UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended [June 30, 1998]
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from_____to_____.
Commission File Number 1-11624
HyperMedia Communications, Inc.
-------------------------------
(Exact name of registrant as specified in its charter)
California 94-3104247
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
901 Mariner's Island Blvd., Suite 365,
San Mateo, California 94404
(Address of principal executive offices) (Zip Code)
(650) 573-5170
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
As of August 4, 1998, 3,200,141 shares of the Registrant's common stock were
issued and outstanding.
1
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<TABLE>
PART I - FINANCIAL INFORMATION
Item 1.
HYPERMEDIA COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
<CAPTION>
June 30, December 31,
1998 1997
------------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 887,000 $ 269,000
Accounts receivable, net of allowance for
doubtful accounts of $143,000 and $110,000 1,136,000 1,165,000
Prepaid expenses and other assets 618,000 567,000
------------------ ------------------
Total current assets 2,641,000 2,001,000
Property and equipment, net 424,000 451,000
------------------ ------------------
$ 3,065,000 $ 2,452,000
================== ==================
Current liabilities:
Accounts payable $ 672,000 $ 956,000
Accrued liabilities 313,000 439,000
Deferred revenue 54,000 31,000
------------------ ------------------
Total current liabilities 1,039,000 1,426,000
------------------ ------------------
Shareholders' equity:
Convertible Preferred Stock, $.001 par value; 10,064,516
shares authorized; 8,512,191 and 8,342,910 shares 3,928,000 2,003,000
issued and outstanding
Common Stock, $.001 par value; 50,000,000 shares
authorized; 3,200,141 shares issued and 10,427,000 10,427,000
outstanding
Accumulated deficit (12,329,000) (11,404,000)
------------------ ------------------
Total shareholders' equity 2,026,000 1,026,000
------------------ ------------------
$ 3,065,000 $ 2,452,000
================== ==================
<FN>
See the accompanying notes to these condensed financial statements.
</FN>
</TABLE>
2
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<TABLE>
HYPERMEDIA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended June 30, Six months ended June 30,
------------------------------------ ----------------------------------
1998 1997 1998 1997
---------------- ------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Revenues $ 1,329,000 $ 1,801,000 $ 3,083,000 $ 3,716,000
---------------- ------------------ ---------------- ----------------
Expenses:
Editorial 239,000 284,000 522,000 575,000
Production 381,000 471,000 884,000 947,000
Circulation 471,000 532,000 995,000 1,096,000
Sales and marketing 553,000 384,000 1,079,000 804,000
Product development 11,000 10,000 23,000 19,000
General and administrative 232,000 210,000 503,000 453,000
---------------- ------------------ ---------------- ----------------
Total expenses 1,887,000 1,891,000 4,006,000 3,894,000
---------------- ------------------ ---------------- ----------------
Loss from operations (558,000) (90,000) (923,000) (178,000)
Interest and other (income) expense, net (3,000) 7,000 2,000 17,000
---------------- ------------------ ---------------- ----------------
Net loss $ (555,000) $ (97,000) $ (925,000) $ (195,000)
================ ================== ================ ================
Basic and diluted net loss per share $ (0.17) $ (0.03) $ (0.29) $ (0.06)
================ ================== ================ ================
Weighted average common and
common equivalent shares 3,200,141 3,200,141 3,200,141 3,200,141
================ ================== ================ ================
<FN>
See the accompanying notes to these condensed financial statements.
</FN>
</TABLE>
3
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<TABLE>
HYPERMEDIA COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six months ended June 30,
------------------------------------------
1998 1997
------------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (925,000) $ (195,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 114,000 119,000
Allowance for doubtful accounts 33,000 (73,000)
Other -- 20,000
Change in assets and liabilities:
Accounts receivable (4,000) 71,000
Prepaid expenses and other assets (51,000) 61,000
Accounts payable (284,000) (88,000)
Accrued liabilities (126,000) (44,000)
Deferred revenue 23,000 118,000
------------------- -----------------
Net cash used in operating activities (1,220,000) (11,000)
------------------- -----------------
Net cash used in investing activities for
purchase of fixed assets (87,000) (24,000)
------------------- -----------------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock 1,925,000 98,000
Proceeds from issuance of Common Stock -- 50,000
Repayment of note payable -- (110,000)
------------------- -----------------
Net cash provided by financing activities 1,925,000 38,000
------------------- -----------------
Net increase in cash 618,000 3,000
Cash and cash equivalents at beginning of period 269,000 107,000
------------------- -----------------
Cash and cash equivalents at end of period $ 887,000 $ 110,000
=================== =================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,000 $ 17,000
=================== =================
<FN>
See the accompanying notes to these condensed financial statements.
</FN>
</TABLE>
4
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HYPERMEDIA COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The financial statements of HyperMedia Communications, Inc. (the "Company") as
of June 30, 1998 and 1997 and for the three and six months then ended are
unaudited, and in the opinion of management, all adjustments (consisting of only
normal recurring items) necessary for the fair presentation of the financial
position and results of operations for the interim periods have been included.
These financial statements should be read in conjunction with the Financial
Statements for the year ended December 31, 1997 and notes thereto included in
the Company's Annual Report on Form 10-K. The results of operations for the
three and six months ended June 30, 1998 are not necessarily indicative of the
results expected for the entire year.
The preparation of these 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 revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - BASIC AND DILUTED NET LOSS PER SHARE
Basic and diluted net loss per share is based upon the weighted average number
of outstanding shares of Common Stock. Common stock equivalent shares from
Convertible Preferred Stock (using the if-converted method) and stock options
and warrants (using the treasury stock method) have been excluded from the
computation for the three month periods ended June 30, 1998 and 1997 and for the
six month periods ended June 30, 1998 and 1997 as their effect is anti-dilutive.
NOTE 3 - STATEMENT OF SHAREHOLDER'S EQUITY
In the first quarter of 1998, the Board of Directors approved the issuance of
the Series J Preferred Stock. The Series J Preferred Stock ranks pari passu with
the Series F, G, H and I Preferred Stock. 111,750 Series J Preferred Stock
shares were issued during the quarter ended March 31, 1998. An additional 57,531
Series J Preferred Stock shares were issued during the quarter ended June 30,
1998.
