purposes. Effective February 9, 1996, the Company converted from an S corporation to a C corporation for income tax purposes and is, therefore, subject to corporate income taxes. Deferred income tax assets and liabilities reflect differences between the bases of the Company's assets and liabilities for financial reporting and income tax purposes. The net deferred income tax asset of approximately $236,000 at December 31, 1996 is primarily F-7 57 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) due to operating loss carryforwards generated since February 9, 1996 and is fully offset by a valuation allowance. The effect of a change in the valuation allowance that results from a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years would be included in income in that period. The statements of operations include a presentation of the unaudited pro forma effects of income taxes on the Company's operations as if the Company had been subject to corporate income taxes for all periods presented. As a result of termination of the S Corporation in February 1996, the accumulated deficit as of that date was transferred to additional paid-in capital. 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. 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 gross revenues for the product or (b) the straight-line method over the estimated economic life of the product. As of December 31, 1996, software development costs were $81,520, net of $2,662 of accumulated amortization. DEFERRED OFFERING COSTS Costs in connection with the Company's public offering of securities have been deferred and will be netted against the gross proceeds of the offering. As of December 31, 1996, costs deferred totaled $406,963. REVENUE RECOGNITION The Company recognizes revenues on web page development and specialized software application contracts using the percentage-of-completion method. The percentage of completion is determined by relating the actual hours of work performed to date to the current estimated hours at completion of the respective contracts. 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 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 work being performed. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts reported in the balance sheet for the Company's notes payable and capital lease obligations approximate fair value due to the short-term nature of these instruments. F-8 58 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) ADVERTISING EXPENSES All advertising costs are expensed when incurred. Advertising expenses were approximately $9,000 and $211,000 for the years ended December 31, 1995 and 1996, respectively. LOSS PER COMMON SHARE Loss per common share is based on the Company's common stock and is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants (calculated using the treasury stock method at the initial public offering price of $6.00 per share). Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock issued for consideration below the assumed initial public offering price per share and stock options issued with exercise prices below such price during the twelve-month period preceding the proposed date of the initial filing of the registration statement have been included in the calculation of common shares, using the treasury stock method, as if they were outstanding for all periods presented. All per share data has been retroactively adjusted to reflect the 93.07-for-one stock split approved by the Board of Directors on September 11, 1996 and effective September 11, 1996. RECENTLY ISSUED ACCOUNTING STANDARDS In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), was issued. SFAS 128 is designed to improve the earnings per share information provided in financial statements by simplifying the existing computational guidelines, revising the disclosure requirements, and increasing the comparability of earnings per share data on an international basis. SFAS 128 is effective for financial statements issued for periods ending after December 15, 1997, including interim periods. Earlier application is not permitted. The Company will adopt SFAS 128 on its effective date. Pro forma earnings per share of the Company computed using SFAS 128 is not different from earnings per share computed using existing standards and guidelines. 2. FURNITURE, FIXTURES AND EQUIPMENT, NET: Furniture, fixtures and equipment, net, are comprised of the following as of:
DECEMBER 31, ------------------- 1995 1996 ------- -------- Furniture and fixtures...................................... $ 3,187 $145,066 Computer equipment.......................................... 30,550 238,317 Computer equipment under capital leases..................... -- 64,667 ------- -------- 33,737 448,050 Less: accumulated depreciation and amortization............. (3,722) (88,790) ------- -------- $30,015 $359,260 ======= ========
F-9 59 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 3. NOTES PAYABLE: Notes payable are comprised of the following as of:
DECEMBER 31, --------------------- 1995 1996 -------- ---------- Promissory note payable to a spouse of a stockholder (interest accrues at 8%), payable September 1997, non-collateralized, payable in cash and/or through issuance of shares of common stock at the effectiveness of an initial public offering at the initial public offering price per share. The Company intends to issue shares in payment of the principal amount payable under the note.... -- $ 200,000 Promissory notes payable to stockholders and affiliates (interest accrues at 8%), payable August and September 1997, non-collateralized.................................. $100,000 789,904 Promissory note payable to a stockholder (interest accrues at the prime rate plus 1%), payable September 12, 2000.... 60,792 55,677 Promissory note payable to a bank (interest accrues at the prime rate plus 1.5%), payable in 60 equal monthly installments through February, 2001, collateralized by certain trade receivables and equipment................... -- 60,646 -------- ---------- 160,792 1,106,227 Less current maturities of notes payable.................... -- 1,003,518 -------- ---------- $160,792 $ 102,709 ======== ==========
Future principal payments on notes payable at December 31, 1996 are as follows: 1997........................................................ $1,003,518 1998........................................................ 13,903 1999........................................................ 15,321 2000........................................................ 72,561 2001........................................................ 924
4. COMMITMENTS AND CONTINGENCIES The Company leases office space and equipment under noncancelable operating lease agreements expiring through 2001. During 1996, the Company entered into several capital leases to purchase computer equipment. Future minimum lease payments under capital and operating leases are as follows as of December 31, 1996:
CAPITAL LEASES OPERATING LEASES -------------- ---------------- 1997........................................................ $19,414 $ 291,405 1998........................................................ 18,659 270,461 1999........................................................ 17,148 248,501 2000........................................................ 14,163 241,440 2001........................................................ 539 40,240 ------- ---------- Total minimum lease payments................................ 69,923 $1,092,047 ========== Less amount representing interest (9,659) ------- Present value of minimum lease payments $60,264 =======
F-10 60 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During January 1996, the Company executed a five-year lease for new office space. Future minimum annual lease payments are approximately $241,000 per year for the remainder of the lease term. The total amount of the base rent payments is being charged to expense on a straight-line method over the term of the lease. The Company has recorded a deferred credit to reflect the excess of rent expense over cash payments since inception of the lease. Rental expense under operating leases for the period from December 2, 1994 to December 31, 1994 and the years ended December 31, 1995 and 1996 was $1,299, $22,188 and $226,700, respectively. Subsequent to December 31, 1996, the Company entered into four additional capital leases for computer equipment. The future minimum payments under these leases are approximately $135,000 per year through 1999. 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. 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. Various legal proceedings may arise in the normal course of business. 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. 5. CONCENTRATION OF CREDIT RISKS: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. The Company places its cash and cash equivalents with quality financial institutions. Concentration of credit risk with respect to trade receivables is monitored by the Company through ongoing credit evaluations of its customers' financial condition. The Company's sales to its five largest customers represented approximately 46% and 26% of total revenues for the years ended December 31, 1995 and 1996, respectively. The five most significant customer balances represented approximately 73% and 39% of the accounts receivable balance at December 31, 1995 and 1996, respectively. No company accounted for more than 10% of the revenues of the Company during 1996. 6. EQUITY TRANSACTIONS: All share and per share amounts presented below have been adjusted to reflect the 93.07-for-one stock split effective September 11, 1996. During 1995, the Company issued warrants to its former Board of Advisors to purchase 37,228 shares of common stock for total consideration of $4.00. The warrants were granted at the fair market value of the common stock at the time of issuance. These warrants were exercised in August 1996. F-11 61 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During February 1996, the Company issued 707,332 additional shares to the previous sole stockholder, 93,070 shares to an executive officer of the Company pursuant to the exercise of options granted in connection with the founding of the Company, and 893,472 shares to four private investors. In August 1996, the Company sold to certain key employees an aggregate of 102,855 shares of common stock for an aggregate consideration of $468,004, payable through the issuance of promissory notes payable in four equal installments, bearing interest at 8% per annum and secured by the shares of common stock purchased therewith. Also in August 1996, the Company entered into employment agreements with such persons which provide that, assuming continued employment with the Company, for each of the first four years of employment, the Company will issue a bonus to the employee in the amount necessary to repay the annual amount due under such promissory note (plus the taxes due by the employee as a consequence of receiving such bonus). Pursuant to the terms of the employment agreements, the Company will continue to make these annual payments if the employee is terminated other than "for cause," as defined in the employment agreements. Pursuant to the terms of the subscription agreements for such shares, if the employee's employment is terminated within such four-year period, the Company has the right to repurchase that percentage of the shares purchased by the employee which shall equal the percentage of the promissory note which is not yet due, payment for such repurchase to be made by canceling the applicable outstanding amount of the promissory note. For financial reporting purposes, these notes receivable have been presented as a separate component of stockholders' equity. In September 1996, the Company amended and restated its Certificate of Incorporation (i) to reclassify its common stock from no par value stock to stock with a par value of $0.0001 per share, (ii) to increase the authorized shares of common stock to 15,000,000, and (iii) to authorize the issuance of 1,000,000 shares of $0.01 par value preferred stock. No preferred stock has been issued. In September 1996, the Board of Directors approved a 93.07-for-one stock split effected in the form of a stock dividend, whereby each common stockholder of record as of September 11, 1996 received 92.07 additional shares of common stock for each share owned as of the record date. As a result of the stock split and the above recapitalization, 1,902,400 shares were issued and $495,618 was transferred from Common Stock to Paid-in Capital. Weighted average common shares outstanding and per share amounts for all periods presented have been restated to reflect the stock split. 7. LONG-TERM INCENTIVE PLANS: EMPLOYEE STOCK OPTION PLAN 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. The Company has reserved 300,000 shares of common stock for issuance under the Stock Option Plan. 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. During 1996, the Company granted options 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 grants was made at or above the fair market value of the stock on the grant date. NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN 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. F-12 62 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 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. During 1996, the Company granted options to purchase shares under the Directors' Plan. The options granted under the Directors' Plan vest 50% per year of service and expire seven years after date of grant. The exercise price of the grants was above the fair market value of the stock on the grant date. Options historically have been granted based on an amount greater than or equal to the fair value of the shares at the date of grant. Since no quoted market price was available prior to the Company's proposed initial public offering, the best estimate of the fair value of the stock was determined by the Board of Directors. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1996: dividend yield of 0%, expected volatility of 80%, risk-free interest rate of 6.46%, and expected lives of four years for the Stock Option Plan and two years for the Directors' Plan. A summary of the Company's stock option plan activity and related information for the year ended December 31, 1996, is as follows:
YEAR ENDED DECEMBER 31, 1996 ------------------------- WEIGHTED AVERAGE SHARES EXERCISE PRICE ------- -------------- Outstanding at beginning of year............................ 0 -- Granted..................................................... 229,167 $6.30 Exercised................................................... 0 -- Forfeited................................................... (8,624) 6.19 ------- Outstanding at end of year.................................. 220,543 6.30 ======= Options exercisable at year-end............................. 0 -- ======= Weighted average fair value of options granted during the year at the share's fair value............................ $ 2.86 Weighted average fair value of options granted during the year at above the share's fair value...................... $ 1.89
The following table summarizes information about the stock options outstanding at December 31, 1996.
WEIGHTED NUMBER OF OPTIONS AVERAGE EXERCISE OUTSTANDING AT REMAINING WEIGHTED AVERAGE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE -------- ----------------- ---------------- ---------------- $4.55 22,241 9.7 $4.55 6.50 198,302 7.5 6.50
F-13 63 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company applies APB Opinion 25 and related interpretations in accounting for its plans. For the fiscal year ended December 31, 1996, no compensation cost was recognized for its stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined under the provisions consistent with FASB Statement 123, the Company's net loss and loss per share for the year ended December 31, 1996, would have been the pro forma amounts indicated below: Net loss -- as reported..................................... $(625,583) Net loss -- pro forma....................................... (676,776) Loss per share -- as reported............................... (0.33) Loss per share -- pro forma................................. (0.36)
8. ACQUISITION: 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 the transaction, the former holders of HISS's capital stock received the right to receive their pro rata share of four annual earnout payments to be paid not later than March 31 of 1998, 1999, 2000 and 2001 (each, an "Annual Earnout"). Each Annual Earnout will be one-fourth of an amount equal to 30% of HISS's gross revenues for the 12 month period ending December 31, 1997; provided, however, that (i) the amount of each Annual Earnout will be limited to the amount of HISS's net profits for the 12-month period ended December 31 immediately preceding the payment date (the "Profit Cap"), (ii) amounts not paid in a year as a result of the Profit Cap will be carried forward to the subsequent year, and (iii) amounts not paid in the fourth year as a result of the Profit Cap will be forfeited. Each Annual Earnout can be paid in whole or in part in cash or, at HomeCom's option, in shares of common stock based upon the average trading price of the common stock for the ten trading days immediately preceding payment of the Annual Earnout. An Annual Earnout will not be paid if the recipient is then in violation of the non-solicitation and non-competition provisions contained in the Stock Purchase Agreement to which the former holders of HISS's capital stock are subject. HISS was formed in July 1996 and was in its start-up phase at the date of acquisition. The purchase consideration is contingent on achieving specified earnings levels in future periods and is not currently estimable. When such amounts are determinable, the consideration, if any, will be recognized and amortized over the remaining life of the intangible assets acquired. 9. RELATED PARTY TRANSACTIONS: The Company has borrowed $160,792 and $1,045,581 as of December 31, 1995 and 1996, respectively, from certain of its stockholders and affiliates of its stockholders. Interest expense on these notes was $3,469 and $44,952 in 1995 and 1996, respectively. The Company has entered into an employment agreement with its Chief Executive Officer and principal stockholder which expires December 31, 2000. F-14 64 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 10. INCOME TAXES: Deferred income taxes at December 31, 1996 reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31, 1996, are as follows: Temporary differences: Allowance for uncollectibles.............................. $ 40,601 Vacation accrual.......................................... 5,675 Depreciation.............................................. 4,820 Deferred rent expense..................................... 27,901 Software development expenses............................. (29,515) --------- 49,482 Net operating loss carryforward............................. 190,156 --------- Deferred tax asset.......................................... 239,638 Valuation allowance......................................... (239,638) --------- Net deferred tax asset...................................... $ 0 =========
At December 31, 1996, the Company had net operating losses for income tax purposes of $500,412 which expire in 2011. Realization of these assets is contingent on having future taxable earnings. Based on the cumulative losses in recent years, management believes that it is more likely than not that some portion or all of the deferred tax asset and operating loss carryforward will not be realized and has recorded a full valuation allowance. PRO FORMA (UNAUDITED) As described in Note 1, the Company previously elected S Corporation status under the provisions of the Internal Revenue Code. In February 1996, the Company elected C Corporation status. The following unaudited pro forma information has been determined based upon the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes". This information reflects income tax expense that the Company would have incurred had it been subject to Federal and state income taxes. The Company would not have a Federal and state income tax provision because of net operating loss carryforwards for all periods presented. The pro forma income tax benefit differs from the amounts computed by applying the Federal statutory rate of 34% to loss before taxes as follows:
DECEMBER 2 TO YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1994 1995 1996 ------------- ------------ ------------ Tax benefit at the statutory rate.................... $ 5,934 $ 1,850 $ 212,698 State income tax, net of federal benefit............. 698 218 25,023 Permanent differences................................ 1,917 Valuation allowance.................................. (6,632) (2,068) (239,638) ------- ------- --------- $ 0 $ 0 $ 0 ======= ======= =========
F-15 65 HOMECOM COMMUNICATIONS, INC. BALANCE SHEETS AS OF DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