5
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Item 2. - Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section and other parts of this Quarterly Report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from those anticipated in these
forward-looking statements as a result of the factors set forth below and in
"Factors Affecting Operating Results and Market Price of Stock". Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof. Forward-looking statements are indicated by an
asterisk (*).
General
HyperMedia Communications, Inc. (the "Company" or "HyperMedia"), publishes
NewMedia Magazine ("NewMedia"), the largest publication serving the corporate
digital content market. "Digital content" is information created using
computer-based video, audio, graphics, animation and Internet technologies.
Companies use digital content in building brand awareness through marketing,
advertising, promotions, corporate presentations and sales and technical
training. Corporate digital content creators utilize a wide array of digital
communications technologies, including Internet development tools and services,
desktop and portable personal computers, workstations, servers, audio/video
compression and editing equipment, graphics hardware and software, high-density
storage devices and video conferencing systems. Digital media output is actively
employed in a broad range of businesses and disciplines, such as brand identity
(including presentations, training and collateral), advertising, publishing,
brand merchandising, film, music, radio, television, cable television, video
production, theme parks and computer media.
The 1998 publishing strategy, which was implemented in the second quarter,
returned NewMedia to a monthly publishing frequency. This publishing schedule
was implemented in response to the expressed preference of NewMedia's
advertising clients for a standard monthly publishing frequency as opposed to
the previous 16 times schedule. The Company intends to continue the guaranteed
average circulation base of 215,000 in 1998. * According to a recent analysis
conducted for the Company by BPA International ("BPA") of NewMedia subscriber
demographic data, the average subscriber to the publication has represented that
they are personally involved in the purchase of approximately $1,080,000 worth
of digital content-related hardware, software and services in a twelve-month
period.* This represents a more than 100 percent increase from the approximate
$516,000 average purchasing power for NewMedia subscribers in 1996. In addition,
a redesign of NewMedia debuted with the July 1998 issue. * The redesign was a
culmination of a repositioning strategy that was initiated in 1996. The goal is
to target the most senior managers and professionals responsible for driving
digital-content strategies within business today - the Digital Elite.*
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of Stock"
for a discussion of factors that could affect future performance.
6
<PAGE>
HyperMedia also produces the NewMedia INVISION Awards Festival, the largest
juried digital media competition in the world. The program seeks out the highest
achievements in digital content creation for business, entertainment, marketing,
government and education. The 1998 NewMedia INVISION Festival will include a
6,000 square foot PLAYLAND Gallery, Evening New Media Showcases and a two day
Digital Creativity conference.*
HyperMedia also publishes newmediaocom, an award-winning World Wide Web site of
news, information, products and services for the digital content creation
market. The Company recently introduced ioServ, an innovative electronic reader
service capability that uses the immediacy and interactivity of the Web to
respond to readers' product information requests in minutes instead of months.
Results of Operations
The Company's gross revenues were $1,329,000 and $1,801,000 for the quarters
ended June 30, 1998 and 1997, respectively, and $3,083,000 and $3,716,000 for
the six months then ended, primarily as a result of decreases in advertising
sales in NewMedia. The Company believes that the decrease in advertising revenue
is related to a number of market factors, including the migration of digital
content development from CD-ROM based media to the Internet and shifts in the
Macintosh hardware and software market, as digital content creators make a
transition toward increased use of Windows based workstations. In the second
quarter of 1998, the Company also reduced the frequency of NewMedia magazine
from a sixteen time publishing schedule to a monthly publishing schedule.
The Company's total expenses were $1,887,000 and $1,891,000 for the quarters
ended June 30, 1998 and 1997, respectively, and $4,006,000 and $3,894,000 for
the six months then ended. The reduction in expenses associated with the lower
number of issues published in 1998 was offset by an increased investment in
sales and marketing.
The net loss for the first six months of 1998 was $925,000 as compared to the
loss of $195,000 for the first six months of 1997. The Company posted a net loss
of $555,000 in the second quarter of 1998 as compared to a net loss of $97,000
for the same period of 1997. The increase in net loss in the second quarter of
1998 as compared to 1997 is primarily a result of an increased investment in
sales and marketing and to the decrease in NewMedia advertising revenues. The
NewMedia magazine sales force has almost doubled in the first half of 1998
compared to the first half of 1997.
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of Stock"
for a discussion of factors that could affect future performance.
7
<PAGE>
Editorial expenses, comprised principally of salaries and fees paid to the
writers for the Company's publications, were $239,000 and $284,000 for the
quarters ended June 30, 1998 and 1997, respectively, and $522,000 and $575,000
for the six months then ended. The reductions in editorial expenses are
primarily attributable to cost control programs. Editorial expenses represented
18% and 16% of revenue for the quarters ended June 30, 1998 and 1997,
respectively. The Company expects that editorial expenses will decrease in the
balance of 1998 versus the second half of 1997 as a result of the lower number
of issues associated with the 1998 publishing strategy. *
Production expenses, including costs for design, materials and printing of the
Company's publications, were $381,000 and $471,000 for the quarters ended June
30, 1998 and 1997, respectively and $884,000 and $947,000 for the six months
then ended. The decrease in production expenses for the second fiscal quarter
and first six months of 1998 as compared to the same quarter and six months of
1997 is primarily attributable to the reduction of the number of issues per
quarter (from 4 to 3), starting in the second fiscal quarter of 1998. Production
expenses represented 29% of revenue in the second quarter of 1998 compared to
26% for the same period in 1997. Production expenses are expected to remain
relatively flat during the balance of 1998, as the result of a projected
increase in advertising pages, if any, and higher paper costs, which will be
offset by the lower number of issues to be published in 1998.*
Circulation expenses, consisting primarily of costs associated with subscription
fulfillment, mailing and the direct mail promotions of the Company's
publications, were $471,000 and $532,000 for the quarters ended June 30, 1998
and 1997, respectively, and $995,000 and $1,096,000 for the six months then
ended. The Company currently capitalizes its circulation development
expenditures and amortizes them over a 12 month period. The decrease of $61,000,
or 11%, is primarily attributable to the smaller amount of circulation
development expenditure amortization included in the second quarter of 1998 as
compared to the same period in 1997. As part of the Company's publishing
strategy in 1996 and 1997, the minimum readership qualifications to receive the
magazine were significantly more stringent. As a result of these new criteria,
the power the average subscriber represents he has to purchase new media
products and services increased to approximately $1,100,000 at the end of 1997,
from approximately $500,000 at the end of 1996 and less than $200,000 in 1995.