DECEMBER 31, SEPTEMBER 30, 1996 1997 ------------ ------------- (AUDITED) (UNAUDITED) ASSETS: CURRENT ASSETS: Cash and cash equivalents................................... $ 332,377 $ 2,177,677 Account receivable, net of allowance for uncollectible accounts of $106,845 and $219,055 as of December 31, 1996 and September 30, 1997, respectively...................... 488,254 657,163 Other current assets........................................ 621 636 ---------- ----------- Total current assets.............................. 821,252 2,835,476 FURNITURE, FIXTURES AND EQUIPMENT, NET...................... 359,260 606,839 SOFTWARE DEVELOPMENT COSTS, NET............................. 81,520 96,128 DEPOSITS.................................................... 57,527 57,530 DEFERRED DEBT ISSUE COSTS................................... -- 127,500 DEFERRED OFFERING COSTS..................................... 406,963 -- ---------- ----------- Total assets...................................... $1,726,522 $ 3,723,473 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT): CURRENT LIABILITIES: Accounts payable and accrued expenses....................... $ 649,794 $ 545,373 Accrued salaries and payroll taxes payable.................. 309,377 143,813 Accrued vacation............................................ 14,935 14,935 Current portion of notes payable to stockholders............ 989,904 -- Current portion of note payable to bank..................... 13,614 12,126 Unearned revenue............................................ 133,170 157,359 Current portion of obligations under capital leases......... 15,140 -- ---------- ----------- Total current liabilities......................... 2,125,934 873,606 CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $566,667......... -- 1,133,333 NOTE PAYABLE TO STOCKHOLDERS AND AFFILIATES................. 55,677 -- NOTE PAYABLE TO BANK........................................ 47,032 -- OTHER LIABILITIES........................................... 73,424 62,420 OBLIGATIONS UNDER CAPITAL LEASES............................ 45,124 49,022 ---------- ----------- Total liabilities................................. 2,347,191 2,118,381 ---------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $.0001 par value, 15,000,000 shares authorized, 1,923,063 and 2,956,396 shares issued and outstanding at December 31, 1996 and September 30, 1997, respectively.............................................. 192 296 Additional paid-in capital.................................. 472,726 5,936,879 Subscriptions receivable.................................... (468,004) (318,753) Accumulated deficit......................................... (625,583) (4,013,330) ---------- ----------- Total stockholders' equity (deficit).............. (620,669) 1,605,092 ---------- ----------- Total liabilities and stockholders' equity (deficit)....................................... $1,726,522 $ 3,723,473 ========== ===========
The accompanying notes are an integral part of these financial statements. F-16 66 HOMECOM COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ------------------------ 1996 1997 1996 1997 --------- ----------- ---------- ----------- NET SALES: Service sales............................... $ 623,068 $ 667,806 $1,318,675 $ 2,268,377 Equipment sales............................. 30,950 45,595 152,649 62,598 --------- ----------- ---------- ----------- Total net sales........................ 654,018 713,401 1,471,324 2,330,975 --------- ----------- ---------- ----------- COST OF SALES: Cost of services............................ 152,866 557,799 271,887 1,252,507 Cost of equipment sold...................... 37,076 42,730 114,552 52,294 --------- ----------- ---------- ----------- Total cost of sales.................... 189,942 600,529 386,439 1,304,801 --------- ----------- ---------- ----------- GROSS PROFIT................................ 464,076 112,872 1,084,885 1,026,174 --------- ----------- ---------- ----------- OPERATING EXPENSES: Sales and marketing......................... 190,596 627,962 408,131 1,163,072 Product development......................... 37,242 177,961 63,823 375,977 General and administrative.................. 276,963 1,381,769 664,244 2,739,374 Depreciation and amortization............... 24,887 58,225 52,835 138,832 --------- ----------- ---------- ----------- Total operating expenses............... 529,688 2,245,917 1,189,033 4,417,255 --------- ----------- ---------- ----------- OPERATING LOSS.............................. (65,612) (2,133,045) (104,148) (3,391,081) OTHER EXPENSES (INCOME) Interest expense............................ 11,257 -- 26,833 53,665 Other expense (income), net................. -- (37,096) -- (56,999) --------- ----------- ---------- ----------- LOSS BEFORE INCOME TAXES.................... (76,869) (2,095,949) (130,981) (3,387,747) INCOME TAXES................................ -- -- -- -- --------- ----------- ---------- ----------- NET LOSS.................................... $ (76,869) $(2,095,949) $ (130,981) $(3,387,747) ========= =========== ========== =========== NET LOSS PER SHARE.......................... $ (.04) $ (.71) $ (.07) $ (1.36) ========= =========== ========== =========== WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES OUTSTANDING............. 1,870,156 2,956,396 1,870,156 2,483,258 ========= =========== ========== ===========
The accompanying notes are an integral part of these Financial Statements. F-17 67 HOMECOM COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, ------------------------ 1996 1997 --------- ----------- CASH FLOW FROM OPERATING ACTIVITIES: Net loss.................................................... $(130,981) $(3,387,747) Adjustments to reconcile net loss to cash used in operating activities: Depreciation.............................................. 52,835 138,486 Amortization.............................................. -- 14,547 Forgiveness of subscriptions receivable................... -- 149,251 Provision for bad debts................................... 33,515 194,894 Deferred rent expense..................................... 51,486 (11,004) Change in operating assets and liabilities: Accounts receivable.................................... (383,630) (363,803) Other current assets................................... (4,663) (15) Deposits............................................... (55,800) (3) Accounts payable and accrued expenses.................. 87,810 (81,001) Accrued salaries and payroll taxes payable............. 147,009 (165,564) Accrued vacation....................................... 29,533 -- Unearned revenue....................................... 84,314 24,189 --------- ----------- Net cash used in operating activities.................. (88,572) (3,487,770) --------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of furniture, fixtures and equipment............... (329,569) (364,265) Software development costs.................................. (53,245) (29,155) --------- ----------- Net cash used in investing activities.................. (382,814) (393,420) --------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Payment of deferred offering costs.......................... (63,618) (438,867) Payment of deferred debt issue costs........................ -- (127,500) Proceeds of issuance of convertible debentures.............. -- 1,700,000 Proceeds from note payable.................................. 70,000 -- Repayment of note payable................................... (7,487) (48,520) Proceeds from notes payable to stockholders................. 444,904 490,000 Repayment of notes payable to stockholders.................. (4,187) (1,335,581) Repayment of capital lease obligations...................... -- (33,042) Proceeds from sale of stock, net of underwriting discounts and commissions........................................... 100 5,520,000 --------- ----------- Net cash provided by financing activities.............. 439,712 5,726,490 --------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (31,674) 1,845,300 CASH AND CASH EQUIVALENTS at beginning of period............ 129,095 332,377 --------- ----------- CASH AND CASH EQUIVALENTS at end of period.................. $ 97,421 $ 2,177,677 ========= =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION AND NON CASH INVESTING AND FINANCING ACTIVITIES: Cash paid during the period for interest.................... $ 5,190 $ 53,664 ========= ===========
During the nine month period ended September 30, 1997, capital lease obligations of $21,800 were incurred when the Company entered into leases on computer equipment. During the nine month period ended September 30, 1997, the Company issued 33,333 shares of common stock in satisfaction of a $200,000 note payable to stockholder. The accompanying notes are an integral part of these Financial Statements. F-18 68 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to Article 10 of Regulation S-X of the Securities and Exchange Commission. The accompanying unaudited financial statements reflect, in the opinion of management, all adjustments necessary to achieve a fair statement of the financial position and results of operations of HomeCom Communications, Inc. (the "Company") for the interim periods presented. All such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the financial statements and notes thereto included in this Registration Statement beginning at page F-3. 2. STOCK OFFERING 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. 3. ISSUANCE OF CONVERTIBLE DEBENTURES In September 1997, the Company issued $1,700,000 of 5% Convertible Debentures due September 22, 2000. The Debentures are convertible into shares of the Company's common stock at the lesser of (a) 75% of the closing bid price of the Common Stock on the Nasdaq SmallCap(TM) Market for the three trading days preceding notice of conversion; or (b) $4.00. The number of shares issuable upon conversion of the Debentures is equal to the aggregate principal balance of the Debentures divided by the conversion price. Net proceeds to the Company from the issuance of the Debentures totaled approximately $1,500,000. Outstanding principal and interest on the Debentures is payable on September 22, 2000. The Debentures are convertible at the option of the holders. The holders have agreed, however, that they may convert (i) not more than one-third of the aggregate value of the Debentures at any time on or after the date on which this registration statement is declared effective (the "Registration Effective Date"); (ii) not more than an additional one-third of the aggregate value of the Debentures at any time on or after the 30th day following the Registration Effective Date; and (iii) the final one-third of the aggregate value of the Debentures at any time on or after the 60th day following the Registration Effective Date. Due to the beneficial conversion feature of the debentures, a portion of the proceeds ($566,667) has been allocated to additional paid-in capital. The corresponding discount on the debentures will be amortized over the period from the date the debentures first become convertible as a non-cash charge to interest expense. In connection with the issuance of the Debentures, the Company agreed to issue 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, warrants to purchase an aggregate 200,000 shares of Common Stock are exercisable at a price of $4.00 per share, and warrants to purchase the remaining 200,000 shares of Common stock are exercisable at a price of $6.00 per share. If not earlier exercised, the warrants expire on October 27, 2000. 4. NET LOSS PER SHARE Net loss per common share is based on the Company's common stock and is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and warrants (calculated using the treasury stock method at the initial public offering price of $6.00 per share). Pursuant to Securities and Exchange F-19 69 HOMECOM COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Commission Staff Accounting Bulletin No. 83, common stock issued for consideration below the initial public offering price per share and stock options issued with exercise prices below such price during the twelve-month period preceding the date of the initial filing of the registration statement have been included in the calculation of common shares, using the treasury stock method, as if they were outstanding for all periods presented. All per share data has been retroactively adjusted to reflect the 93.07-for-one stock split approved by the Board of Directors on September 11, 1996 and effective September 11, 1996. 5. INCOME TAXES There was no provision for or cash payment of income taxes for the nine months ended September 30, 1997 and 1996, respectively, as the Company anticipates a net taxable loss for the year ended December 31, 1997, and, prior to February 9, 1996, the Company qualified as a S Corporation for federal and state income tax purposes. F-20 70 ====================================================== NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN SO AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE ANY OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE SUCH DATE. ------------------ TABLE OF CONTENTS
PAGE ---- Prospectus Summary..................... 3 Forwarding Looking Statements.......... 5 Risk Factors........................... 6 Use of Proceeds........................ 13 Price Range of Common Stock............ 13 Dividend Policy........................ 13 Selected Financial Data................ 14 Management's Discussion and Analysis of Financial Condition and Results of Operations........................... 16 Business............................... 22 Management............................. 32 Certain Transactions................... 39 Principal and Selling Stockholders..... 41 Description of Securities.............. 43 Plan of Distribution................... 47 Legal Matters.......................... 48 Experts................................ 48 Additional Information................. 48 Index to Financial Statements.......... F-1
====================================================== ====================================================== HOMECOM COMMUNICATIONS, INC. UP TO 850,000 SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF AN AGGREGATE $1,700,000 OF 5% CONVERTIBLE DEBENTURES -------------------- PROSPECTUS -------------------- , 1997 ====================================================== 71 PART II ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Securities and Exchange Commission registration fee......... $ 2,021.67 Nasdaq SmallCap Market additional listing fee............... 8,500.00 Accountants' fees and expenses.............................. 30,000.00 Legal fees and expenses..................................... 45,000.00 Blue Sky fees and expenses.................................. 5,000.00 Transfer Agent's fees and expenses.......................... 500.00 Printing and engraving expenses............................. 2,500.00 Miscellaneous............................................... 1,478.33 ---------- Total expenses.............................................. $95,000.00 ==========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Delaware General Corporation Law (the "DGCL") permits a corporation to eliminate or limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of duty of care or other duty as a director, provided that no provision shall eliminate or limit the liability of a director: (A) for an appropriation, in violation of his duties, of any business opportunity of the corporation; (B) for acts or omissions which involve intentional misconduct or a knowing violation of law; (C) for unlawful corporate distributions; or (D) for any transaction from which the director received an improper personal benefit. This provision pertains only to breaches of duty by directors in their capacity as directors (and not in any other corporate capacity, such as officers) and limits liability only for breaches of fiduciary duties under Delaware corporate law (and not for violation of other laws, such as the federal securities laws). The Company's Restated Certificate of Incorporation (the "Restated Certificate") exonerates the Company's directors from monetary liability to the extent permitted by this statutory provision. The Company's Restated Certificate of Incorporation and Restated Bylaws (the "Restated Bylaws") also provide that the Company shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including any action by or in the right of the Company), by reason of the fact that such person is or was a director or officer of the Company, or is or was serving at the request of the Company as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including reasonable attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Company (and with respect to any criminal action or proceeding, if such person had no reasonable cause to believe such person's conduct was unlawful), to the maximum extent permitted by, and in the manner provided by, the DGCL. Notwithstanding any provisions of the Company's Restated Certificate of Incorporation and Restated Bylaws to the contrary, the DGCL provides that the Company shall not indemnify a director or officer for any liability incurred in a proceeding in which the director is adjudged liable to the Company or is subjected to injunctive relief in favor of the Company: (1) for any appropriation, in violation of his duties, of any business opportunity of the Company; (2) for acts or omissions which involve intentional misconduct or a knowing violation of law; (3) for unlawful corporate distributions; or (4) for any transaction from which the director or officer received an improper personal benefit. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following list describes sales by the Registrant of securities in the past three years which were not registered under the Securities Act. II-1 72 During the period from its formation in December 1994 through August 1996, the Registrant has issued the securities set forth below which were not registered under the Securities Act of 1933, as amended (the "Securities Act"). All share amounts have been adjusted to reflect the Registrant's September 1996 recapitalization and 93.07 for 1 stock split. 1. In December 1994, in connection with the incorporation of the Registrant, the Registrant issued and sold to its sole stockholder 93,070 shares of Common Stock for $27,706. 2. In February 1996, in connection with the recapitalization of the Registrant, the Registrant issued and sold 707,332 shares of Common Stock to its President, Chief Executive Officer and sole stockholder for a total purchase price of $760. 3. In February 1996, the Registrant issued and sold 93,070 shares of Common Stock to its Senior Vice President for a total purchase price of $10 upon the exercise of stock options granted in connection with the founding of the Registrant. 4. Pursuant to a privately negotiated transaction with five investors, the Registrant issued and sold to four of the investors in February 1996 an aggregate of 893,472 shares of Common Stock for a total purchase price of $96, and issued and sold to three of the investors in February, March and May 1996 promissory notes in the aggregate principal amount of $499,904. In May 1997, pursuant to the terms of such promissory notes, the Registrant issued a total of 33,333 shares of Common Stock to the holders of such notes in partial repayment of the principal amounts owed thereunder. 5. In August 1996, the Registrant issued an aggregate of 37,228 shares of Common Stock to four members of its former Board of Advisors upon exercise of warrants, for a total purchase price of $4.00. 6. In August 1996, the Registrant issued and sold an aggregate of 102,855 shares of Common Stock to six of its employees for a total purchase price of $468,004.22, paid through delivery of 8% promissory notes, payable 25% per year, secured by the shares purchased thereby. 7. In August 1996, in connection with the Registrant's acquisition of all of the stock of HomeCom Internet Security Services, Inc., a Delaware corporation ("HISS"), the Registrant and the stockholders of HISS entered into a Stock Purchase Agreement which provides that the Registrant may, at its option, issue shares of its Common Stock as all or part of the earnout payments to be paid to such former stockholders pursuant to the Stock Purchase Agreement. 8. In September 1996, the Registrant granted stock options (i) to three directors under its Non-Employee Directors Stock Option Plan to purchase an aggregate of up to 30,000 shares of Common Stock and (ii) to 24 employees under its Stock Option Plan to purchase an aggregate of up to 79,167 shares of Common Stock. 9. In September 1997, the Registrant issued and sold 5% convertible debentures (the "Debentures") to four private investors for an aggregate purchase price of $1,700,000. The Debentures were issued pursuant to the terms of a 5% Convertible Debenture Purchase Agreement dated effective as of September 19, 1997 (the "Debenture Agreement"). Outstanding principal and interest on the Debentures is payable on September 22, 2000. The Debentures are convertible at the option of the holders. The holders have agreed, however, that they may convert (i) not more than one-third of the aggregate value of the Debentures at any time on or after the date on which this registration statement is declared effective (the "Registration Effective Date"); (ii) not more than an additional one-third of the aggregate value of the Debentures at any time on or after the 30th day following the Registration Effective Date; and (iii) the final one-third of the aggregate value of the Debentures at any time on or after the 60th day following the Registration Effective Date. The Debentures are convertible at a conversion price (the "Conversion Price") which is the lesser of (a) 75% of the average closing bid price of the Common Stock as represented by Nasdaq or on other securities exchanges or markets on which the Common Stock is listed for the three trading days ending on the day preceding notice of conversion, or (b) $4.00. The number of shares issuable upon conversion of the Debentures is equal to the aggregate principle balance of the Debentures divided by the Conversion Price. The Conversion Price is subject to adjustment under II-2 73 certain circumstances. See "Description of Securities -- Convertible Debentures". On December 13, 1997, the closing price of the Common Stock, which is quoted on the Nasdaq SmallCap(TM) Market under the symbol "HCOM," was $8.0625 per share. In connection with the issuance of the Debentures, the Registrant granted to an entity designated by the investors aggregate warrants to acquire 400,000 shares of Common Stock, with warrants to acquire 200,000 of such shares exercisable at a price of $4.00 per share and warrants to acquire the remaining 200,000 of such shares exercisable at a price of $6.00 per share. If not earlier exercised, these warrants expire on October 27, 2000. The sales and issuance of shares listed above were exempt from registration under the Securities Act by virtue of Sections 4(2) and 3(b) thereof and in reliance on Rule 701 and Regulation D promulgated thereunder. The recipients of the above-described securities represented their intention to acquire the securities for investment only and not with a view to distribution thereof. Appropriate restrictive legends were affixed to stock certificates and warrants issued in such transactions. ITEM 16. EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 1.1 Form of Underwriting Agreement.* 3.1 Restated Certificate of Incorporation of the Registrant.* 3.2 Restated Bylaws of the Registrant.* 4.1 See Exhibits 3.1 and 3.2 for provisions of the Restated Certificate of Incorporation and Bylaws of the Registrant defining rights of the holders of Common Stock of the Registrant.* 4.2 Specimen Stock Certificate.* 4.3 Form of Warrant.* 5.1 Opinion of Morris, Manning & Martin, L.L.P., Counsel to the Registrant, as to the legality of the shares being registered. 10.1 HomeCom Communications, Inc. Stock Option Plan and form of Stock Option Certificate.* 10.2 HomeCom Communications, Inc. Non-Employee Directors Stock Option Plan and form of Stock Option Certificate.* 10.3 Employment Agreement between the Registrant and Harvey W. Sax, dated January 1, 1996.* 10.4 Form of Employment Agreement entered into between the Registrant and each of its executive officers except Harvey W. Sax.* 10.5 Lease Agreement between Property Georgia OBJLW One Corporation and the Registrant dated January 22, 1996.* 10.6 Lease and Services Agreement between Alliance Greensboro, L.P. and the Registrant, dated June 25, 1996.* 10.7 Business Alliance Program Agreement between Oracle Corporation and the Registrant, dated May 30, 1996, together with the Sublicense Addendum, Application Specific Sublicense Addendum, Full Use and Deployment Sublicense Addendum and License Transfer Policy, each dated May 30, 1996.* 10.8 Network Enrollment Agreement between Apple Computer, Inc. and the Registrant, effective May 1996.* 10.9 Member Level Agreement between Microsoft Corporation and the Registrant, effective May 1996.* 10.10 Master Agreement for Internet Services and Products between BBN Planet Corporation and the Registrant, dated February 1, 1996.* 10.11 Authorized Business Partners Agreement between BBN Planet Corporation and the Registrant, dated May 14, 1996.*
II-3 74 10.12 Stock Purchase Agreement between the Registrant and the stockholders of HomeCom Internet Security Services, Inc., dated August 31, 1996.* 10.13 Form of Promissory Notes issued by the Registrant and held by Mark Germain.* 10.14 Form of Promissory Notes issued by the Registrant and held by Esther Blech and the Edward A. Blech Trust.* 10.15 Marketing Associate Solution Alliance Agreement dated February 6, 1997 between the Registrant and Unisys Corporation.* 10.16 Marketing Associate Agreement dated February 6, 1997 between the Registrant and Unisys Corporation.* 10.17 Letter agreement dated January 16, 1997 between the Registrant, David A. Blech, Esther Blech and the Edward A. Blech Trust.* 10.18 HomeCom Communications, Inc. Employee Stock Purchase Plan.* 10.19 5% Convertible Debenture Purchase Agreement dated effective September 19, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and Colbo. 10.20 Form of 5% Convertible Debenture issued by the Registrant and held by Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and Colbo. 10.21 Registration Rights Agreement dated effective September 19, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and Colbo. 10.22 Letter agreement dated September 23, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and Colbo. 10.23 Letter agreement dated October 27, 1997 between the Registrant, Euro Factors International, Inc., Beauchamp Finance, FTS Worldwide Corporation and Colbo. 10.24 Form of Warrant to purchase 200,000 shares of Common Stock at an exercise price of $4.00 per share issued by the Registrant to First Granite Securities, Inc. 10.25 Form of Warrant to purchase 200,000 shares of Common Stock at an exercise price of $6.00 per share issued by the Registrant to First Granite Securities, Inc. 23.1 Consent of Coopers & Lybrand L.L.P. 23.2 Consent of Morris, Manning & Martin, L.L.P. (included in Exhibit 5.1). 24.1 Powers of Attorney (included on signature page). 27.1 Financial Data Schedule (for SEC use only).**
- --------------- *Incorporated herein by reference to exhibit of the same number in the Form S-1 Registration Statement of the Registrant (Registration No. 333-12219). **Incorporated herein by reference to exhibit of the same number in the Form 10-Q/A of the Registrant filed with the Commission on December 18, 1997. ITEM 17. UNDERTAKINGS (a) The Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this Registration Statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of this Registration Statement (or the most recent post-effective amendment thereof) which, individually II-4 75 or in the aggregate, represent a fundamental change in the information set forth in this Registration Statement. Notwithstanding the foregoing, any increase or decrease in the volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective Registration Statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in this Registration Statement or any material change to such information in this Registration Statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the "1993 Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. (c) The Registrant hereby undertakes that: (1) For purposes of determining any liability under the 1933 Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of the Registration Statement as of the time it was declared effective. (2) For purposes of determining any liability under the 1933 Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 76 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Atlanta, State of Georgia on the 19 day of November, 1997. HOMECOM COMMUNICATIONS, INC. By: /s/ HARVEY W. SAX -------------------------------------- Harvey W. Sax President and Chief Executive Officer POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Harvey W. Sax and Norman H. Smith, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ HARVEY W. SAX President and Chief Executive Officer November 19, 1997 - ------------------------------------ (Principal Executive Officer) and Director Harvey W. Sax /s/ NAT STRICKLEN Executive Vice President and Director November 19, 1997 - ------------------------------------ Nat Stricklen /s/ KRISHAN PURI Executive Vice President and Director November 19, 1997 - ------------------------------------ Krishan Puri /s/ GIA BOKUCHAVA, PH.D. Chief Technical Officer and Director November 19, 1997 - ------------------------------------ (Principal Accounting and Financial Gia Bokuchava, Ph.D. Officer) /s/ ROGER NEBEL Vice President and Director November 19, 1997 - ------------------------------------ Roger Nebel /s/ NORMAN H. SMITH Chief Financial Officer November 19, 1997 - ------------------------------------ Norman H. Smith /s/ GREGORY ABOWD Director November 19, 1997 - ------------------------------------ Gregory Abowd
II-6 EX-5.1 2 OPINION OF MORRIS, MANNING & MARTIN 1 [MORRIS, MANNING & MARTIN LETTERHEAD] December 18, 1997 HomeCom Communications, Inc. Suite 100, Building 14 Piedmont Center 3535 Piedmont Road Atlanta, Georgia 30305 Re: Registration Statement on Form S-1 Ladies and Gentlemen: We have served as counsel for HomeCom Communications, Inc. a Delaware corporation (the "Company"), in connection with the registration under the Securities Act of 1933, as amended, pursuant to the Company's Registration Statement on Form S-1 (the "Registration Statement"), of a proposed public offering of 850,000 shares (the "Shares") of the Company's authorized common stock, $.0001 par value (the "Common Stock"), of which all 850,000 Shares are to be sold by certain shareholders of the Company (the "Selling Shareholders") designated in the Registration Statement. We have examined and are familiar with originals or copies (certified or otherwise identified to our satisfaction) of such documents, corporate records and other instruments relating to the incorporation of the Company and to the authorization and issuance of the outstanding shares of Common Stock and the Shares to be sold by the Selling Shareholders, as appropriate, as we have deemed necessary and advisable. Based upon the foregoing and having regard for such legal considerations that we have deemed relevant, it is our opinion that the 850,000 Shares to be sold by the Selling Shareholders will be, upon sale and delivery as contemplated in the Registration Statement, legally and validly issued, fully paid and nonassessable. 2 MORRIS, MANNING & MARTIN a limited liability partnership December 18, 1997 Page 2 We hereby consent to the reference to our firm under the heading "Legal Matters" in the Prospectus contained in the Registration Statement and to the filing of this Opinion as Exhibit 5.1 thereto. Very truly yours, MORRIS, MANNING & MARTIN, L.L.P. By: /s/ Oby T. Brewer III ----------------------------- Oby T. Brewer III EX-10.19 3 5% CONVERTIBLE DEBENTURE PURCHASE AGREEMENT 1 EXHIBIT 10.19 THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE SECURITIES, WHICH OPINION AND WHICH COUNSEL SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION. 5% CONVERTIBLE DEBENTURE PURCHASE AGREEMENT HOMECOM COMMUNICATIONS, INC. THIS AGREEMENT is made this 19th day of September, 1997, between HOMECOM COMMUNICATIONS, INC., NASDAQ Symbol "HCOM" (the "Company"), a Delaware corporation, with its principal office at Building 14, Suite 100, 3535 Piedmont Road, Atlanta, GA 30305 and __________________________ (the "Purchaser"), with its principle office at ____________________________________. IN CONSIDERATION of the mutual covenants contained in this Agreement, the Company and the Purchaser agree as follows: Section 1. Certain Definitions. For purposes of this Agreement: "Agreement" means this 5% Convertible Debenture Purchase Agreement including all Exhibits hereto. "Closing Date" means the date of the delivery of the original Debentures to the Escrow Agent against a wire transfer of the funds to the Escrow Agent. "Closing" means the completion of the purchase and sale of the Debentures on the Closing Date. 2 "Common Stock" means the Common Stock of the Company $.0001 par value. "Conversion Date" means the date on which the Purchaser has telecopied the Notice of Conversion to the Company. "Conversion Price" means an amount equal to the lessor of (a) a twenty-five (25%) percent discount from the closing bid price of the Common Stock as reported by NASDAQ or on other securities exchanges or markets on which the Common Stock is listed for the previous three (3) trading days ending on the day before the Conversion Date, or (b) $6.00. "Conversion Shares" means the Underlying Common Stock issued upon the conversion of the Convertible Debenture. "Conversion Table" means the Purchaser may convert up to one-third (1/3rd) of its initial investment, including any and all interest and liquidated damages, if any, from ninety (90) days after the Closing Date, or upon the Registration Effective Date (whichever is sooner) and may convert up to an additional one-third (1/3rd), including any and all interest and liquidated damages, if any, from one hundred twenty (120) days from the Closing Date or thirty (30) days from the Effective Registration Date (whichever is sooner), and may convert the remaining portion of its initial investment, including any and all interest and liquidated damages, if any, after one hundred fifty (150) days from the Closing Date or sixty (60) days from the Registration Effective Date (whichever is sooner). "Convertible Debenture" means the Debenture of the Company convertible into common stock of the Company as hereinafter provided. "Debenture" or "Debentures" means the Convertible Debenture or Convertible Debentures purchased on the Closing Date, as appropriate. "Potential Material Event" means any of the following: (a) the possession by the Company of material information not ripe for disclosure in a registration statement, which shall be evidenced by determinations in good faith by the Board of Directors of the Company that disclosure of such information in the registration statement would be detrimental to the business and affairs of the Company; or (b) any material engagement or activity by the Company which would, in the good faith determination of the Board of Directors of the Company, be adversely affected by disclosure in a registration statement at such time, which determination shall be accompanied by a good faith determination by the Board of Directors of the Company that the registration statement would be materially misleading absent the inclusion of such information. "Registration Effective Date" means the date upon which the registration of the Conversion Shares is declared effective by the Commission. 3 Section 2. Authorization and Sale of Debenture. 2.1 Agreement to Execute and Deliver the Debenture Agreement and the Debenture. The Company will borrow One Million, Seven Hundred Thousand ($1,700,000) Dollars from the Purchaser in reliance upon the representations and warranties of the Purchaser contained in this Agreement. The Purchaser will lend such sum to the Company, in reliance upon the representations and warranties of the Company contained in this Agreement. Such loan shall occur on the Closing Date and shall accrue interest from the Closing Date. 2.2 Authorization. Subject to the terms and conditions of this Agreement, the Company has authorized the execution and delivery of one or more Convertible Debentures in an aggregate principal amount of up to One Million, Seven Hundred Thousand ($1,700,000) Dollars (the "Principal"), with a maturity date three (3) years after the date of issuance (the "Maturity Date"). The Company promises to pay to the Purchaser the Principal, if any remains unconverted, with interest at five (5%) percent per annum, in cash or shares of Common Stock at the Conversion Price at the discretion of the Company on the Maturity Date. Such loan shall occur on the Closing Date and shall accrue interest from the Closing Date. The form of such Debenture is annexed hereto as Exhibit A. 2.3 Time and Place of Closings. The Closings shall be held at the offices of Sheldon E. Goldstein, P.C. ("Escrow Agent"), 65 Broadway, 10th Fl., New York, NY 10006, on the Closing Date. 2.4 Payment and Delivery. At or prior to the Closing, the following shall occur: (a) Purchaser shall remit by wire transfer the Purchase Price to Escrow Agent as per the separate Escrow Agreement in the form of Exhibit B attached hereto, which shall be executed and delivered by the parties contemporaneously with this Agreement, as payment in full for the Debenture. (b) Company shall deliver or cause to be delivered to Escrow Agent original Debentures, substantially in the form set forth in Exhibit A hereto, bearing the original signatures of an authorized officer of the Company. (c) Wire instructions for Sheldon E. Goldstein, P.C., as follows: Chase Manhattan Bank, N.A. ABA #021000021 For the Account of United States Trust Company of New York Account #920-1-073195 In Favor of Sheldon E. Goldstein, P.C. Attorney Trust Account Account #59-02347 4 2.5 Closings. At the closings, the following shall occur: (a) The Escrow Agent shall deliver the Purchase Price and the Debenture in accordance with the terms of the Escrow Agreement. (b) The Company shall cause the legal opinion required pursuant to the terms of Section 3.17 hereof to be executed and delivered to the Purchaser. (c) The Company and Purchaser shall execute and deliver the Registration Rights Agreement in the form of Exhibit C attached hereto. Section 3. General Representations and Warranties of the Company. The Company hereby represents and warrants to, and covenants with, the Purchaser that the following are true and correct as of the date hereof. 3.1 Organization; Qualification. The Company is a corporation duly organized and validly existing under the laws of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company. 3.2 Capitalization and Conversion. The authorized capital stock of the Company consists of 15,000,000 Shares of Common Stock, $.0001 par value, of which 2,956,396 are outstanding. All issued and outstanding Shares of Common Stock have been duly authorized and validly issued and are fully paid and nonassessable. As of the Closing Date, the Company had reserved from its authorized but unissued shares of Common Stock a sufficient number of shares of Common Stock for issuance upon conversion of the aggregate principal amount of the Debenture. Each such conversion shall reduce the principal amount owing on the Debenture by the amount stated in the Notice of Conversion (Exhibit D) and will be reflected in a Convertible Debenture Principal Reduction Schedule signed by an authorized officer of the Company. The Purchaser shall be entitled to convert its Debentures into Common Stock as per Conversion Table defined herein. 3.3 Authorization. The Company has all requisite corporate right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Company, its directors and shareholders necessary for the authorization, execution, delivery and performance of this Agreement and the Debenture by the Company, the authorization, sale, issuance and delivery of the Conversion Shares and the performance of the Company's obligations hereunder has been taken. This Agreement has been duly executed and delivered by the Company and constitutes a 5 legal, valid and binding obligation of the Company enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in Section 7.3 of this Agreement. Upon their issuance and delivery pursuant to this Agreement, the Conversion Shares will be validly issued, fully paid and nonassessable and will be free of any liens or encumbrances except for those imposed by or on behalf of the Purchaser, its creditors or agents. 3.4 No Conflict. The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated hereby will not, conflict with, or result in any violation of, or default (with or without notice or lapse of time, or both), or give rise to a right of termination, cancellation or acceleration of any obligation or to a loss of a material benefit, under, any provision of the Certificate of Incorporation, and any amendments thereto, Bylaws and any amendments thereto of the Company or any material mortgage, indenture, lease or other agreement or instrument, permit, concession, franchise, license, judgment, order, decree statute, law, ordinance, rule or regulation applicable to the Company, its properties or assets. 3.5 Accuracy of Reports and Information. The Company is in compliance, to the extent applicable, with all reporting obligations under either Section 12(b), 12 (g) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company has registered its Common Stock pursuant to Section 12 of the Exchange Act and the Common Stock is listed and trades on the NASDAQ National Small Cap Market. The Company has filed all material required to be filed pursuant to all reporting obligations, under either Section 13(a) or 15(d) of the Exchange Act for a period of at least twelve (12) months immediately preceding the offer and sale of the Debenture (or for such shorter period that the Company has been required to file such material). 3.6 SEC Filings/Full Disclosure. For a period of at least twelve (12) months immediately preceding this offer and sale, or such shorter period that the Company has been required to file such Reports as defined herein, (i) none of the Company's filings with the Securities and Exchange Commission contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein in light of the circumstances under which they were made, not misleading, and (ii) the Company has timely filed all requisite forms, reports and exhibits thereto with the Securities and Exchange Commission. There is no fact known to the Company (other than general economic conditions known to the public generally) that has not been publicly disclosed by the Company or disclosed in writing to the Purchaser which (i) could reasonably be expected to have a material adverse effect on the condition (financial or otherwise) or on earnings, business affairs, properties or assets of the Company, or (ii) could reasonably be expected to materially and adversely affect the ability of the Company to perform its obligations pursuant to this Agreement. 6 A copy of press release proposed to be released by the Company on or about September 22, 1997 is attached hereto as Schedule 3.6. The Purchaser agrees that, until such time as the press release is generally released to the public, the information contained therein represents confidential information, the Purchaser agrees to treat such information as confidential, and not to disclose or use such information. In connection therewith, the Purchaser agrees that the Purchaser will not trade in the Company's common Stock at any time until such information is generally released to the public. 3.7 Absence of Undisclosed Liabilities. The Company has no material liabilities or obligations, absolute or contingent (individually or in the aggregate), except as set forth in the Reports (as hereinafter defined) or as incurred in the ordinary course of business after the date of the Reports. 3.8 Governmental Consent, etc. No consent, approval or authorization of or designation, declaration or filing with any governmental authority on the part of the Company is required in connection with the valid execution and delivery of this Agreement, or the offer, sale or issuance of the Debenture, or the consummation of any other transaction contemplated hereby, except the filing with the SEC of a registration statement for the purpose of registering the Common Stock underlying the Debenture and "Blue Sky" filings and/or registrations required in connection with the purchase and sale of the Debentures or the issuance of the Common Stock upon conversion thereof. 3.9 Intellectual Property Rights. Except as disclosed in the Form 10-Ks, Form 10-Qs and Form 8-Ks filed by the Company for a period of at least twelve (12) months immediately preceding this offer, or such shorter period that the Company has been required to file such Reports as defined herein (the "Reports"), the Company has sufficient trademarks, trade names, patent rights, copyrights and licenses to conduct its business as presently conducted. To the Company's knowledge, neither the Company nor its products is infringing or will infringe any trademark, trade name, patent right, copyright, license, trade secret or other similar right of others currently in existence; and there is no claim being made against the Company regarding any trademark, trade name, patent, copyright, license, trade secret or other intellectual property right which could have a material adverse effect on the condition (financial or otherwise), business, results of operations or prospects of the Company. 