The Company intends to maintain the higher minimum readership qualifications to
receive the magazine in 1998.* Circulation expenses represented 35% of revenues
for the second quarter of 1998 as compared to 30% of revenues for the same
period of 1997. Circulation expenses are expected to decrease in the balance of
1998 versus 1997 as the result of the impact of the frequency based on the 1998
publishing strategy.*
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
sections entitled "Factors Affecting Operating Results and Market Price of
Stock" for a discussion of factors that could affect future performance.
8
<PAGE>
Sales and marketing expenses were $553,000 and $384,000 for the quarters ended
June 30, 1998 and 1997, respectively, and $1,079,000 and $804,000 for the six
months then ended. The increase is attributable to higher expenditures on sales
and marketing programs and increased sales compensation expenses, including
those related to the hiring of new sales personnel in the fourth quarter of 1997
and the first half of 1998. The NewMedia magazine sales force has almost doubled
from the first half of 1997 to the first half of 1998. Sales and marketing
expenses represented 35% of revenues for the first half of 1998 as compared to
22% of revenues for the same period of 1997. Sales and marketing expenses
represented 42% of revenue for the second quarter of 1998 as compared to 21% of
revenue for the same period of 1997. Sales and marketing expenses are expected
to increase during the balance of 1998 because of higher sales compensation
expenses due to increased headcount, and higher expenditures associated with the
expansion of the NewMedia INVISION Awards Festival, which will include a
conference program.*
Product development expenses were $11,000 and $10,000 for the quarters ended
June 30, 1998 and 1997, respectively, and $23,000 and $19,000 for the six months
then ended, and consist of costs incurred in the development of new products,
including the Internet World Wide Web site, Hyperstand. The Company plans to
continue its product development efforts during 1998.*
General and administrative expenses were $232,000 and $210,000 for the quarters
ended June 30, 1998 and 1997, respectively, and $503,000 and $453,000 for the
six months then ended. The increase of $50,000, or 11%, in the first six months
of 1998 as compared to 1997 and $22,000, or 10%, in the second quarter of 1998
as compared to the same period in 1997 primarily reflects increased consulting
costs. General and administrative expenses represented 17% of revenue for the
second quarter of 1998 as compared to 12% for the same period in 1997.
---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of Stock"
for a discussion of factors that could affect future performance.
9
<PAGE>
Liquidity and Capital Resources
At June 30, 1998, the Company had approximately $1,602,000 in net working
capital and its principal sources of liquidity consisted of approximately
$887,000 in cash, a $1 million line of credit limited to 70% of qualified
accounts receivable, and an agreement with MK Global Ventures to purchase up to
$50,000 of the Company's Series J Preferred Stock at the Company's request,
subject to MK Global's acceptance, at any time up to and including August 21,
1998. The revolving credit facility is secured by the assets of the Company and
requires the Company to maintain certain quarterly financial ratios. For the
quarter ended June 30, 1998, the Company was not in compliance with certain
financial covenants. However, the Company obtained a waiver for the quarter
ended June 30, 1998 and the line of credit remains available to the company. No
borrowings were outstanding under this agreement at quarter end.
The Company signed an agreement in February 1998 with its largest shareholder,
MK Global Ventures in association with its MK GVD Fund, to invest additional
capital to finance operations. Under the Series J Preferred Stock Purchase
Agreement, MK GVD Fund agreed to invest, subject to MK Global's acceptance, up
to $2,000,000 on or before August 21, 1998. The price per share of this Series J
Preferred Stock, which the Company has not registered under the Securities Act
of 1933, as amended, was 85% of the fair market value of the Company's common
stock, based on the average of the closing bid price per share for the ten
trading days ending five business days before the closing of the investment. The
Company drew approximately $1,300,000 of this capital commitment in February
1998, approximately an additional $100,000 of this capital commitment in March
1998, and an additional $550,000 in June 1998. These capital draws were offset
by $25,000 in issuance costs.
The Company expects that it will continue to require significant amounts of cash
to finance operations.* The Company has not committed to make significant
capital expenditures, but may make such expenditures in the future.* The Company
believes that the existing cash balances, together with any cash generated from
operations and borrowings potentially available under its line of credit, will
be sufficient to meet its cash requirements through at least the end of 1998.*
There can be no assurance, however, that the Company's anticipation of its
future cash requirements will be correct. Thereafter, the Company may seek to
raise additional working capital, primarily through sales of debt or equity
securities.* In addition, the Company may seek to raise additional working
capital prior to the end of 1998 if it can raise such capital on acceptable
terms.* See "Factors Affecting Operating Results and Market Price of Stock --
Possible Delisting of Securities from Nasdaq SmallCap Market; Need to Raise
Additional Capital."
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Factors Affecting Operating Results and Market Price of Stock"
for a discussion of factors that could affect future performance.
10
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The terms of the Series E Preferred Stock, Series F Preferred Stock, Series G
Preferred Stock, Series H Preferred Stock, Series I Preferred Stock, Series J
Preferred Stock and outstanding warrants grant the holders thereof certain
preferential rights including conversion and/or registration rights, which may
have a dilutive effect on existing shareholders and may therefore limit the
availability of financing, particularly equity financing. The Company has no
commitments for any such financing, and there can be no assurance that any such
debt or equity financing will be available on terms acceptable to the Company,
or at all. The Company's ability to borrow under the line of credit is subject
to compliance with certain financial covenants, including, but not limited to,
quarterly profitability beginning with the fourth fiscal quarter of 1998 and
maintaining a minimum $1,500,000 tangible net worth. There can be no assurance
that the Company will be successful in complying with these financial covenants.
The Company's failure to comply with the financial covenants could preclude it
from utilizing the line of credit, which could have a material adverse effect on
the Company's liquidity and financial condition. In addition, the Company's
inability to raise capital, if required, could have a material adverse effect on
the Company's business and results of operations.
FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF STOCK
This section and other parts of this Quarterly Report on Form 10-Q contain
forward-looking statements that involve risks and uncertainties. The Company's
actual results may differ significantly from those anticipated in these
forward-looking statements as a result of the factors set forth below and in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof.
Forward-looking statements are indicated by an asterisk (*).
Among the factors that could cause actual results to differ materially are those
listed below and those listed in the Company's SEC reports including but not
limited to the annual report on Form 10-K for the year ended December 31, 1997
and quarterly report on Form 10-Q for the quarter ended March 31, 1998.
History of Losses and Accumulated Deficits
The Company has incurred total net losses of $12,329,000 from inception to June
30, 1998, including a net loss of $555,000 for the quarter ended June 30, 1998.
The Company expects to incur losses for at least the next two quarters of 1998,
as it continues to increase expenditures to promote and expand its current
publications and develop and launch new products.* There can be no assurance
that during 1998 or thereafter the Company will be able to increase its revenues
or become profitable. The Company's potential future growth depends on many
factors, including the ability of the Company to attract sufficient advertising
customers for NewMedia, maintain the circulation base of NewMedia, have a
productive advertising sales force, control its costs, and successfully
implement its marketing and product strategy in relation to the corporate
digital content creation marketplace. The Company has recently hired a
significant portion of its sales staff who must be trained and integrated into
the operation. There can be no assurance that the Company will be successful in
any of these efforts. See "Risks Associated with Sales and Marketing Strategy."
1998 Publishing Strategy; Sales and Marketing Strategy
The key elements of the Company's 1998 publishing strategy are to focus on the
professional market for digital content creation, to return to publishing at a
monthly frequency of 12 times per year starting in the second quarter of 1998,
to maintain the stringent minimum qualification criteria that potential
subscribers were required to meet in order to qualify for a subscription, and to
maintain the guaranteed circulation base of 215,000 qualified NewMedia readers.*
In addition, the Company increased the price it charges for a one-time,
full-page, four-color advertisement in NewMedia from $17,845 to $19,995. There
can be no assurance that the Company's publishing strategy will result in
11
<PAGE>
increased revenues or in profitability. Certain components of production,
circulation and editorial expenses associated with this publishing strategy will
increase.* As NewMedia's publishing frequency changes in the second quarter of
1998 from 16 times per year to monthly, there can be no assurance that
advertising revenues, minus variable production and postage charges from the new
publishing frequency of three issues per quarter, will be greater than the
previous rate of four issues per quarter. The Company has been undergoing an
advertising category transition since the second half of 1995, away from the
consumer market toward the professional market for digital content creation. To
replace these consumer market advertisers and to grow advertising revenues, the
Company needs to sell advertisements oriented to the professional market for
digital content creation. There can be no assurance that the Company will be
able to sell a sufficient number of advertisements to the professional market to
make its strategy successful. Until the circulation direct mail (and associated)
campaigns for qualified readers using the qualification criteria is completed,
there can be no assurance that the estimated purchasing power of new media
products and services will be maintained with a reasonable level of circulation
expenditures. As a result, the Company does not expect growth in advertising
revenues until at least the fourth quarter of 1998, if at all.*
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of factors that could affect future
performance.
12
<PAGE>
Possible Delisting of Securities From Nasdaq SmallCap Market; Need to Raise
Additional Capital
The Nasdaq SmallCap Market ("Nasdaq") has recently adopted more stringent
financial requirements for listing on Nasdaq, which became effective on February
23, 1998. With respect to continued listing, such new requirements are (i)
either at least $2,000,000 in tangible net assets, a $35,000,000 market
capitalization or net income of at least $500,000 in two of the three prior
years, (ii) at least 500,000 shares in the public float valued at $1,000,000 or
more, (iii) a minimum closing bid price for the Company's Common Stock of $1.00,
(iv) at least two active market makers, and (v) at least 300 holders of the
Common Stock. The $1,400,000 that the Company raised through the issuance of
Series J Convertible Preferred Stock in February 1998 and March 1998 enabled the
Company to meet the new requirement of at least $2,000,000 in tangible net
assets on a pro forma basis based on the Company's December 31, 1997 and January
31, 1998 balance sheets and on an actual basis based on the Company's March 31,
1998 and June 30, 1998 balance sheets. Based on current financial projections
for the third and fourth quarters of 1998, the Company will need to sell
additional shares of Series J Convertible Preferred Stock, or other equity
securities, to continue to meet the new financial requirements for continued
listing on Nasdaq. In addition, the Company's Common Stock has failed to meet
the minimum $1.00 closing bid price and the Company must demonstrate to Nasdaq
its ability to regain compliance with the minimum bid price criteria and to
sustain long term compliance with all applicable maintenance criteria. The
Company will participate in a written hearing before a Panel authorized by the
NASD in early September 1998. The Panel will determine whether the Company's
Common Stock will remain listed on the Nasdaq SmallCap Market and their decision
is subject to appeal. In the event of delisting by Nasdaq, trading, if any, in
the Common Stock would thereafter be conducted in the over-the-counter market,
in the so-called "pink sheets" or the NASD's "Electronic Bulletin Board."
Consequently, the liquidity of the Company's securities could be impaired, not
only in the number of securities which could be bought and sold, but also
through delays in the timing of transactions and lower prices for the Company's
securities than might otherwise be attained.