3.10 Material Contracts. Except as set forth in the Reports, the material agreements to which the Company is a party described in the Reports are valid agreements, in full force and effect, the Company is not in material breach or material default (with or without notice or lapse of time, or both) under any of such agreements, and, to the Company's knowledge, the other contracting party or parties thereto are not in material breach or material default (with or without notice or lapse of time, or both) under any of such agreements. 3.11 Litigation. Except as disclosed in the Reports, there is no action, proceeding or investigation pending, or to the Company's knowledge threatened, against the 7 Company which might result, either individually or in the aggregate, in any material adverse change in the business, prospects, conditions, affairs or operations of the Company. The Company is not a party to or subject to the provisions of any order, writ, injunction, judgment or decree of any court or government agency or instrumentality. There is no action, suit, proceeding or investigation by the Company currently pending or which the Company currently intends to initiate which will materially effect the Company. 3.12 Title to Assets. Except as is required to be set forth in the Reports, the Company has good and marketable title to all properties and material assets described in the Reports as owned by it, free and clear of any pledge, lien, security interest, encumbrance, claim or equitable interest other than such as are not material to the business of the Company. 3.13 Subsidiaries. Except as disclosed in the Reports and the financial statements, the Company does not presently own or control, directly or indirectly, any interest in any other corporation, partnership, association or other business entity. 3.14 Required Governmental Permits. The Company is in possession of and operating in material compliance with all authorizations, licenses, certificates, consents, orders and permits from state, federal and other regulatory authorities which are material to the conduct of its business, all of which are valid and in full force and effect. 3.15 Listing. The Company will exercise its best efforts to maintain the listing of its Common Stock on the Nasdaq National Small Cap Market or other organized United States Markets or Quotron System. The Company has not received any notice, oral or written, regarding any intention by Nasdaq to delist the Common Stock. 3.16 Other Outstanding Securities. Except as disclosed in the Reports, there are no other material outstanding debt or equity securities presently convertible into Common Stock. 3.17 Legal Opinion. Purchaser shall, upon the purchase of the Debenture, receive an opinion letter from counsel to the Company, and the Company represents that it will immediately obtain such an opinion from counsel to the Company in the form attached as Exhibit E. 3.18 Dilution. The Company is aware and acknowledges that conversion of the Debentures could cause dilution to existing shareholders and could significantly increase the outstanding number of shares of Common Stock. 3.19 Financing Restrictions. The Company cannot without the prior written approval from the Purchaser, obtain any debt or equity financing which would be convertible into the Company's Common Stock within the later of one hundred fifty (150) days from the Closing Date or thirty (30) days from the Registration Effective Date. 3.20 No Undisclosed Liabilities or Events. The Company has no liabilities or obligations other than those disclosed in the Reports, this Agreement or those incurred in the 8 ordinary course of the Company's business since January 1, 1997, and which individually or in the aggregate, do not or would not have a material adverse effect on the properties, business, condition (financial or otherwise), results of operations or prospects of the Company. No event or circumstances has occurred or exists with respect to the Company or its properties, business, condition (financial or otherwise), results of operations or prospects, which, under applicable law, rule or regulation, requires public disclosure or announcement prior to the date hereof by the Company but which has not been so publicly announced or disclosed. 3.21 No Default. The Company is not in default in the performance or observance of any material obligation, agreement, covenant or condition contained in any indenture, mortgage, deed of trust or other material instrument or agreement to which it is a party or by which it is or its property is bound, and neither the execution, nor the delivery by the Company, nor the performance by the Company of its obligations under this Agreement or the Transaction Documents, including the conversion provision of the Debentures, will conflict with or result in the breach or violation of any of the terms or provisions of, or constitute a default or result in the creation or imposition of any lien or charge on any assets or properties of the Company under, any material indenture, mortgage, deed of trust or other material agreement applicable to the Company or instrument to which the Company is a party or by which it is bound or any statute or the Memorandum or Articles of the Company, or any decree, judgment, order, rule or regulation of any court or governmental agency or body having jurisdiction over the Company or its properties, or the Company's listing agreement for its Common Stock. 3.22 Absence of Events of Default. Except as set forth in the Reports and this Agreement, no Event of Default, as defined in the respective agreement to which the Company is a party, and no event which, with the giving of notice or the passage of time or both, would become an Event of Default (as so defined), has occurred and is continuing, which would have a material adverse effect on the Company's business, properties, prospects, condition (financial or otherwise) or results of operations. Section 4. Representations, Warranties and Covenants of the Purchaser. The Purchaser represents and warrants to, and covenants with, the Company that the following are true and correct as of the date hereof and as of the Closing Date. 4.1 Authority. The Purchaser has all requisite right, power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. All corporate action on the part of the Purchaser, its directors, shareholders, members or partners necessary for the authorization, execution, delivery and performance of this Agreement, and the purchase of the Debentures as well as their respective conversion and exercise, and the performance of the Purchaser's obligations hereunder, has been taken. The Purchaser's signatory has all right, power, authority and capacity to execute and deliver this Agreement and to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by the Purchaser and will constitute the legal, valid and binding obligations of the Purchaser, enforceable in accordance with its terms, subject to laws of general application relating to bankruptcy, insolvency and the relief of debtors and rules of law governing specific 9 performance, injunctive relief or other equitable remedies, and to limitations of public policy as they may apply to the indemnification provisions set forth in Section 7.3 of this Agreement. 4.2 Investment Experience. Purchaser is an "accredited investor" as defined in Rule 501(a) under the Securities Act. Purchaser is aware of the Company's business affairs and financial condition and has had access to and has acquired sufficient information about the Company, including the Reports, to reach an informed and knowledgeable decision to acquire the Debentures. Purchaser has such business and financial experience as is required to give it the capacity to protect its own interests in connection with the purchase of the Debentures. 4.3 Investment Intent. Without limiting its ability to resell the underlying Common Stock pursuant to an effective registration statement, Purchaser represents that it is purchasing the Debentures for its own account as principal for investment purposes, and not with a view to a distribution. Purchaser understands that its acquisition of the Debentures have not been registered under the Securities Act or registered or qualified under any state securities law in reliance on specific exemptions therefrom, which exemptions may depend upon, among other things, the bona fide nature of Purchaser's investment intent as expressed herein. Purchaser will not, directly or indirectly, offer, sell, pledge, transfer or otherwise dispose of (or solicit any offers to buy, purchaser or otherwise acquire or take a pledge of) any of the Debentures or the underlying Common Stock, except in compliance with the Securities Act and any applicable state securities laws, and the rules and regulations promulgated thereunder. 4.4 Registration or Exemption Requirements. Purchaser further acknowledges and understands that the Debentures or the Conversion Shares may not be resold or otherwise transferred except in a transaction registered under the Securities Act and any applicable state securities laws or unless an exemption from such registration is available. Purchaser understands that the Debentures and, if converted or exercised as the case may be, the Conversion Shares will be imprinted with a legend that prohibits the transfer of such securities unless (i) it is registered or such registration is not required pursuant to an exemption therefrom, and (ii) if the transfer is pursuant to an exemption from registration other than Rule 144 under the Securities Act and Purchaser provides an opinion of counsel to the Company, which opinion and which counsel shall be reasonably satisfactory to the Company to the effect that the transaction is so exempt. 4.5 No Legal, Tax or Investment Advice. Purchaser understands that nothing in this Agreement or any other materials presented to Purchaser in connection with the purchase and sale of the Debentures constitutes legal, tax or investment advice. Purchaser has consulted such legal, tax and investment advisors as it, in its sole discretion, has deemed necessary or appropriate in connection with its purchase of the Debentures. 4.6 Purchaser Review. Purchaser hereby represents and warrants that the Purchaser has carefully examined the Reports, and the financial statements contained therein. The Purchaser acknowledges that the Company has made available to the Purchaser all documents and information that it has requested relating to the Company and has provided answers to all of its questions concerning the Company and the Debenture. Nothing stated in the 10 previous two sentences, however, shall be deemed to affect the representations and warranties of the Company contained in this Agreement. 4.7 Restrictions on Conversion of Debenture. The Purchaser or any subsequent holder of the Debenture (the "Holder") shall be prohibited from converting any portion of the Debenture which would result in the Purchaser or the Holder being deemed the beneficial owner, in accordance with the provisions of Rule 13d-3 of the Exchange Act, of 4.99% or more of the then issued and outstanding Common Stock of the Company. 4.8 Certain Risks. The Purchaser recognizes that the purchase of the Debentures and the Conversion Shares involves a high degree of risk in that: (i) an investment in the Company is highly speculative and only investors who can afford the loss of their entire investment should consider investing in the Company and the Debentures and the underlying securities; (ii) a purchaser may not be able to liquidate its investment; (iii) transferability of the Debentures and Conversion Shares is extremely limited; (iv) in the event of disposition, Purchaser could sustain the loss of its entire investment; (v) the Debentures represent non-voting securities, which have the right to convert into and purchase shares of voting equity securities in a corporate entity; (vi) no return on investment, whether through distributions, appreciation, transferability or otherwise, and no performance by, through or of the Company, has been promised, assured, represented or warranted by the Company, or by any director, officer, employee, agent or representative thereof; (vii) while the Common Stock is presently quoted and traded on the NASDAQ National Small Cap Market and while the Purchasers are beneficiaries of certain registration rights provided herein, (a) the Debentures and the Conversion Shares are not registered under applicable federal or state securities laws, and thus may not be sold, conveyed, assigned or transferred unless registered under such laws or unless an exemption from registration is available under such laws, as more fully described below; and (b) the Debentures are not quoted, traded or listed for trading or quotation on the NASDAQ National Small Cap Market, or any other organized market or quotation system, and there is therefore no present 11 public or other market for such Debentures, nor can there be any assurance that the Common Stock will continue to be quoted, traded or listed for trading or quotation on the NASDAQ National Small Cap Market or on any other organized market or quotation system. 4.9 No Registration, Review or Approval. The Purchaser acknowledges and understand that the limited private offering and sale of the Debentures and the Conversion Shares pursuant to this Agreement has not been reviewed or approved by the SEC or by any state securities commission, authority or agency, and is not registered under the Act or under the securities or "blue sky" laws, rules or regulations of any state. The Purchaser acknowledges, understands and agrees that the Debentures and the Conversion Shares are being offered and sold hereunder pursuant to (i) a private placement exemption to the registration provisions of the Act pursuant to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under such Act, and (ii) a similar exemption to the registration provisions of applicable state securities laws. 4.10 No Hedging. The Purchaser shall not, directly or indirectly, at any time during which the Purchaser holds any Debentures, engage in any short or other hedging transaction, such as opinion writing, equity swaps or other types of derivative transaction in the Common Stock or other securities of the Company or acquire or establish any "put equivalent position" within the meaning of Rule 16a-1 promulgated under the Exchange Act. Section 5. Conditions to the Purchaser's Obligation to Purchase. The Company understands that the Purchaser's obligation to purchase the Debenture is conditioned upon: (a) Acceptance by Purchaser of this Debenture Purchase Agreement for the purchase of the Debenture, as evidenced by the execution of this Agreement by its authorized officers; (b) Delivery of the Debentures into Escrow; (c) Delivery of legal opinion as required by this Agreement; (d) Execution and delivery by the Company of the Escrow Agreement and the Registration Rights Agreement in the form of Exhibits B and C attached hereto. Section 6. Conditions to Company's Obligation to Sell. Purchaser understands that the Company's obligation to sell the Debenture is conditioned upon: (a) The receipt and acceptance by the Company of this Debenture Purchase Agreement for the Debenture as evidenced by execution of this Debenture Purchase Agreement by the President or any Vice President of the Purchaser; and (b) Delivery into escrow by Purchaser of good funds as payment in full for the purchase of the Debenture. 12 (c) Execution and delivery by the Purchaser of the Escrow Agent and the Registration Rights Agreement in the form of Exhibits B and C. Section 7. Compliance with the Securities Act. 7.1 Registration Rights Agreement. The parties will enter into a Registration Rights Agreement, annexed hereto as Exhibit C. 7.2 Underwriter. The Company understands that the Purchaser disclaims being an "underwriter" (as such term is defined under the Securities Act and the rules and regulations promulgated thereunder (an "Underwriter"), but Purchaser being deemed an Underwriter shall not relieve the Company of any obligation it has hereunder, except as may be required by law. 7.3 Indemnification. Each of the Company and the Purchaser agrees to indemnify the other and to hold the other harmless from and against any and all losses, damages, liabilities, costs and expenses (including reasonable attorneys' fees) which the other may sustain or incur in connection with any material breach by the indemnifying party of any representation, warranty or covenant made by it in this Agreement. 7.4 Information Available. So long as any registration statement is effective covering the resale of the Common Stock underlying the Debenture, the Company will furnish to Purchaser: (a) as soon as possible after available (but in the case of the Company's Annual Report to Stockholders, within 150 days after the end of each fiscal year of the Company), one copy of (i) its Annual Report to Stockholders (which Annual report shall contain financial statements audited in accordance with generally accepted accounting principles in the United States of America by a national firm of certified public accountants); (ii) each of its Quarterly Reports to Stockholders, and its Quarterly Reports on Form 10-Q; and (iii) a full copy of the registration statement covering the Conversion Shares (the foregoing, in each case, including exhibits); and (b) upon the reasonable request of Purchaser, such other information that is generally available to the public. 7.5 Rule 144 Reporting. With a view to making available the benefits of certain rules and regulations of the SEC which may at any time permit the sale of the Underlying Shares to the public without registration, the Company agrees to use its best efforts to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act, at all times after the effective date on which the Company becomes subject to the reporting requirements of the Securities Act or the Exchange Act; 13 (b) use its best efforts to file with the SEC in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; (c) to furnish to Purchaser forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of said Rule 144, and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents of the Company and other information in the possession of or reasonably obtainable by the Company as Purchaser may reasonably request in availing itself of any rule or regulation of the SEC allowing Purchaser to sell any of the Underlying Shares without registration. 7.6 Temporary Cessation of Offers and Sales by Purchaser. If at any time or from time to time after the Registration Effective Date, the Company notifies the Purchasers in writing of the existence of a Potential Material Event, the Purchasers shall not offer or sell any Conversion Shares or engage in any other transaction involving or relating to the Registrable Shares, from the time of the giving of notice with respect to a Potential Material Event until such Purchasers receive written notice from the Company that such Potential Material Event either has been disclosed to the public or no longer constitutes a Potential Material Event; provided, however, that the Company may not so suspend the right to such holders of Conversion Shares for more than two twenty (20) day periods in the aggregate during any 12-month period with at least a ten (10) business day interval between such periods, during the periods the Registration Statement is required to be in effect. 7.7 Transfer of Common Stock After Registration. Purchaser hereby covenants with the Company not to make any sale of the Common Stock except either (i) in accordance with the Registration Statement, in which case Purchaser covenants to comply with the requirement of delivering a current prospectus, or (ii) in accordance with Rule 144, in which case Purchaser covenants to comply with Rule 144. 