In order to continue to meet the new financial requirements for continued
listing on Nasdaq, the Company will need to sell additional shares of Series J
Convertible Preferred Stock or other equity securities of the Company. The
Series J Convertible Preferred Stock, if sold, would be issued at 85% of the
fair market value of the Company's Common Stock, based on the average of the
closing bid price per share for the ten trading days ending five business days
before the closing of the investment, and its issuance would therefore be
dilutive to existing holders of the Company's Common Stock. In addition, the
Company is likely to require additional equity capital to maintain its Nasdaq
listing in the future, and no assurance can be given that any such equity
capital will be available on terms acceptable to the Company, or at all, and any
such equity capital is likely to be dilutive to existing holders of the
Company's Common Stock. Further, issuances of equity securities at purchase
prices below that of the outstanding Preferred Stock will increase the number of
shares of Common Stock issuable upon conversion of the Preferred Stock as a
result of the anti-dilution provisions thereof, resulting in further dilution to
the holders of the Common Stock.
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of factors that could affect future
performance.
13
<PAGE>
Control By Principal Stockholders
The Company's principal stockholders, MK Global Ventures II and its affiliate MK
GVD Fund (together, the "MK Entities"), together beneficially own over 50% of
the outstanding Common Stock (assuming conversion of all outstanding Preferred
Stock in Common Stock). In addition, the MK Entities have two representatives on
the five-person Board of Directors of the Company. Accordingly, the MK Entities
will be able to determine the composition of the Company's Board of Directors,
will retain voting power to approve all matters requiring stockholder approval
and will continue to have significant influence over the affairs of the Company.
In addition, this concentration of ownership could have the effect of delaying
or preventing a change in control of the Company.
Risks Associated With Sales and Marketing Strategy
The Company's ability to achieve future profitability depends upon the success
of the Company's strategy to add and retain sales personnel in key markets and
to increase the productivity of existing sales personnel. In July 1998, the
Company hired a new Publisher. In the fourth quarter of 1997, the Company
appointed a new East Coast Advertising Director and a Silicon Valley Senior
Advertising Manager, and the Company has hired additional advertising sales
personnel in the first quarter of 1998. New sales personnel typically take from
six to nine months to become fully productive, and therefore the Company's
operating results during such time may be adversely affected by the hiring of
such personnel. In addition, there can be no assurance that such new sales
personnel will achieve sufficient advertising revenue to become profitable for
the Company after the first six to nine months or at all. Any failure of one or
more of the new personnel to become productive will have a material adverse
effect on the Company's operating results. Furthermore, the Company's revenues
from advertising sales depends upon a small number of key sales personnel. Any
inability of such personnel to maintain or increase existing sales levels, or
any turnover in such personnel, would have a material adverse effect on the
Company's operating results.
Year 2000 Compliance
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, in less than two years, computer systems and
software used by many companies may need to be upgraded to comply with such
"Year 2000" requirements. The Company believes that its internal systems are
Year 2000 compliant and does not expect that costs associated with Year 2000
compliance will be material. In addition, the Company believes that the
purchasing patterns of companies that subscribe to NewMedia as well as the
Company's advertising clients may be affected by Year 2000 issues, as companies
expend significant resources to correct or patch their current software systems
for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase advertising in publications like NewMedia, which could
result in a material adverse effect on the Company's business, operating results
and financial condition.
14
<PAGE>
Highly Competitive Market
Revenues from NewMedia are derived primarily from the sale of advertising in the
magazine and will continue to be derived primarily from such sales in the
foreseeable future.* The technology publishing industry is highly competitive.
Many of the Company's competitors have substantially greater financial, sales
and marketing resources than the Company. Although the market for digital
content creation and Internet products is an evolving market, the Company
competes for advertising revenue with numerous magazines and newspapers,
including personal computer magazines. There can be no assurance that the
Company will not experience increased competition from new or existing
technology periodicals or other media, such as the Internet. Such increased
competition, if experienced, would have a material adverse impact on the
Company's ability to increase its advertising revenues.
Uncertainty of Growth of the Professional Market for Digital Content Creation
NewMedia is targeted toward professional users of digital content creation
products and services in connection with computers. The computer industry has
historically been characterized by business cycles. To the extent that the
computer industry or professional digital content creation market experiences a
significant downturn, the Company would expect a similar downturn in its
business. The professional market for digital content creation products and
services is in the early stages of development, and predictions as to its size
and the factors which will affect it are inconclusive. To the extent that the
professional digital content creation market does not develop as quickly as the
Company anticipates or that it experiences a significant downturn following
growth, the Company's ability to generate revenue or profits may be adversely
affected. Furthermore, even if the professional digital content creation market
does develop as anticipated, there can be no assurance that the demand for
NewMedia will also increase.
Dependence on Key Personnel and Sales Personnel
The Company's success depends to a large extent upon the efforts and abilities
of key managerial employees, including without limitation, Richard Landry, the
Chief Executive Officer. The Company's success also depends on the performance
of key sales personnel. The loss of certain of these key managers or sales
personnel could have a material adverse effect on the Company. The Company has
not entered into employment agreements with its executive officers and carries
no key man insurance on their lives. The success of the Company's business will
also depend upon its ability to continue to attract and retain qualified
employees. Competition for such employees is intense, and there can be no
assurance that the Company will be successful in attracting or retaining such
personnel.
- ---------------
* This statement is a forward looking statement reflecting current expectations.
There can be no assurance that the Company's actual performance will meet the
Company's current expectations. Investors are strongly encouraged to review the
section entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of factors that could affect future
performance.