7.8 Termination of Obligations. The obligations of the Company pursuant to the Registration Rights Agreement shall cease and terminate upon the earlier to occur of (i) such time as all of the Common Stock have been re-sold, or (ii) such time as all of the Common Stock may be re-sold in any three-month period pursuant to Rule 144 under the Securities Act. 7.9 Legend. The certificate or certificates representing the Debentures and, upon conversion, the Conversion Shares shall be subject to a legend restricting transfer under the Securities Act of 1933, such legend to be substantially as follows: "THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS 14 EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE SECURITIES, WHICH OPINION AND WHICH COUNSEL SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION." Such securities shall also include any legends required by any applicable state securities laws. With respect to the Conversion Shares, the legend(s) shall be removed and the Company shall issue a replacement certificate without such legend to the holder of such certificate if such holder provides to the Company an opinion of counsel reasonably acceptable to the Company, to the effect that a public sale, transfer or assignment of such stock may be made without registration. Section 8. Legal Fees and Expenses. Except as provided in the Escrow Agreement, each of the parties shall pay its own fees and expenses (including the fees of any attorneys, accountants, appraisers or others engaged by such party) in connection with this Agreement and the transactions contemplated hereby. Section 9. Notice of Conversion. Conversion of the Debenture to Common Stock may be exercised in whole or in part by Purchasers telecopying an executed and completed Notice of Conversion (in the form annexed hereto as Exhibit D) to the Company and delivering the original Notice of Conversion and the certificate representing the Debenture to the Company by express courier within three (3) business days of exercise. Each date on which a Notice of Conversion is telecopied to the Company in accordance with the provisions hereof shall be deemed a Conversion Date. The Company will transmit the certificates representing the Common Stock issuable upon conversion of all or any part of the Debenture (together with the certificates representing portions of the Debenture not so converted) to the Purchaser via express courier within five (5) business days after the Company has received the original Notice of Conversion and Debenture certificate being so converted. In addition to any other remedies which may be available to the Purchaser, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock within such five (5) business day period, the Purchaser will be entitled to revoke the relevant Notice of Conversion by delivering by telecopier with an original by overnight courier a notice to such effect to the Company whereupon the Company and the Purchaser shall each be restored to their respective positions immediately prior to the delivery of the Notice of Conversion. Upon receipt of such Notice the Company shall return by overnight courier the original certificate representing the Debenture. The Notice of Conversion and certificate representing the portion of the Debenture converted shall be delivered as follows: 15 To the Company: HomeCom Communications, Inc. Building 14, Suite 100 3535 Piedmont Road Atlanta, GA 30305 Attn: Harvey Sax, President/CEO (tele) (404) 237-4646 (fax) (404) 237-3060 or to such other person at such other place as the Company shall designate to the Purchaser in writing. In the event that the Common Stock issuable upon conversion of the Debenture is not delivered within five (5) business days of receipt by the Company of a valid Conversion Notice and the Debenture to be converted (such date of receipt referred to as the "Conversion Date"), the Company shall pay to the Purchaser, by wire transfer, as liquidated damages for such failure and not as a penalty, for each $100,000 of Debenture sought to be converted, $500 for each of the first ten (10) days, and $1,000 per day thereafter that the Conversion Shares are not delivered, which penalty shall run from the sixth business day after the Conversion Date. Section 10. Notices. All notices, requests, consents and other communications hereunder shall be in writing, shall be mailed by first class registered or certified airmail, postage prepaid, and shall be deemed given when so mailed: (a) if to the Company, to HomeCom Communications, Inc. Building 14, Suite 100 3535 Piedmont Road Atlanta, GA 30305 Attn: Harvey Sax, President/CEO (tele) (404) 237-4646 (fax) (404) 237-3060 copy to: Morris, Manning & Martin, LLP 1600 Atlanta Financial Center 3343 Peachtree Road, NE Atlanta, GA 30326 Attn: Oby T. Brewer, III (tele) (404) 233-7000 (fax) ( 404) 365-9532 16 or to such other person at such other place as the Company shall designate to the Purchaser in writing; (b) if to the Purchaser, to (tele) (fax) copy to: (tele) (fax) or at such other address or addresses as may have been furnished to the Company in writing; or (c) if to any transferee or transferees of a Purchaser, at such address or addresses as shall have been furnished to the Company at the time of the transfer or transfers, or at such other address or addresses as may have been furnished by such transferee or transferees to the Company in writing. Section 11. Miscellaneous. 11.1 Entire Agreement. This Agreement, including all Exhibits and Schedules hereto, embody the entire agreement and understanding between the parties hereto with respect to the subject matter hereof and supersedes all prior oral or written agreements and understandings relating to the subject matter hereof. No statement, representation, warranty, covenant or agreement or any kind not expressly set forth in this Agreement shall affect, or be used to interpret, change or restrict, the express terms and provisions of this Agreement. 11.2 Amendments. This Agreement may not be modified or amended except pursuant to an instrument in writing signed by the Company and by Purchaser. 11.3 Headings. The headings of the various sections of this Agreement have been inserted for convenience of reference only and shall not be deemed to be part of this Agreement. 17 11.4 Severability. In case any provision contained in this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 11.5 Governing Law/Jurisdiction. This Agreement will be construed and enforced in accordance with and governed by the laws of the State of New York, except for matters arising under the 1933 Act, without reference to principles of conflicts of law. Each of the parties consents to the jurisdiction of the federal district court for the Southern District of New York in connection with any dispute arising under this Agreement and hereby waives, to the maximum extent permitted by law, any objection, including any objection based on forum non conveniens, to the bringing of any such proceeding in such jurisdictions. Each party hereby agrees that if either party to this Agreement obtains a judgment against it in such a proceeding, the party which obtained such judgment may enforce same by summary judgment in the courts of any country having jurisdiction over the party against whom such judgment was obtained, and each party hereby waives any defenses available to it under local law and agrees to the enforcement of such a judgment. Each party to this Agreement irrevocably consents to the service of process in any such proceeding by the mailing of copies thereof by registered or certified mail, postage prepaid, to such party at its address set forth herein. Nothing herein shall affect the right of any party to serve process in any other manner permitted by law. 11.6 Recovery of Attorney's Fees. Should any party bring an action to enforce the terms of this Agreement then, if Purchaser prevails in such action it should be entitled to recovery of its attorney's fees from the Company, and if the Company prevails in such action it shall be entitled to recovery of its attorney's fees from the Purchasers. 11.7 Fees. The Company acknowledges that Purchaser shall have no responsibility for the payment of any of its fees in connection with this offering. 11.8 Counterparts/Facsimile. This Agreement may be executed in two or more counterparts, each of which shall constitute an original, but all of which, when taken together, shall constitute but one instrument, and shall become effective when one or more counterparts have been signed by each party hereto and delivered to the other party. In lieu of the original, a facsimile transmission or copy of the original shall be as effective and enforceable as the original. 11.9 Publicity. The Purchaser shall not issue any press releases or otherwise make any public statement with respect to the transactions contemplated by this Agreement without the prior written consent of the Company, except as may be required by applicable law or regulation. 11.10 Survival. The representations and warranties in this Agreement shall survive Closing. 18 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed by their duly authorized representatives the day and year first above written. HOMECOM COMMUNICATIONS, INC. By /s/ Harvey Sax --------------------------------- Harvey Sax, Chief Executive Officer Attest: /s/ Norman Smith ------------------------- Norman Smith Chief Financial Officer PURCHASER: ------------------------- By ----------------------- Officer EX-10.20 4 FORM OF 5% CONVERTIBLE DEBENTURE 1 EXHIBIT 10.20 No. $ USD ------ ---------- HOMECOM COMMUNICATIONS, INC. $1,700,000 5% Convertible Debenture THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER REGULATION D PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS SUBSCRIPTION AGREEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER PROVISIONS OF APPLICABLE STATE SECURITIES LAWS; AND IN THE CASE OF AN EXEMPTION, ONLY IF THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL THAT SUCH TRANSACTION DOES NOT REQUIRE REGISTRATION OF THE SECURITIES, WHICH OPINION AND WHICH COUNSEL SHALL BE SATISFACTORY TO THE COMPANY IN ITS SOLE DISCRETION. THIS DEBENTURE is one of a duly authorized issue of Debentures of HOMECOM COMMUNICATIONS, INC., a corporation duly organized and existing under the laws of the State of Delaware (the "ISSUER") issued September __, 1997, designated as its Five (5%) Percent Convertible Debenture due September __, 2000, in an aggregate face amount not exceeding One Million, Seven Hundred Thousand (USD$1,700,000) Dollars, issuable in One Hundred Thousand ($100,000) Dollars par value face amounts. FOR VALUE RECEIVED, the ISSUER promises to pay to the registered holder hereof and its successors and assigns (the "HOLDER"), the principal sum of: United States Dollars, 2 on September __, 2000 (the "Maturity Date"), and to pay interest, as outlined below, at the rate of 5% per annum, on the principal sum outstanding from time to time for the term of the Debenture or until the Debenture is completely converted. Accrual of Interest shall commence on the first business day to occur after the date hereof and shall continue until payment in full of the principal sum has been made or duly provided for. The interest so payable will be paid to the person in whose name this Debenture (or one or more predecessor Debentures) is registered on the records of the Issuer regarding registration and transfers of the Debenture (the "Debenture Register"), provided, however, that the ISSUER'S obligation to a transferee of this Debenture arises only if such transfer, sale or other disposition is made in accordance with the terms and conditions contained in the 5% Convertible Debenture Purchase Agreement dated as of September 19, 1997 between the ISSUER and HOLDER (the "Agreement"). Except upon an event of default, the principal of, and interest on, this Debenture are payable only in cash or Conversion Shares (as defined in this Agreement) at the discretion at the Company, at the address last appearing on the Debenture register of the ISSUER as designated in writing by the Holder hereof from time to time. The ISSUER will pay the principal of and all accrued and unpaid interest due upon this Debenture on the Maturity Date in cash or Conversion Shares at the Conversion Price, less any amounts required by law to be deducted or withheld, to the Holder at the last address on the Debenture Register. Such payment shall constitute a payment of principal and interest hereunder and shall satisfy and discharge the liability for principal and interest on the Debenture to the extent of the sum represented by such check plus any amounts so deducted. The Debenture is subject to the following additional provisions: 1. The Debenture is exchangeable for like Debentures in equal aggregate principal amount of authorized denominations, as requested by the HOLDERS surrendering the same. No service charge will be made for such registration or transfer or exchange. 2. The ISSUER shall be entitled to withhold from all payments of principal of, and interest on, this Debenture any amounts required to be withheld under the applicable provisions of the United States Income Tax or other applicable laws at the time of such payments. 3. This Debenture has been issued subject to investment representations of the original HOLDER hereof and may be transferred or exchanged in the US only in compliance with Securities Act of 1933, as amended (the "Act") and applicable state securities laws. Prior to the due presentment for such transfer of this Debenture, the ISSUER and any agent of the ISSUER may treat the person in whose name this Debenture is duly registered on the ISSUER'S Debenture Register as the owner hereof for the purpose of receiving payment as herein provided and all other purposes, whether or not this debenture is overdue, and neither the ISSUER nor any such agent shall be affected by notice to the contrary. The transferee shall be bound, as the original HOLDER by the same representations and terms described herein and under the Agreement. -2- 3 4. The Holder is entitled, at its option, to convert this Debenture in accordance with the terms and conditions contained in the 5% Convertible Debenture Purchase Agreement, dated as of September 19, 1997 between the ISSUER and HOLDER. No fractional shares or scrip representing fractions of shares will be issued on conversion, but the number of shares issuable shall be rounded to the nearest whole share, with the fraction paid in cash at the discretion of the ISSUER. The Conversion Price shall be equitably adjusted accordingly on a pro rata basis in the event of the happening of certain events that would affect the Common Stock or the Convertible Debenture's value including, but not limited to, forward and reverse splits, dividend payment on shares, subdivision of shares, combinations, reclassifications, issuance of rights, warrants, options or the like. An adjustment made pursuant to this section shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such an event. 5. No provision of this Debenture shall alter or impair the obligation of the ISSUER, which is absolute and unconditional, upon an Event of Default (as defined below), to pay the principal of, and interest on this Debenture at the place, time, and rate, and in the coin or currency herein prescribed. 6. The ISSUER hereby expressly waives demand and presentment for payment, notice on nonpayment, protest, notice of protest, notice of dishonor, notice of acceleration or intent to accelerate, and diligence in taking any action to collect amounts called for hereunder and shall be directly and primarily liable for the payment of all sums owing and to be owing hereon, regardless of and without any notice, diligence, act or omission as or with respect to the collection of any amount called for hereunder. 7. The ISSUER agrees to pay all costs and expenses, including reasonable attorneys' fees, which may be incurred by the Holder in collecting any amount due or exercising the conversion rights under this Debenture. If one or more of the following described "Events of Default" shall occur, a. Any of the representations or warranties made by the ISSUER herein, or in the Agreement shall have been incorrect when made in any material respect; or b. The ISSUER shall fail to perform or observe in any material respect any other covenant, term, provision, condition, agreement or obligation of the ISSUER under this Debenture, the Registration Rights Agreement and the Convertible Purchase Agreement between the parties of even date herewith, and such failure shall continued uncured for a period of seven (7) days after written notice from the Holder specifically describing such failure; or -3- 4 c. A trustee, liquidator or receiver shall be appointed for the ISSUER or for a substantial part of its property or business without its consent and shall not be discharged within thirty (30) days after such appointment; or d. Any governmental agency or any court of competent jurisdiction at the instance of any governmental agency shall assume custody or control of the whole or any substantial portion of the properties or assets of the ISSUER and shall not be dismissed within thirty (30) calendar days thereafter; or e. Bankruptcy reorganization, Insolvency or liquidation proceedings or other proceedings for relief under any bankruptcy law or any law for the relief or debtors shall be instituted by or against the ISSUER, and if instituted against the ISSUER, ISSUER shall by any action or answer approve of, consent to or acquiesce in any such proceedings or admit the material allegations of, or default in answering a petition filed in any such proceeding; or f. The ISSUER'S Common Stock is delisted from trading on NASDAQ National Small Cap Market unless it is thereupon admitted to trading on a national stock exchange. Then, or at any time thereafter, and in each and every such case, unless such Event of Default shall have been waived in writing by the HOLDER (which waiver shall not be deemed to be a waiver of any subsequent default) at the option of the HOLDER and in the HOLDER'S sole discretion, the HOLDER may consider this Debenture immediately due and payable, without presentment, demand protest or notice of any kind, all of which are hereby expressly waived, anything herein or in any note or other instruments contained to the contrary notwithstanding, and HOLDER may immediately, and without expiration of any period of grace, enforce any and all of the HOLDER'S rights and remedies provided herein or any other rights or remedies afforded by law. 8. In case any provision of this Debenture is held by a court of competent jurisdiction to be excessive in scope or otherwise invalid or unenforceable, such provision shall be adjusted rather than voided, if possible, so that it is enforceable to the maximum extent possible, and the validity and enforceability of the remaining provisions of this Debenture will not in any way be affected or impaired thereby. 9. This Debenture and the Agreement referred to in this Debenture constitute the full and entire understanding and agreement between the ISSUER and HOLDER with respect hereof. Neither this Debenture nor any terms hereof may be amended, waived, discharged or terminated other than by a written instrument signed by the ISSUER and the HOLDER. Any Capitalized terms shall have the same meaning as defined in the Agreement. In the event of any inconsistencies between this Debenture and the Agreement, the Agreement shall control. -4- 5 10. This Debenture shall be governed by and construed in accordance with the laws of the State of New York. 11. Notwithstanding anything to the contrary herein contained, Holder shall be prohibited from converting any portion of the Debenture which would result in the Holder being deemed the beneficial owner, in accordance with the provisions of Rule 13d-3 of the Securities Exchange Act of 1934, as amended, of 4.99% or more of the then issued and outstanding Common Stock of the Company. IN WITNESS WHEREOF, the ISSUER has caused this instrument to be duly executed by an officer thereunto duly authorized. HOMECOM COMMUNICATIONS, INC. By -------------------------------------- Harvey Sax, Chief Executive Officer Date: -5- 6 NOTICE OF CONVERSION (To be Executed by the Registered Holder in order to Convert the 5% Convertible Debenture) The undersigned hereby irrevocably elects to convert the below applicable portion of Debenture No. ____ into shares of common stock of HOMECOM COMMUNICATIONS, INC. (the "Company") according to the conditions hereof, as of the date written below. The undersigned represents and warrants that (i) All offers and sales by the undersigned of the shares of Common Stock issuable to the undersigned upon conversion of the Debenture shall be made pursuant to an exemption from registration under the Act, or pursuant to registration of the Common Stock under the Securities Act of 1933, as amended (the "Securities Act"), subject to any restrictions on sale or transfer set forth in the 5% Convertible Debenture Purchase Agreement between the Company and the original holder of the Certificate submitted herewith for conversion. (ii) Upon conversion pursuant to the Notice of Conversion, the undersigned will not own or deemed to beneficially own (within the meaning of the Securities Exchange Act of 1934) 4.9% or more of the then issued and outstanding shares of the company. - ------------------------------- ---------------------------- Date of Conversion Applicable Conversion Price - ------------------------------- ---------------------------- Number of Common Shares upon $ Amount of Conversion Conversion - ------------------------------- ---------------------------- Signature Name Address: Delivery of Shares to: ---------------------------- EX-10.21 5 REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.21 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT, dated the 19th of September, 1997, between the person and/or entity whose name and address appears on the signature page attached hereto (individually a "Holder" or collectively with the holders of the other Securities issued pursuant to a Convertible Debenture Purchase Agreement of even date herewith, as defined below, the "Holders") and HOMECOM COMMUNICATIONS, INC., a Delaware corporation having its principle place of business at Building 14, Suite 100, 3535 Piedmont Road, Atlanta, GA 30305. WHEREAS, simultaneously with the execution and delivery of this Agreement, the Holders are purchasing from the Company, pursuant to a 5% Convertible Debenture Purchase Agreement dated the date hereof (the "Agreement"), an aggregate of up to One Million, Seven Hundred Thousand ($1,700,000) Dollars principal amount of Debentures (singularly the "Debenture" and collectively the "Debentures"); and WHEREAS, the Debenture is convertible into shares (the "Conversion Shares") of the Company's Common Stock, par value $.0001 per share (the "Common Stock"); and WHEREAS, the Company desires to grant to the Holders the registration rights set forth herein with respect to the Conversion Shares. NOW, THEREFORE, the parties hereto mutually agree as follows: Section 1. Registrable Securities. As used herein the term "Registrable Security" means each of the Conversion Shares; provided, however, that with respect to any particular Registrable Security, such security shall cease to be a Registrable Security when, as of the date of determination, (i) it has been effectively registered under the Securities Act of 1933, as amended (the "Securities Act") and disposed of pursuant thereto, (ii) registration under the Securities Act is no longer required for the immediate public distribution of such security as a result of the provisions of Rule 144, or (iii) it has ceased to be outstanding. The term "Registrable Securities" means any and/or all of the securities falling within the foregoing definition of a "Registrable Security." In the event of any merger, reorganization, consolidation, recapitalization or other change in corporate structure affecting the Common Stock, such adjustment shall be made in the definition of "Registrable Security" as is appropriate in order to prevent any dilution or enlargement of the rights granted pursuant to this Section 1. Section 2. Restrictions on Transfer. The Holder acknowledges and understands that prior to the registration of the Conversion Shares as provided herein, the Debenture and the Conversion Shares are "restricted securities" as defined in Rule 144 promulgated under the Act. The Holder understands that no disposition or transfer of the Debenture or Conversion Shares may be made by Holder in the absence of (i) an opinion of counsel from counsel to the Holder, which opinion and counsel shall be reasonably satisfactory to the Company and its counsel that 2 which opinion and counsel shall be reasonably satisfactory to the Company and its counsel that such transfer may be made or (ii) a registration statement under the Securities Act is then in effect with respect thereto. Section 3. Registration Rights. (a) The Company shall prepare and file with the Securities and Exchange Commission ("SEC"), on one occasion, at the sole expense of the Company (except as provided in Section 3(c) hereof), in respect of all holders of Registrable Securities, so as to permit a non-underwritten public offering and sale of the Registrable Securities under the Act. The number of Conversion Shares to be registered shall be two hundred (200%) percent of the number of shares that would be required if all the Registrable Securities were converted on the day before the filing of the Registration Statement. (b) The Company will maintain any Registration Statement or post-effective amendment filed under this Section 3 hereof current under the Securities Act until the earlier of (i) the date that all of the Registrable Securities have been sold pursuant to the Registration Statement, (ii) the date the holders thereof receive an opinion of counsel that the Registrable Securities may be sold under the provisions of Rule 144 or (iii) the second anniversary of the effective date of the Registration Statement. (c) All fees, disbursements and out-of-pocket expenses and costs incurred by the Company in connection with the preparation and filing of any Registration Statement under subparagraph 3(a) and in complying with applicable securities and Blue Sky laws (including, without limitation, all attorneys' fees) shall be borne by the Company. The Holder shall bear the cost of underwriting discounts and commissions, if any, applicable to the Registrable Securities being registered and the fees and expenses of its counsel. The Company shall use its best efforts to qualify any of the securities for sale in such states, up to a maximum number of five (5) states, as such Holder reasonably designates and shall furnish indemnification in the manner provided in Section 6 hereof. Holder will pay in advance the costs to the Company to qualify the securities in more than five (5) states. However, the Company shall not be required to qualify in any state which will require an escrow or other restriction relating to the Company and/or the sellers. The Company at its expense will supply the Holder with copies of such Registration Statement and the prospectus or offering circular included therein and other related documents in such quantities as may be reasonably requested by the Holder, not to exceed 500 copies. (d) The Company shall not be required by this Section 3 to include a Holder's Registrable Securities in any Registration Statement which is to be filed if, in the opinion of counsel for both the Holder and the Company (or, should they not agree, in the opinion of another counsel experienced in securities law matters acceptable to counsel for the Holder and the Company) the proposed offering or other transfer as to which such registration is requested is exempt from applicable federal and state securities laws and would result in all purchasers or transferees obtaining securities which are not "restricted securities", as defined in Rule 144 under the Securities Act. -2- 3 (e) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not declared effective by the SEC within ninety (90) days from the Closing Date up through and including one hundred twenty (120) days from the Closing Date, as defined in the Agreement, then the Company will pay Holder (pro rated on a daily basis), as liquidated damages for such failure and not as a penalty, one (1%) percent of the outstanding principal amount of the Debentures for each month thereafter until the Company procures registration of the Common Stock underlying the Debenture (the "Conversion Shares"). (f) In the event the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not declared effective by the SEC within one hundred twenty (120) days from the Closing Date up through and including one hundred eighty (180) days from the Closing Date, as defined in the Agreement, then the Company will pay Holder (pro rated on a daily basis), as liquidated damages for such failure and not as a penalty, two (2%) percent of the outstanding principal amount of the Debentures until the Company procures registration of the Common Stock underlying the Debenture (the "Conversion Shares"). (g) Liquidated damages referenced in Sections 3(e) and 3(f) shall not exceed five (5%) percent in total of the outstanding principal amount of the Debentures. (h) In the event that the Registration Statement to be filed by the Company pursuant to Section 3(a) above is not declared effective by the SEC within one hundred eight (180) days from the Closing Date, then from and after such one hundred eighty (180) days and until the Registration Statement is declared effective, the interest rate per annum on the Debenture shall be increased to twelve (12%) percent from five (5%) percent per annum. If the Company does not remit the damages to the Purchaser as set forth above, the Company will pay the Purchaser reasonable costs of collection, including attorneys fees, in addition to the liquidated damages. Such payment shall be made to the Purchaser in cash or Common Stock at the option of the Company immediately if the registration of the Conversion Shares are not effected; provided, however, that the payment of such liquidated damages shall not relieve the Company from its obligations to register the Conversion Shares pursuant to this Section. The registration of the Conversion Shares pursuant to this provision shall not affect or limit Purchaser's other rights or remedies as set forth in this Agreement. Notwithstanding the foregoing, the amounts payable by the Company pursuant to this Section 3 shall not be payable to the extent any delay in the filing or effectiveness of the Registration Statement occurs because of an act of, or a failure to act timely by the Investor or its counsel in the event all of the Registrable Securities may be sold pursuant to Rule 144 or another available exemption under the Act, or acts beyond the Company's control. (j) No provision contained herein shall preclude the Company from selling securities pursuant to any Registration Statement in which it is required to include Registrable Securities pursuant to this Section 3. -3- 4 Section 4. Cooperation with Company. Holders will cooperate with the Company in all respects in connection with this Agreement, including, timely supplying all information reasonably requested by the Company and executing and returning all documents reasonably requested in connection with the registration and sale of the Registrable Securities. Section 5. Registration Procedures. If and whenever the Company is required by any of the provisions of this Agreement to effect the registration of any of the Registrable Securities under the Act, the Company shall (except as otherwise provided in this Agreement), as expeditiously as possible: (a) prepare and file with the Commission such amendments and supplements to such registration statement and the Prospectus used in connection therewith as may be necessary to keep such registration statement effective and to comply with the provisions of the Act with respect to the sale or other disposition of all securities covered by such registration statement whenever the Holder or Holders of such securities shall desire to sell or otherwise dispose of the same (including prospectus supplements with respect to the sales of securities from time to time in connection with a registration statement pursuant to Rule 415 of the Commission); (b) furnish to each Holder such numbers of copies of a summary prospectus or other prospectus, including a preliminary prospectus or any amendment or supplement to any prospectus, in conformity with the requirements of the Act, and such other documents, as such Holder may reasonably request (up to a maximum of 500 copies) in order to facilitate the public sale or other disposition of the securities owned by such Holder; (c) use its best efforts to register and qualify the securities covered by such registration statement under such other securities or blue sky laws of such jurisdictions as the Holder shall reasonably request (subject to the limitations set forth in Section 3(c) above), and do any and all other acts and things which may be necessary or advisable to enable each Holder to consummate the public sale or other disposition in such jurisdiction of the securities owned by such Holder, except that the Company shall not for any such purpose be required to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified or to file therein any general consent to service of process; (d) use its best efforts to list such securities on the Nasdaq Small Cap Market or any securities exchange on which any securities of the Company is then listed, if the listing of such securities is then permitted under the rules of such exchange or Nasdaq; (e) enter into and perform its obligations under an underwriting agreement, if the offering is an underwritten offering, in usual and customary form, with the managing underwriter or underwriters of such underwritten offering; (f) notify each Holder of Registrable Securities covered by such registration statement, at any time when a prospectus relating thereto covered by such registration statement is required to be delivered under the Act, of the happening of any event of -4- 5 which it has knowledge as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. Section 6. Indemnification. (a) In the event of the filing of any Registration Statement with respect to Registrable Securities pursuant to Section 3 hereof, the Company agrees to indemnify and hold harmless the Holder and each person, if any, who controls the Holder within the meaning of the Securities Act ("Distributing Holders") against any losses, claims, damages or liabilities, joint or several (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), to which the Distributing Holders may become subject, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any such Registration Statement, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by the Distributing Holders, specifically for use in the preparation thereof. This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) Each Distributing Holder agrees that it will indemnify and hold harmless the Company, and each officer, director of the Company or person, if any, who controls the Company within the meaning of the Securities Act, against any losses, claims, damages or liabilities (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees) to which the Company or any such officer, director or controlling person may become subject under the Securities Act or otherwise, insofar as such losses claims, damages or liabilities (or actions in respect thereof; arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in a Registration Statement requested by such Distributing Holder, or any related preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, but in each case only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in such Registration Statement, preliminary prospectus, final prospectus, offering circular, notification or amendment or supplement thereto in reliance upon, and in conformity with, written information furnished to the Company by such Distributing Holder, specifically for use in the preparation thereof and, provided further, that the indemnity agreement contained in this Section 6(b) shall not inure to the benefit of the Company with -5- 6 respect to any person asserting such loss, claim, damage or liability who purchased the Registrable Securities which are the subject thereof if the Company failed to send or give (in violation of the Securities Act or the rules and regulations promulgated thereunder) a copy of the prospectus contained in such Registration Statement to such person at or prior to the written confirmation to such person of the sale of such Registrable Securities, where the Company was obligated to do so under the Securities Act or the rules and regulations promulgated thereunder. This indemnity agreement will be in addition to any liability which the Distributing Holders may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve the indemnifying party from any liability which it may have to any indemnified party otherwise than as to the particular item as to which indemnification is then being sought solely pursuant to this Section 6. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, assume the defense thereof, subject to the provisions herein stated and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 6 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation, unless the indemnifying party shall not pursue the action to its final conclusion. The indemnified party shall have the right to employ separate counsel in any such action and to participate in the defense thereof, but the fees and expenses of such counsel shall not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the action with counsel reasonably satisfactory to the indemnified party; provided that if the indemnified party is the Distributing Holder, the fees and expenses of such counsel shall be at the expense of the indemnifying party if (i) the employment of such counsel has been specifically authorized in writing by the indemnifying party, or (ii) the named parties to any such action (including any impleaded parties) include both the Distributing Holder and the indemnifying party and the Distributing Holder shall have been advised by such counsel that there may be one or more legal defenses available to the indemnifying party different from or in conflict with any legal defenses which may be available to the Distributing Holder (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the Distributing Holder, it being understood, however, that the indemnifying party shall, in connection with any one such action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable only for the reasonable fees and expenses of one separate firm of attorneys for the Distributing Holder, which firm shall be designated in writing by the Distributing Holder). No settlement of any action against an indemnified party shall be made without the prior written consent of the indemnified party, which consent shall not be unreasonably withheld. -6- 7 Section 7. Contribution. In order to provide for just and equitable contribution under the Securities Act in any case in which (i) the Distributing Holder makes a claim for indemnification pursuant to Section 6 hereof but is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that the express provisions of Section 6 hereof provide for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any Distributing Holder, then the Company and the applicable Distributing Holder shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (which shall, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all attorneys' fees), in either such case (after contribution from others) on the basis of relative fault as well as any other relevant equitable considerations. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the applicable Distributing Holder, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Distributing Holder agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 7. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Section 8. Notices. Any notice pursuant to this Agreement by the Company or by the Holder shall be in writing and shall be deemed to have been duly given if delivered by (i) hand, (ii) by facsimile and followed by mail delivery, or (iii) if mailed by certified mail, return receipt requested, postage prepaid, addressed as follows: (a) If to the Holder, to its, his or her address set forth on the signature page of this Agreement, with a copy to the person designated in the Agreement. (b) If to the Company, at HomeCom Communications, Inc., Building 14, Suite 100, 3535 Piedmont Road, Atlanta, GA 30305, Attn: Harvey Sax, President/CEO, (tele) (404) 237-4646, (fax) (404) 237-3060, and a copy to Morris, Manning & Martin, LLP, 1600 Atlanta Financial Center, 3343 Peachtree Road, NE, Atlanta, GA 30326, Attn: Oby T. Brewer, III, or to such other address as any such party may designate by notice to the other party. Notices shall be deemed given at the time they are delivered personally or five (5) days after they are mailed in the manner set forth above. If notice is delivered by facsimile to the Company and followed by mail, delivery shall be deemed given two (2) days after such facsimile is sent. -7- 8 Section 9. Assignment. This Agreement is binding upon and inures to the benefit of the parties hereto and their respective heirs, successors and permitted assigns. This Agreement cannot be assigned, amended or modified by the parties hereto, except by written agreement executed by the parties. If requested by the Company, the Holder shall have furnished to the Company an opinion of counsel reasonably satisfactory to the Company to such effect. Section 10. Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 11. Headings. The headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. Section 12. Governing Law, Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts made and to be performed entirely within such State, without regard to its principles of conflicts of laws. Each of the parties hereto agrees that in the event of any dispute arising hereunder venue shall be New York, New York and each party hereby submits to the jurisdiction of the United States Federal Court in the Southern District of New York. Section 13. Severability. If any provision of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceablity shall not affect any other provision hereof and this Agreement shall be construed as if such invalid or unenforceable provision had never been contained herein. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, on the day and year first above written. HOMECOM COMMUNICATIONS, INC. By:/s/ Harvey Sax ----------------------------------- Harvey Sax, Chief Executive Officer PURCHASER: By: ---------------------------------- Officer -8- EX-10.22 6 LETTER AGREEMENT DATED 9/23/97 1 EXHIBIT 10.22 HOMECOM COMMUNICATIONS, INC. Building 14, Suite 100 3535 Piedmont Road Atlanta, GA 30305 September 23, 1997 To The Purchasers of HomeCom Communications, Inc. 5% Convertible Debentures Dear Sirs: Please be advised that the 5% Convertible Debenture Purchase Agreement and the Registration Rights Agreement, dated as of September 19, 1997, have been amended, as follows: 5% Convertible Debenture Purchase Agreement: 3.1 Organization; Qualification. The Company is a corporation duly organized and validly existing under the laws of Delaware and is in good standing under such laws. The Company has all requisite corporate power and authority to own, lease and operate its properties and assets, and to carry on its business as presently conducted. The Company is qualified to do business as a foreign corporation in each jurisdiction in which the ownership of its property or the nature of its business requires such qualification, except where failure to so qualify would not have a material adverse effect on the Company, and except that the Company is not qualified in New York and Virginia. The Company will, in the event it is required to do so, qualify to transact business in New York and Virginia. Section 9. Notice of Conversion. Conversion of the Debenture to Common Stock may be exercised in whole or in part by Purchasers telecopying an executed and completed Notice of Conversion (in the form annexed hereto as Exhibit D) to the Company and delivering the original Notice of Conversion and the certificate representing the Debenture to the Company by express courier within three (3) business days of exercise. Each date on which a Notice of Conversion is telecopied to the Company in accordance with the provisions hereof shall be deemed a Conversion Date. The Company will transmit the certificates representing the Common Stock issuable upon conversion of all or any part of the Debenture (together with the certificates representing portions of the Debenture not so converted) to the Purchaser via express courier within five (5) business days after the Company has received the original Notice of Conversion and Debenture certificate being so converted. In addition to any other remedies which may be available to the Purchaser, in the event that the Company fails for any reason to effect delivery of such shares of Common Stock within such five (5) business day period, the 2 Purchaser will be entitled to revoke the relevant Notice of Conversion by delivering by telecopier with an original by overnight courier a notice to such effect to the Company whereupon the Company and the Purchaser shall each be restored to their respective positions immediately prior to the delivery of the Notice of Conversion. Liquidated damages, under Section 3 below, shall continue to run from the sixth business day from the original Conversion Date up until the time that the Notice of Conversion is revoked or the Common Stock has been delivered at which time liquidation damages shall cease to accrue. Upon receipt of such Notice the Company shall return by overnight courier the original certificate representing the Debenture. The Notice of Conversion and certificate representing the portion of the Debenture converted shall be delivered as follows: Registration Rights Agreement: Section 3 (i) is inserted as follows: (i) If the Registration Statement covering the Registrable Securities is not filed in proper form with the Securities and Exchange Commission within thirty (30) days after the Closing Date, the Company will make payment to the Holder, as liquidated damages and not as a penalty, in the amount of one-half (.5%) percent of the outstanding principal amount of debentures for each month thereafter on a pro rata basis daily up until the 90th day after the Closing Date. All Agreements: "Closing Date" shall be deemed to be the date that the wire transfer from the Escrow Agent of the entire net proceeds payable to the Company is actually credited to the Company's account. Very truly yours, HOMECOM COMMUNICATIONS, INC. By /s/ Harvey Sax ---------------------------- Officer AGREED TO: Purchasers: - --------------------------- --------------------------- - --------------------------- --------------------------- EX-10.23 7 LETTER AGREEMENT DATED 10/27/97 1 EXHIBIT 10.23 HOMECOM COMMUNICATIONS, INC. Suite 100, Building 14 3535 Piedmont Road, N.E. Atlanta, Georgia 30305 October 27, 1997 VIA FACSIMILE NO. 212/213-2077 & FIRST CLASS MAIL Eurofactors International Inc. Beauchamp Finance FTS Worldwide Corporation COLBO (collectively, the "Purchasers") c/o Krieger & Prager 319 Fifth Avenue New York, New York 10016 Re: Acquisition by the Purchasers of 5% Convertible Debentures of HomeCom Communications, Inc. (the "Company") in an aggregate principal amount of $1.7 Million (the "Convertible Debentures") Gentlemen: This letter agreement ("Agreement") amends that certain 5% Convertible Debenture Purchase Agreement ("Purchase Agreement"), dated as of September 19, 1997 and as amended, between the Purchasers and the Company as set forth herein. This Agreement also confirms the understanding of the parties hereto with respect to the Company's issuance of certain warrants to First Granite Securities, Inc. ("FGS") in connection with the sale of the Convertible Debentures to the Purchasers, all as more fully described below. As used herein, the term "Transaction Documents" means the Purchase Agreement, that certain Convertible Debenture attached to the Purchase Agreement as Exhibit A, that certain Convertible Debenture Escrow Agreement attached to the Purchase Agreement as Exhibit B, that certain Registration Rights Agreement attached to the Purchase Agreement as Exhibit C, Acknowledgment and Release Agreements in the form attached hereto as Exhibit A from each of The Malachi Group, Inc., ClarCo Holdings, Inc., FGS and Adar Equities, and this Agreement. I. AMENDMENT TO PURCHASE AGREEMENT. The parties hereto agree to amend the Purchase Agreement in accordance with the following: 1. Conversion Price. The definition of "Conversion Price" set forth in Section 1 of the Purchase Agreement is amended to be and read as follows: " "Conversion Price" means an amount equal to the lessor of (a) a twenty-five (25%) percent discount from the average closing bid price of the Common Stock as reported by NASDAQ or on other securities exchanges or markets on which the Common Stock is listed for the previous three (3) trading days ending on the day before the Conversion Date, or (b) $4.00." 