15
<PAGE>
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
The Company signed an agreement in February 1998 with its largest shareholder,
MK Global Ventures in association with its MK GVD Fund, to invest in additional
capital of the Company to finance operations. Under the Series J Preferred Stock
Purchase Agreement, MK GVD Fund agreed to invest up to $2,000,000 on or before
August 21, 1998. The price per share of this Series J Preferred Stock, which the
Company has not registered under the Securities Act of 1933, as amended, was 85%
of the fair market value of the Company's common stock based on the average of
the closing bid price per share for the ten trading days ending five business
days before the closing of the investment. Shares of Series J Preferred Stock,
which carry a 5% dividend, are convertible at the option of the holder at any
time into shares of Common Stock in an amount equal to the Initial Sales Price
divided by the appropriate Conversion Price. In February and March 1998, the
Company issued 105,000 and 6,750 shares of Series J Preferred Stock under this
agreement at a price of $12.38 and $14.88 per share, respectively, for aggregate
proceeds of approximately $1,400,000. In June 1998, the Company issued an
additional 57,531 shares of Series J Preferred Stock under the agreement at a
price of $9.56 per share for an additional aggregate proceeds of $550,000. Each
share of Series J Preferred Stock is currently convertible at the option of the
holder into 25.9 shares of the Company's common stock, subject to adjustment.
These proceeds will be primarily used by the Company to fund operating losses
and working capital requirements and to meet the new Nasdaq SmallCap Market
("Nasdaq") listing requirements of at least $2,000,000 in net tangible assets
based on the Company's June 30, 1998 balance sheet. The issuance of the Series J
Preferred Stock to the MK GVD Fund, an affiliate of the Company and an
accredited investor, was exempt from registration under the Securities Act of
1933, as amended, pursuant to section 4 (2) as a transaction not involving any
public offering.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on May 21, 1998.
The results of the items submitted for vote were as follows:
1. Election of directors to serve until the next annual meeting.
Nominee Votes for Withheld
------- --------- --------
Patrick Ferrell 3,004,029 17,150
John Griffin 3,004,029 17,150
Michael Kaufman 3,004,029 17,150
Greg Lahann 3,004,029 17,150
Richard Landry 3,004,029 17,150
2. Ratification and approval of an amendment of the Articles of
Incorporation to reduce the number of designated shares of
each series of Series F, Series G, Series H, and Series I
Preferred Stock to the actual number of shares for each of the
respective series of Preferred Stock that is outstanding and
to return such previously designated and unissued shares to
the pool of undesignated Preferred Stock.
Votes for: 1,994,031
16
<PAGE>
Votes against: 18,700
Abstain: 3,600
Non-votes: 1,183,810
3. Ratification and approval of an amendment to the 1993 Stock
Plan increasing the aggregate number of shares of Common Stock
reserved for issuance thereunder by 700,000 to 1,400,000.
Votes for: 1,883,586
Votes against: 130,545
Abstain: 2,200
Non-votes: 1,183,810
4. Ratify the appointment of Price Waterhouse LLP as independent
accountants of the Company for the fiscal year ending December
31, 1998.
Votes for: 3,015,479
Votes against: 13,500
Abstain: 2,200
Non-votes: 178,962
17
<PAGE>
Item 5. Other Information
Proposals of shareholders of the Company that are intended to be presented by
such shareholders at the Company's 1999 Annual Meeting of Shareholders, which
are not eligible for inclusion in the proxy statement and form of proxy relating
to that meeting, must be received by the Company no later than March 10, 1999.
If such shareholders fail to comply with the foregoing notice provision, then
the proxy holders will be allowed to use their voting discretionary authority
when the proposal is raised at the 1999 Annual Meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1.1A Amended and Restated Articles of Incorporation filed
as of 6/2/98
3.1.1B Certificate of Correction of Amended and Restated
Articles of Incorporation filed as of 7/2/98
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during the
fiscal quarter ended June 30, 1998.
Items 1 and 3 are not applicable and have been omitted.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 1998 HyperMedia Communications, Inc.
By: /s/ Richard Landry
-----------------------------
Richard Landry
President and Chief Executive Officer
(Principal Financial and Accounting
Officer)
19
CERTIFICATE OF CORRECTION OF
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
HYPERMEDIA COMMUNICATIONS, INC.
The undersigned, Richard Landry and Donna Petkanics, hereby certify
that:
1. They are the President and Chief Executive Officer, and Assistant
Secretary, respectively, of HyperMedia Communications, Inc., a California
corporation (the "Company").
2. The name of the Company is HyperMedia Communications, Inc.
3. That the Amended and Restated Articles of Incorporation (the
"Amended Articles") was filed with the Secretary of State of State of California
on May 27, 1998 and that said Articles requires correction as permitted by
subsection (a) of Section 109 of the General Corporation Law of the State of
California.
4. Article III B Sec. 4(a) of the Amended Articles is corrected to read
as follows:
"Right to Convert. Each share of Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred and Series J
Preferred Stock shall be convertible, at any time after the date of
issuance, at the option of the holder thereof, of such share at the
office of the Corporation or any transfer agent for the Series F
Preferred, Series G Preferred, Series H Preferred, Series I Preferred
and Series J Preferred Stock, into that number of fully-paid and
nonassessable shares of Common Stock that is equal to the Initial Sales
Price for each respective Series of Preferred Stock divided by the
appropriate Conversion Price (as hereinafter defined) for each Series
of Preferred Stock. The Initial Sales Price shall be $3.039 per share
for the Series F Preferred, $1.992 per share for the Series G
Preferred, $2.136 per share for the Series H Preferred, $15.60 for the
Series I Preferred and $12.38 per share for the Series J Preferred. The
price at which shares of Common Stock shall be deliverable upon
conversion (individually the "Series F Conversion Price", "Series G
Conversion Price", "Series H Conversion Price", "Series I Conversion
Price", and "Series J Conversion Price", and collectively, the
"Conversion Prices") shall initially be $3.039 per share of Common
Stock for conversions of Series F Preferred, $1.992 per share of Common
Stock for conversions of Series G Preferred, $2.136 per share of Common
Stock for conversions of Series H Preferred, $10.00 per share of Common
Stock for conversions of Series I Preferred and $20.00 per share of
Common Stock for conversions of Series J Preferred. Such initial
Conversion Prices shall be subject to adjustment as hereinafter
provided."
1
<PAGE>
5. This certificate does not alter the wording of any resolution or
written consent which was in fact adopted by the Board of Directors or the
shareholders of the Corporation
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in this certificate are
true and correct to their own knowledge.
Date: July 2, 1998 HYPERMEDIA COMMUNICATIONS, INC.
/s/ RICHARD LANDRY
--------------------------------
Richard Landry, President and
Chief Executive Officer
/s/ DONNA M. PETKANICS
--------------------------------
Donna M. Petkanics, Assistant
Secretary
2
AMENDED AND RESTATED ARTICLES OF INCORPORATION OF
HYPERMEDIA COMMUNICATIONS, INC.
The undersigned, Richard Landry and Donna Petkanics, hereby certify
that:
1. They are the President and Chief Executive Officer, and Assistant
Secretary, respectively, of HyperMedia Communications, Inc., a California
corporation (the "Company").
2. The Articles of Incorporation of the Company are amended and
restated in full to read as set forth in Exhibit A attached hereto.
3. The Amended and Restated Articles of Incorporation of the Company
attached hereto have been duly approved by the Board of Directors of the
Company.
4. The Amended and Restated Articles of Incorporation of the Company
attached hereto have been duly approved by the shareholders of the Company in
accordance with Sections 902 and 903 of the California Corporations Code. The
total number of outstanding shares of Common Stock is 3,200,141. The total
number of outstanding shares of Preferred Stock is 8,454,660 of which 8,064,516
shares have been designated as Series E Preferred Stock, all of which are issued
and outstanding, 175,000 shares have been designated Series F Preferred Stock,
82,250 of which are issued and outstanding, 175,000 shares have been designated
Series G Preferred Stock, 50,344 of which are issued and outstanding, 400,000
shares have been designated Series H Preferred Stock, 117,000 of which are
issued and outstanding, 200,000 shares have been designated Series I Preferred
Stock, 28,800 of which are issued and outstanding and 250,000 shares have been
designated Series J Preferred Stock, 111,750 shares of which are issued and
outstanding. The total number of shares voting in favor of the Amended and
Restated Articles of Incorporation equaled or exceeded the vote required. The
percentage vote required was a simple majority of the outstanding shares of
Series E Preferred Stock voting separately as a single class, a simple majority
of the outstanding shares of Series F Preferred Stock voting separately as a
single class, a simple majority of the outstanding shares of Series G Preferred
Stock voting separately as a single class, a simple majority of the outstanding
shares of Series H Preferred Stock voting separately as a single class, a simple
majority of the outstanding shares of Series I Preferred Stock voting separately
as a single class, a simple majority of the outstanding shares of Series J
Preferred Stock voting separately as a single class, a simple majority of the
outstanding shares of Preferred Stock voting separately as a single class and a
simple majority of the outstanding shares of Common Stock voting separately as a
single class and a simple majority of the outstanding shares of Preferred Stock
and Common Stock voting together as a single class.
<PAGE>
The undersigned further declare under penalty of perjury under the laws
of the State of California that the matters set forth in this certificate are
true and correct to their own knowledge.
Date: May 21, 1998 /s/ RICHARD LANDRY
--------------------------------
Richard Landry, President and
Chief Executive Officer
/s/ DONNA M. PETKANICS
--------------------------------
Donna M. Petkanics, Assistant
Secretary
[Signature page to Amended and Restated Articles of Incorporation]
<PAGE>
EXHIBIT A
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
HYPERMEDIA COMMUNICATIONS, INC.
ARTICLE I
The name of this Corporation is HyperMedia Communications, Inc.
ARTICLE II
The purpose of this Corporation is to engage in any lawful act or
activity for which a corporation may be organized under the General Corporation
Law of California other than the banking business, the trust company business or
the practice of a profession permitted to be incorporated by the California
Corporations Code.
ARTICLE III
This Corporation is authorized to issue two classes of shares to be
designated respectively Common Stock and Preferred Stock. The total number of
shares of Common Stock this Corporation shall have authority to issue is
50,000,000, with a par value of $0.001 per share. The total number of shares of
Preferred Stock this Corporation shall have authority to issue is 10,064,516,
with a par value of $0.001 per share.
The Preferred Stock may be issued from time to time in one or more
series. The Board of Directors is authorized to fix the number of shares of any
series of Preferred Stock and to determine or alter the rights, preferences,
privileges, and restrictions granted to or imposed upon any wholly unissued
series of Preferred Stock and, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number
of shares constituting any series of Preferred Stock, to decrease (but not below
the number of shares of any such series then outstanding) the number of shares
of any such series subsequent to the issue of shares of that series.
Of the Preferred Stock, 8,064,516 shares shall be designated Series E
Preferred Stock ("Series E Preferred"), 82,250 shares shall be designated Series
F Preferred Stock ("Series F Preferred"), 50,344 shares shall be designated
Series G Preferred Stock ("Series G Preferred"), 117,000 shares shall be
designated Series H Preferred Stock ("Series H Preferred"), 28,800 shares shall
be designated Series I Preferred Stock ("Series I Preferred") and 250,000 shares
shall be designated Series J Preferred Stock ("Series J Preferred").
<PAGE>
The Corporation shall from time to time in accordance with the laws of
the State of California increase the authorized amount of its Common Stock if at
any time the number of shares of Common Stock remaining unissued and available
for issuance shall not be sufficient to permit conversion of the Preferred
Stock.
The relative rights, preferences, privileges and restrictions granted
to or imposed on the respective classes of the shares of capital stock or the
holders thereof are as follows:
A. Series E Preferred.
1. Dividend Rights of Series E Preferred.
(a) The holders of the Series E Preferred shall be entitled to
receive, when and as declared by the Board of Directors, out of funds legally
available therefor, dividends at the rate of $0.0074 per share per annum, on
each outstanding share of Series E Preferred, payable in preference and priority
to any payment of any dividend on Common Stock of the Corporation for such year.
The dividends on the Series E Preferred shall be cumulative so that if all
dividends accumulated at the annual rate specified above, shall not have been
paid or declared and a sum sufficient for the payment thereof set apart, the
deficiency shall first be fully paid before any dividend or other distribution,
other than dividends payable solely in Common Stock, shall be paid or declared
and set apart for the Common Stock. If less than full dividends are paid on or
declared and set apart for payment on the Series E Preferred, then such
dividends shall be subtracted from any accumulated dividends. Any accumulation
of dividends on the Series E Preferred shall not bear interest. The Corporation
shall not be obligated to pay any accumulated but unpaid dividends on the Series
E Preferred before January 1, 2000 except for the conversion of such dividends
into shares of Common Stock pursuant to subsection (b) of this Section A.1
below.