2 2. Purchaser Review. Section 4.6 of the Purchase Agreement is amended by deleting the first sentence of Section 4.6 in its entirety and substituting in lieu thereof the following: "The Purchaser hereby represents and warrants that the Purchaser has carefully examined the reports (including the financial statements contained therein) and all materials required to be disclosed under Rule 502(c) under the Securities Act." II. ISSUANCE OF WARRANTS. Subject to receipt by the Company of counterparts of this Agreement executed by each Purchaser, the Purchasers hereby direct the Company to promptly issue to FGS warrants to purchase common stock (the "Warrants") in full and complete accord and satisfaction of any and all obligations to FGS owed by any of the parties hereto, such Warrants to have the following terms: SHARES: Common Stock NUMBER OF SHARES: 400,000 EXERCISE PRICE: 200,000 shares purchasable at an exercise price of $4.00 per share and 200,000 shares purchasable at an exercise price of $6.00 per share TERM OF THE WARRANTS: 3 years ANTI-DILUTION: Standard weighted average anti-dilution rights The parties agree that the Warrants shall be in the form attached hereto as Exhibit B and shall be promptly signed and issued to FGS by the Company upon receipt of the Transaction Documents. III. ACKNOWLEDGMENT AND RELEASE. For and in consideration of the agreement by the Company to amend the Purchase Agreement as set forth herein and to issue the Warrants to FGS, each Purchaser and each of their respective officers, directors, employees and affiliates (collectively "Purchaser Affiliates"), by executing this Agreement, hereby releases, acquits and forever discharges the Company and each of its officers, directors, employees, parents, subsidiaries and affiliates (collectively, "Company Affiliates") from any and all claims, demands, or obligations which any of the Purchasers or the Purchaser Affiliates had, now has or may later claim to have against them, known or unknown, from the beginning of time to the date of this Agreement, whether now accrued or to accrue hereafter, involving any matters relating to the payment of compensation or commissions, whether in cash, stock or warrants to acquire stock, in connection with the sale of the Convertible Debentures (including, without limitation, the issuance of the Warrants to FGS and the payment of cash commissions to The Malachi Group, Inc.). IV. MISCELLANEOUS. 1. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Georgia. 2. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon, and all of such counterparts shall together constitute one and the same instrument. This Agreement shall become -2- 3 binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. This Agreement may be executed and delivered by fax (telecopier); any original signatures that are initially delivered by fax shall be physically delivered with reasonable promptness thereafter. 3. This Agreement shall become effective on the date the Company has received an executed counterpart of this Agreement from each of the Purchasers. 4. This Agreement shall constitute the full and complete agreement between the parties concerning its subject matter and fully supersedes any and all other prior agreements or understandings between the parties regarding the subject matter hereto. This Agreement shall not be modified or amended except by written instrument signed by all of the parties hereto. Very truly yours, HomeCom Communications, Inc. By: /s/ Harvey Sax --------------------------------- Harvey Sax, President [SIGNATURES CONTINUED ON NEXT PAGE] -3- 4 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] Accepted and agreed to by the undersigned Purchasers: Eurofactors International, Inc. By: ------------------------------- Print Name: ----------------------- Print Title: ----------------------- Attest: ----------------------- Print Name: ----------------------- Signed, sealed and delivered in the presence of: - ------------------------------ Notary Public My commission expires: --------- [NOTARIAL SEAL] -4- 5 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] Accepted and agreed to by the undersigned Purchasers: FTS Worldwide Corporation By: ------------------------------- Print Name: ---------------------- Print Title: ---------------------- By: ------------------------------ Print Name: ---------------------- Print Title: ---------------------- Signed, sealed and delivered in the presence of: - ------------------------------ Notary Public My commission expires: -------- [NOTARIAL SEAL] -5- 6 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] Accepted and agreed to by the undersigned Purchasers: Beauchamp Finance By: ------------------------------- Print Name: ---------------------- Print Title: ---------------------- Attest: --------------------------- Print Title: ---------------------- Signed, sealed and delivered in the presence of: - ------------------------------ Notary Public My commission expires: -------- [NOTARIAL SEAL] -6- 7 [SIGNATURES CONTINUED FROM PREVIOUS PAGE] Accepted and agreed to by the undersigned Purchasers: COLBO By: ------------------------------- Print Name: ---------------------- Print Title: ---------------------- Attest: --------------------------- Print Title: ---------------------- Signed, sealed and delivered in the presence of: - ------------------------------ Notary Public My commission expires: -------- [NOTARIAL SEAL] -7- EX-10.24 8 FORM OF WARRANT TO PURCHASE $4.00 1 EXHIBIT 10.24 STOCK PURCHASE WARRANT HOMECOM COMMUNICATIONS, INC. COMMON STOCK ($.0001 PAR VALUE) DATED OCTOBER 27, 1997 200,000 SHARES VOID AFTER OCTOBER 27,2000 This certifies that, for value received, FIRST GRANITE SECURITIES, INC. (the "Holder"), its permitted successors and assigns, is entitled, upon the due exercise hereof at any time during the period commencing on OCTOBER 27, 1997, and terminating at 5:00 p.m. E.S.T. on OCTOBER 27, 2000, to purchase Two Hundred Thousand (200,000) shares of common stock, $.0001 par value per share ("Common Stock"), of HOMECOM COMMUNICATIONS, INC., a Delaware corporation (hereinafter called "HomeCom"), such number of shares being subject to adjustment upon the occurrence of the contingencies set forth in this Warrant. The purchase price payable upon the exercise of this Warrant shall be $4.00 per share multiplied by the number of shares of Common Stock being purchased (hereinafter referred to as the "Exercise Price"), subject to adjustment upon the occurrence of the contingencies set forth in this Warrant. Shares issuable upon exercise of this Warrant are hereinafter referred to as the "Warrant Shares." SECTION I. DURATION AND EXERCISE OF WARRANT. This Warrant shall expire on 5:00 p.m. E.S.T. on OCTOBER 27, 2000 (the "Expiration Date"). After the Expiration Date, any unexercised portion of this Warrant will be wholly void and of no value. This Warrant may be exercised by the Holder on any business day beginning on the date hereof and on or prior to the Expiration Date. For purposes of this Warrant, the term "business day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. Subject to the provisions of this Warrant, the Holder shall have the right to purchase from HomeCom (and HomeCom shall as soon as practicable, subject to Section V, issue and sell to such Holder) Two Hundred Thousand (200,000) fully paid and nonassessable shares of Common Stock, including any shares of any class or series of stock into which such shares may hereafter be changed and subject to the adjustments contemplated by Section IV hereof, at the Exercise Price, upon surrender to HomeCom of this Warrant, together with a Warrant Exercise Agreement in the form attached hereto as EXHIBIT 1 duly filled in and executed by the Holder or his duly authorized agent, and upon payment of the Exercise Price in lawful money of the United States of America in cash, by cashier's check payable to the order of HomeCom or by wire transfer to HomeCom's account of immediately available funds. The number of Warrant Shares, and the amount and type of securities or other property purchasable upon exercise of this Warrant shall be subject to adjustment as provided in Section IV. 2 Subject to Section IV, (i) upon such surrender of this Warrant and payment of the Exercise Price on or prior to the Expiration Date, HomeCom shall deliver or cause to be delivered to the Holder certificates or other appropriate instruments for the Warrant Shares and any other securities, and such other property issuable upon the exercise of this Warrant, in such name or names as the Holder shall designate on the Form of Exercise attached thereto; and (ii) such Warrant Shares, securities and other property shall be deemed to have been issued, and any person so designated therein shall be deemed to have become, the holder of record of such Warrant Shares, securities or property as of the date of the surrender of this Warrant and payment of the Exercise Price. This Warrant shall be exercisable, at the election of the Holder, either in its entirety or from time to time in part only. Upon the exercise of only a portion of this Warrant, the Holder shall be required to pay HomeCom upon exercise of such portion of this Warrant a fraction of the Exercise Price equal to the fraction of this Warrant so exercised. In the event that less than all of this Warrant is exercised, HomeCom shall cause a new Warrant to be issued to the Holder or such person or entity as shall be designated in the Form of Exercise for the remaining portion of the Warrant. SECTION II. REGISTRATION; TRANSFERS AND EXCHANGES. HomeCom shall maintain at its executive offices a register reflecting the ownership of the Warrant Shares and any permitted transfers thereof from time to time (the "Warrant Register"). HomeCom may deem and treat the Holder of this Warrant as indicated in the Warrant Register as the absolute owner thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for the purpose of any exercise thereof, any distribution to the Holder thereof and for all other purposes, and HomeCom shall not be affected in any way by any notice to the contrary. Upon written notice to HomeCom by the Holder and its permitted transferee of a transfer of this Warrant in accordance with the terms hereof, HomeCom shall reflect such transfer in the Warrant Register. Holder acknowledges and understands that neither this Warrant nor the Warrant Shares are registered under the Securities Act of 1933, as amended ("Federal Act") or under any state securities law. If at any time during which this Warrant is exercisable according to its terms there is no effective Registration Statement on file with the Securities and Exchange Commission (the "Commission") covering the Warrant Shares then acquirable hereunder, the offer and sale of the Warrant Shares to the holder of this Warrant must be exempt from the registration requirements of the Federal Act, and such state securities laws as shall be applicable; and in the case of an exemption, only if HomeCom has received an opinion of counsel that such transaction does not require registration of the Warrant Shares, which opinion and which counsel shall be satisfactory to HomeCom in its sole discretion. HomeCom may condition such exercise upon its receipt of such representations, factual assurances and legal opinions as it shall deem necessary to determine and document the availability of any such exemption and may further condition such exercise upon such undertakings by the Holder or such restriction upon the transferability of the Warrant Shares to be acquired hereunder as it shall determine to be necessary to effectuate and protect the claim to any such exemption. -2- 3 If this Warrant at any time becomes mutilated, lost, stolen or destroyed, HomeCom will issue in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent Warrant, but only upon receipt of evidence satisfactory to HomeCom of such loss, theft or destruction of such Warrant and indemnity reasonably satisfactory to HomeCom. SECTION III. PAYMENT OF TAXES. HomeCom shall not be required to pay any transfer, documentary, stamp or other taxes imposed under any federal, state or local laws on Warrants issued pursuant to transfers or exchanges or under other circumstances covered in Sections II and V hereof. HomeCom shall not be required to pay any tax or taxes or government charges of any kind that may be payable in respect of any issuance of any stock certificates for Warrant Shares, any certificates or other instruments for any other securities, or any other property purchased upon exercise of this Warrant. HomeCom shall not be required to issue or deliver such stock certificates, certificates or other instruments for other securities, or other property unless or until the person requesting the issuance thereof shall have paid to HomeCom the amount of any such tax or government charge or shall have established to the satisfaction of HomeCom that such tax or government charge has been paid. SECTION IV. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES PURCHASABLE HEREUNDER. The Exercise Price and the number of Warrant Shares purchasable upon the exercise of the Warrant are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section IV. A. In case HomeCom shall at any time after the date of this Warrant (i) declare a dividend on the Common Stock payable in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares or (iv) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which HomeCom is the continuing corporation), the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, shall be proportionately adjusted so that the Holder of the Warrant exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Warrant had been exercised immediately prior to such date, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. -3- 4 1. No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($.05) in such price; provided, however, that any adjustments which by reason of this Section IV are not required to be made shall be carried forward and taken into account in any subsequent adjustment. 2. In the event that at any time, as a result of an adjustment made pursuant to Section IV the holder of the Warrant thereafter exercised shall become entitled to receive any shares of capital stock of HomeCom other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of the Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock purchasable pursuant to this Warrant. 3. Upon each adjustment of the Exercise Price as a result of the calculations made in Section IV, the Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares (calculated to the nearest hundredth) obtained by (A) multiplying the number of Warrant Shares purchasable upon exercise of the Warrant immediately prior to such adjustment of the number of Warrant Shares by the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (B) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. B. In case of any capital reorganization of HomeCom, or of any reclassification of the Common Stock (other than a change in par value, or from no par value to par value, or as a result of subdivision or combination), or in case of the consolidation of HomeCom with or the merger of HomeCom with any other corporation or association (other than a consolidation or merger in which (i) HomeCom is the continuing corporation and (ii) the holders of HomeCom's Common Stock immediately prior to such merger or consolidation continue as holders of Common Stock after such merger or consolidation) or of the sale of the properties and assets of HomeCom as, or substantially as, an entirety to any other corporation or association, the Warrant shall after such reorganization, reclassification, consolidation, merger or sale be exercisable, upon the terms and conditions specified herein, for the number of shares of stock or other securities or property to which a holder of the number of Warrant Shares purchasable (at the time of such reorganization, reclassification, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such reorganization, reclassification, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section IV with respect to the rights and interests thereafter of the holder of the Warrant shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other -4- 5 securities or property thereafter deliverable on the exercise of the Warrant. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares shall not be deemed to be a reclassification of the Common Stock for the purposes of this Section IV. HomeCom shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof the successor corporation or association (if other than HomeCom) resulting from such consolidation or merger or the entity purchasing such assets or other appropriate entity shall assume, by written instrument executed and delivered to HomeCom, the obligation to deliver to the holder of the Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase and the obligations under this Warrant. SECTION V. FRACTIONAL WARRANTS AND FRACTIONAL WARRANT SHARES. HomeCom expressly agrees that the Holder of this Warrant shall be entitled to exchange such Warrant for fractions of Warrants upon surrender of this Warrant to HomeCom in exchange for Warrants reflecting such fractions of Warrants; provided, however, that HomeCom will not be required to issue any fractional Warrants representing fractional shares of Common Stock upon exercise of this Warrant or distribute stock certificates or other instruments that evidence fractional shares of Common Stock and HomeCom will pay a cash adjustment in respect of any fractional shares of Common Stock or fractional shares of securities otherwise issuable upon the exercise of this Warrant. SECTION VI. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote, receive dividends or to be deemed for any purpose the holder of Warrant Shares or of any other securities of HomeCom that may at any time be issuable on the exercise of this Warrant, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of HomeCom or any right to vote on matters submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or, without limitation, otherwise), or to receive notice of meetings, or to receive subscription rights or otherwise, until this Warrant shall have been exercised as provided herein. SECTION VII. ISSUANCE OF NEW WARRANTS. Notwithstanding any of the provisions of this Warrant to the contrary, HomeCom may, at its option, issue a new Warrant in such form as may be approved by its Board of Directors which reflect any adjustment or change in the number or kind or class of shares of stock or other securities or property purchasable under this Warrant made in accordance with the provisions hereof. HomeCom may, at its option, require the Holder of this Warrant to surrender its then current Warrant for any such new Warrant. SECTION VIII. NOTICES. All instructions, notices and other communications to be given to any party hereto shall be in writing and shall be personally delivered or sent by first class or certified mail, postage prepaid and return receipt requested, and shall be deemed to be given for purposes -5- 6 of this Warrant on the day when delivered to the intended party (if by personal delivery) or three (3) days after mailing (if by mail) at its address specified below: (a) If to HomeCom: Building 14, Suite 100 3535 Piedmont Road Atlanta, Georgia 30305 Attn: Harvey Sax, President/CEO (P)(404) 237-4646 (F)(404) 237-3060 or such other address as HomeCom may designate from time to time by written notice to the Holder. (b) If to the Holder: First Granite Securities, Inc. 1276 50th Street Brooklyn, New York 11219 Attention: Shauel Seitler (P) (718) 437-2379 (F) (718) 437-2169 or such other address as the Holder may designate from time to time by written notice to HomeCom. SECTION IX. SUPPLEMENTS AND AMENDMENTS. This Warrant may be amended and supplemented in writing signed by HomeCom and the Holder. SECTION X. SUCCESSORS. This Warrant shall be binding upon and inure to the benefit of the respective successors and permitted assigns hereunder of HomeCom or the Holder. SECTION XI. TERMINATION. This Warrant shall terminate at the close of business on the Expiration Date. Notwithstanding the foregoing, this Warrant will terminate on any earlier date when this Warrant has been exercised in full or has been redeemed or acquired by HomeCom. SECTION XII. GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Georgia. SECTION XIII. JURISDICTION AND VENUE. Any judicial proceedings brought by or against any party on any dispute arising out of this Warrant or any matter related thereto shall be brought in the state or federal courts of Fulton County, Georgia and, by execution and delivery of this Warrant, each of the parties accepts for itself the exclusive jurisdiction and venue of the aforesaid courts as trial courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection -6- 7 with this Warrant after exhaustion of all appeals taken (or by the appropriate appellate court if such appellate court renders judgment). SECTION XIV. BENEFITS OF THIS AGREEMENT. Nothing in this Warrant shall be construed to give to any person or corporation other than HomeCom and the Holder of this Warrant any legal or equitable right, remedy or claim under this Warrant, and this Warrant shall be for the sole and exclusive benefit of HomeCom and the Holder hereof. SECTION XV. SEVERABILITY. If any provision of this Warrant is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; this Warrant shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions of this Warrant shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or its severance from this Warrant. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of this Warrant a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION XVI. HEADINGS. The section and subsection headings herein are for convenience only and shall not affect the construction hereof. IN WITNESS WHEREOF, HomeCom has caused this Warrant to be duly executed as of the day and year first above written. HOMECOM INC. By: /s/ Harvey Sax ----------------------------------- Harvey Sax, President/CEO -7- EX-10.25 9 FORM OF WARRANT TO PURCHASE $6.00 1 EXHIBIT 10.25 STOCK PURCHASE WARRANT HOMECOM COMMUNICATIONS, INC. COMMON STOCK ($.0001 PAR VALUE) DATED OCTOBER 27, 1997 200,000 SHARES VOID AFTER OCTOBER 27, 2000 This certifies that, for value received, FIRST GRANITE SECURITIES, INC. ("the Holder"), its permitted successors and assigns, is entitled, upon the due exercise hereof at any time during the period commencing on OCTOBER 27, 1997, and terminating at 5:00 p.m. E.S.T. on OCTOBER 27, 2000, to purchase Two Hundred Thousand (200,000) shares of common stock, $.0001 par value per share ("Common Stock"), of HOMECOM COMMUNICATIONS, INC., a Delaware corporation (hereinafter called "HomeCom"), such number of shares being subject to adjustment upon the occurrence of the contingencies set forth in this Warrant. The purchase price payable upon the exercise of this Warrant shall be $6.00 per share multiplied by the number of shares of Common Stock being purchased (hereinafter referred to as the "Exercise Price"), subject to adjustment upon the occurrence of the contingencies set forth in this Warrant. Shares issuable upon exercise of this Warrant are hereinafter referred to as the "Warrant Shares." SECTION I. DURATION AND EXERCISE OF WARRANT. This Warrant shall expire on 5:00 p.m. E.S.T. on OCTOBER 27, 2000 (the "Expiration Date"). After the Expiration Date, any unexercised portion of this Warrant will be wholly void and of no value. This Warrant may be exercised by the Holder on any business day beginning on the date hereof and on or prior to the Expiration Date. For purposes of this Warrant, the term "business day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in New York, New York are authorized or obligated by law or executive order to close. Subject to the provisions of this Warrant, the Holder shall have the right to purchase from HomeCom (and HomeCom shall as soon as practicable, subject to Section V, issue and sell to such Holder) Two Hundred Thousand (200,000) fully paid and nonassessable shares of Common Stock, including any shares of any class or series of stock into which such shares may hereafter be changed and subject to the adjustments contemplated by Section IV hereof, at the Exercise Price, upon surrender to HomeCom of this Warrant, together with a Warrant Exercise Agreement in the form attached hereto as EXHIBIT 1 duly filled in and executed by the Holder or his duly authorized agent, and upon payment of the Exercise Price in lawful money of the United States of America in cash, by cashier's check payable to the order of HomeCom or by wire transfer to HomeCom's account of immediately available funds. The number of Warrant Shares, and the amount and type of securities or other property purchasable upon exercise of this Warrant shall be subject to adjustment as provided in Section IV. 2 Subject to Section IV, (i) upon such surrender of this Warrant and payment of the Exercise Price on or prior to the Expiration Date, HomeCom shall deliver or cause to be delivered to the Holder certificates or other appropriate instruments for the Warrant Shares and any other securities, and such other property issuable upon the exercise of this Warrant, in such name or names as the Holder shall designate on the Form of Exercise attached thereto; and (ii) such Warrant Shares, securities and other property shall be deemed to have been issued, and any person so designated therein shall be deemed to have become, the holder of record of such Warrant Shares, securities or property as of the date of the surrender of this Warrant and payment of the Exercise Price. This Warrant shall be exercisable, at the election of the Holder, either in its entirety or from time to time in part only. Upon the exercise of only a portion of this Warrant, the Holder shall be required to pay HomeCom upon exercise of such portion of this Warrant a fraction of the Exercise Price equal to the fraction of this Warrant so exercised. In the event that less than all of this Warrant is exercised, HomeCom shall cause a new Warrant to be issued to the Holder or such person or entity as shall be designated in the Form of Exercise for the remaining portion of the Warrant. SECTION II. REGISTRATION; TRANSFERS AND EXCHANGES. HomeCom shall maintain at its executive offices a register reflecting the ownership of the Warrant Shares and any permitted transfers thereof from time to time (the "Warrant Register"). HomeCom may deem and treat the Holder of this Warrant as indicated in the Warrant Register as the absolute owner thereof (notwithstanding any notation of ownership or other writing thereon made by anyone) for the purpose of any exercise thereof, any distribution to the Holder thereof and for all other purposes, and HomeCom shall not be affected in any way by any notice to the contrary. Upon written notice to HomeCom by the Holder and its permitted transferee of a transfer of this Warrant in accordance with the terms hereof, HomeCom shall reflect such transfer in the Warrant Register. Holder acknowledges and understands that neither this Warrant nor the Warrant Shares are registered under the Securities Act of 1933, as amended ("Federal Act") or under any state securities law. If at any time during which this Warrant is exercisable according to its terms there is no effective Registration Statement on file with the Securities and Exchange Commission (the "Commission") covering the Warrant Shares then acquirable hereunder, the offer and sale of the Warrant Shares to the holder of this Warrant must be exempt from the registration requirements of the Federal Act, and such state securities laws as shall be applicable; and in the case of an exemption, only if HomeCom has received an opinion of counsel that such transaction does not require registration of the Warrant Shares, which opinion and which counsel shall be satisfactory to HomeCom in its sole discretion. HomeCom may condition such exercise upon its receipt of such representations, factual assurances and legal opinions as it shall deem necessary to determine and document the availability of any such exemption and may further condition such exercise upon such undertakings by the Holder or such restriction upon the transferability of the Warrant Shares to be acquired hereunder as it shall determine to be necessary to effectuate and protect the claim to any such exemption. -2- 3 If this Warrant at any time becomes mutilated, lost, stolen or destroyed, HomeCom will issue in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and in substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor and representing an equivalent Warrant, but only upon receipt of evidence satisfactory to HomeCom of such loss, theft or destruction of such Warrant and indemnity reasonably satisfactory to HomeCom. SECTION III. PAYMENT OF TAXES. HomeCom shall not be required to pay any transfer, documentary, stamp or other taxes imposed under any federal, state or local laws on Warrants issued pursuant to transfers or exchanges or under other circumstances covered in Sections II and V hereof. HomeCom shall not be required to pay any tax or taxes or government charges of any kind that may be payable in respect of any issuance of any stock certificates for Warrant Shares, any certificates or other instruments for any other securities, or any other property purchased upon exercise of this Warrant. HomeCom shall not be required to issue or deliver such stock certificates, certificates or other instruments for other securities, or other property unless or until the person requesting the issuance thereof shall have paid to HomeCom the amount of any such tax or government charge or shall have established to the satisfaction of HomeCom that such tax or government charge has been paid. SECTION IV. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES PURCHASABLE HEREUNDER. The Exercise Price and the number of Warrant Shares purchasable upon the exercise of the Warrant are subject to adjustment from time to time upon the occurrence of the events enumerated in this Section IV. A. In case HomeCom shall at any time after the date of this Warrant (i) declare a dividend on the Common Stock payable in shares of its capital stock (whether shares of Common Stock or of capital stock of any other class), (ii) subdivide the outstanding Common Stock, (iii) combine the outstanding Common Stock into a smaller number of shares or (iv) issue any shares of its capital stock in a reclassification of the Common Stock (including any such reclassification in connection with a consolidation or merger in which HomeCom is the continuing corporation), the Exercise Price in effect at the time of the record date for such dividend or of the effective date of such subdivision, combination or reclassification, shall be proportionately adjusted so that the Holder of the Warrant exercised after such time shall be entitled to receive the aggregate number and kind of shares of capital stock which, if such Warrant had been exercised immediately prior to such date, he would have owned upon such exercise and been entitled to receive by virtue of such dividend, subdivision, combination or reclassification. Such adjustment shall be made successively whenever any event listed above shall occur. -3- 4 1. No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($.05) in such price; provided, however, that any adjustments which by reason of this Section IV are not required to be made shall be carried forward and taken into account in any subsequent adjustment. 2. In the event that at any time, as a result of an adjustment made pursuant to Section IV the holder of the Warrant thereafter exercised shall become entitled to receive any shares of capital stock of HomeCom other than shares of Common Stock, thereafter the number of such other shares so receivable upon exercise of the Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Common Stock purchasable pursuant to this Warrant. 3. Upon each adjustment of the Exercise Price as a result of the calculations made in Section IV, the Warrant outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Exercise Price, that number of Warrant Shares (calculated to the nearest hundredth) obtained by (A) multiplying the number of Warrant Shares purchasable upon exercise of the Warrant immediately prior to such adjustment of the number of Warrant Shares by the Exercise Price in effect immediately prior to such adjustment of the Exercise Price and (B) dividing the product so obtained by the Exercise Price in effect immediately after such adjustment of the Exercise Price. B. In case of any capital reorganization of HomeCom, or of any reclassification of the Common Stock (other than a change in par value, or from no par value to par value, or as a result of subdivision or combination), or in case of the consolidation of HomeCom with or the merger of HomeCom with any other corporation or association (other than a consolidation or merger in which (i) HomeCom is the continuing corporation and (ii) the holders of HomeCom's Common Stock immediately prior to such merger or consolidation continue as holders of Common Stock after such merger or consolidation) or of the sale of the properties and assets of HomeCom as, or substantially as, an entirety to any other corporation or association, the Warrant shall after such reorganization, reclassification, consolidation, merger or sale be exercisable, upon the terms and conditions specified herein, for the number of shares of stock or other securities or property to which a holder of the number of Warrant Shares purchasable (at the time of such reorganization, reclassification, consolidation, merger or sale) upon exercise of such Warrant would have been entitled upon such reorganization, reclassification, consolidation, merger or sale; and in any such case, if necessary, the provisions set forth in this Section IV with respect to the rights and interests thereafter of the holder of the Warrant shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any shares of stock or other -4- 5 securities or property thereafter deliverable on the exercise of the Warrant. The subdivision or combination of shares of Common Stock at any time outstanding into a greater or lesser number of shares shall not be deemed to be a reclassification of the Common Stock for the purposes of this Section IV. HomeCom shall not effect any such consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof the successor corporation or association (if other than HomeCom) resulting from such consolidation or merger or the entity purchasing such assets or other appropriate entity shall assume, by written instrument executed and delivered to HomeCom, the obligation to deliver to the holder of the Warrant such shares of stock, securities or assets as, in accordance with the foregoing provisions, such holder may be entitled to purchase and the other obligations under this Warrant. SECTION V. FRACTIONAL WARRANTS AND FRACTIONAL WARRANT SHARES. HomeCom expressly agrees that the Holder of this Warrant shall be entitled to exchange such Warrant for fractions of Warrants upon surrender of this Warrant to HomeCom in exchange for Warrants reflecting such fractions of Warrants; provided, however, that HomeCom will not be required to issue any fractional Warrants representing fractional shares of Common Stock upon exercise of this Warrant or distribute stock certificates or other instruments that evidence fractional shares of Common Stock and HomeCom will pay a cash adjustment in respect of any fractional shares of Common Stock or fractional shares of securities otherwise issuable upon the exercise of this Warrant. SECTION VI. NO RIGHTS AS STOCKHOLDERS. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote, receive dividends or to be deemed for any purpose the holder of Warrant Shares or of any other securities of HomeCom that may at any time be issuable on the exercise of this Warrant, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a stockholder of HomeCom or any right to vote on matters submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issue of stock, reclassification of stock, change of par value, consolidation, merger, conveyance, or, without limitation, otherwise), or to receive notice of meetings, or to receive subscription rights or otherwise, until this Warrant shall have been exercised as provided herein. SECTION VII. ISSUANCE OF NEW WARRANTS. Notwithstanding any of the provisions of this Warrant to the contrary, HomeCom may, at its option, issue a new Warrant in such form as may be approved by its Board of Directors which reflect any adjustment or change in the number or kind or class of shares of stock or other securities or property purchasable under this Warrant made in accordance with the provisions hereof. HomeCom may, at its option, require the Holder of this Warrant to surrender its then current Warrant for any such new Warrant. SECTION VIII. NOTICES. All instructions, notices and other communications to be given to any party hereto shall be in writing and shall be personally delivered or sent by first class or certified mail, postage prepaid and return receipt requested, and shall be deemed to be given for purposes -5- 6 of this Warrant on the day when delivered to the intended party (if by personal delivery) or three (3) days after mailing (if by mail) at its address specified below: (a) If to HomeCom: Building 14, Suite 100 3535 Piedmont Road Atlanta, Georgia 30305 Attn: Harvey Sax, President/CEO (P)(404) 237-4646 (F)(404) 237-3060 or such other address as HomeCom may designate from time to time by written notice to the Holder. (b) If to the Holder: First Granite Securities, Inc. 1276 50th Street Brooklyn, New York 11219 Attention: Shauel Seitler (P) (718) 437-2379 (F) (718) 437-2169 or such other address as the Holder may designate from time to time by written notice to HomeCom. SECTION IX. SUPPLEMENTS AND AMENDMENTS. This Warrant may be amended and supplemented in writing signed by HomeCom and the Holder. SECTION X. SUCCESSORS. This Warrant shall be binding upon and inure to the benefit of the respective successors and permitted assigns hereunder of HomeCom or the Holder. SECTION XI. TERMINATION. This Warrant shall terminate at the close of business on the Expiration Date. Notwithstanding the foregoing, this Warrant will terminate on any earlier date when this Warrant has been exercised in full or has been redeemed or acquired by HomeCom. SECTION XII. GOVERNING LAW. This Warrant shall be governed by and construed in accordance with the laws of the State of Georgia. SECTION XIII. JURISDICTION AND VENUE. Any judicial proceedings brought by or against any party on any dispute arising out of this Warrant or any matter related thereto shall be brought in the state or federal courts of Fulton County, Georgia and, by execution and delivery of this Warrant, each of the parties accepts for itself the exclusive jurisdiction and venue of the aforesaid courts as trial courts, and irrevocably agrees to be bound by any judgment rendered thereby in connection -6- 7 with this Warrant after exhaustion of all appeals taken (or by the appropriate appellate court if such appellate court renders judgment). SECTION XIV. BENEFITS OF THIS AGREEMENT. Nothing in this Warrant shall be construed to give to any person or corporation other than HomeCom and the Holder of this Warrant any legal or equitable right, remedy or claim under this Warrant, and this Warrant shall be for the sole and exclusive benefit of HomeCom and the Holder hereof. SECTION XV. SEVERABILITY. If any provision of this Warrant is held to be illegal, invalid or unenforceable under present or future laws effective during the term hereof, such provision shall be fully severable; this Warrant shall be construed and enforced as if such illegal, invalid or unenforceable provision had never comprised a part hereof; and the remaining provisions of this Warrant shall remain in full force and effect and shall not be affected by the illegal, invalid or unenforceable provision or its severance from this Warrant. Furthermore, in lieu of such illegal, invalid or unenforceable provision there shall be added automatically as a part of this Warrant a provision as similar in terms to such illegal, invalid or unenforceable provision as may be possible and be legal, valid and enforceable. SECTION XVI. HEADINGS. The section and subsection headings herein are for convenience only and shall not affect the construction hereof. IN WITNESS WHEREOF, HomeCom has caused this Warrant to be duly executed as of the day and year first above written. HOMECOM INC. By: /s/ Harvey Sax ----------------------------- Harvey Sax, President/CEO -7- EX-23.1 10 CONSENT OF COOPERS & LYBRAND 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-1 of HomeCom Communications, Inc. of our report, which includes an explanatory paragraph relating to the uncertainty of the Company's ability to continue as a going concern, dated February 21, 1997, on our audits of the financial statements of HomeCom Communications, Inc. We also consent to the reference to our firm under the caption "Experts." COOPERS & LYBRAND L.L.P. Atlanta, Georgia December 18, 1997 -----END PRIVACY-ENHANCED MESSAGE-----