(b) In the event that the Corporation shall have any
accumulated but unpaid dividends outstanding immediately prior to, and in the
event of, a conversion of the Series E Preferred (as provided in Section A.4
hereof), such dividends shall be converted into Common Stock at the then
effective Series E Conversion Price, as may be applicable, determined in
accordance with and pursuant to the terms specified in Section A.4 hereof.
(c) As authorized by Section 402.5(c) of the California
Corporations Code, the provisions of Sections 502 and 503 of the California
Corporations Code shall not apply with respect to repurchases by the Corporation
of shares of Common Stock issued to or held by employees, officers, directors or
consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase.
2. Liquidation Preference. In the event of any liquidation,
dissolution, or winding up of the Corporation, either voluntary or involuntary,
distributions to the shareholders of the Corporation shall be made in the
following manner:
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<PAGE>
(a) The holders of the Series E Preferred shall be entitled to
receive, prior and in preference to any distribution of any of the assets or
surplus funds of the Corporation to the holders of the Series F Preferred Stock,
Series G Preferred Stock, Series H Preferred Stock, Series I Preferred Stock and
Series J Preferred Stock and Common Stock by reason of their ownership of such
stock, the amount of $0.124 per share for each share of Series E Preferred then
held by them, and in addition, an amount equal to all accumulated but unpaid
dividends (whether or not such dividends were declared) on the Series E
Preferred held by them. If the assets and funds thus distributed among the
holders of the Series E Preferred shall be insufficient to permit the payment to
such holders of the full aforesaid preferential amounts, then the entire assets
and funds of the Corporation legally available for distribution shall be
distributed such that each holder of Series E Preferred shall be entitled to
receive a portion of the assets and funds so distributed equal to the ratio that
the aggregate liquidation preference of the shares of Series E Preferred held by
such holder, exclusive of cumulative dividends, bears to the aggregate
preferential amount of all shares of Series E Preferred outstanding as of the
date of the distribution.
After payments have been made to the holders of the Series E Preferred
of the full amounts to which they shall be entitled as aforesaid and to the
holders of Series F Preferred of the full amounts to which they shall be
entitled as described in Section B below, the holders of the Common Stock,
Series E Preferred and Series F Preferred shall be entitled to share ratably in
the remaining assets, based on the number of shares of Common Stock held,
assuming conversion of the Series E Preferred pursuant to Section A.4 below and
conversion of the Series F Preferred pursuant to Section B.4 below,
respectively.
(b) For purposes of this Section A.2, a merger or
consolidation of the Corporation with or into any other Corporation or
Corporations, or the merger of any other Corporation or Corporations into the
Corporation, or the sale of all or substantially all of the assets of the
Corporation, or any other corporate reorganization, in which consolidation,
merger, sale of assets or reorganization the shareholders of the Corporation
receive distributions in cash or securities of another Corporation or
Corporations as a result of such consolidation, merger, sale of assets or
reorganization, shall be treated as a liquidation, dissolution or winding up of
the Corporation.
3. Voting Rights of Series E Preferred.
(a) Number of Votes. Except as otherwise required by law and
as provided in subsection (b) below, each share of Common Stock issued and
outstanding shall have one vote and each share of Series E Preferred issued and
outstanding shall have the number of votes equal to the number of shares of
Common Stock into which the Series E Preferred is convertible as adjusted from
time to time pursuant to Section A.4 hereof.
(b) Voting by Series E Preferred. The holder of each share of
Series E Preferred shall be entitled to notice of any shareholders' meeting in
accordance with the bylaws of the Corporation and shall vote with holders of the
Common Stock upon any matter submitted to a vote of shareholders, except those
matters required by law to be submitted to a class vote, and except as set forth
in Section 5.
3
<PAGE>
(c) Cumulative Voting. The holders of Common Stock and Series
E Preferred shall be entitled to cumulative voting rights as to the directors to
be elected in accordance with the provisions of Section 708 of the California
Corporations Code.
4. Conversion. The holders of the Series E Preferred have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series E Preferred shall
initially be convertible, at the option of the holder thereof, at any time after
the date of issuance of such share at the principal office of the Corporation or
any transfer agent for the Corporation's Preferred Stock, into such number of
fully paid and nonassessable shares of Common Stock as is determined by dividing
$0.124 by the Series E Conversion Price, determined as hereinafter provided, in
effect at the time of the conversion. The price at which shares of Common Stock
shall be deliverable upon conversion shall be, with respect to each share of
Series E Preferred, the price at which one share of Common Stock is initially
sold to the public pursuant to an effective registration statement under the
Securities Act of 1933, as amended, (the "Series E Conversion Price").
(b) Automatic Conversion.
(i) Each share of Series E Preferred then
outstanding shall automatically convert into shares of Common Stock, at the then
effective Series E Conversion Price at any time upon the vote of at least 75% of
the outstanding shares of Series E Preferred to convert shares of Series E
Preferred into Common Stock.
Notwithstanding any provision contained herein to the
contrary, each of the shares of Series E Preferred Stock may not, under any
circumstances, be converted into Common Stock before April 15, 1993. Between
April 15, 1993 and December 31, 1999, such shares of Series E Preferred Stock
may be converted into Common Stock at the option of the holder thereof, if,
prior to December 31, 1996, the Company's aggregate net income for any four
consecutive quarters exceeds $2,500,000. In any event, after December 31, 1999,
each of the shares of Series E Preferred Stock may be converted into Common
Stock at the option of the holder thereof.
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall round up to the nearest integer.
Before any holder of Series E Preferred shall be
entitled to convert the same into full shares of Common Stock and to receive
certificates therefor, the holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Preferred Stock, as applicable, and shall give written
notice to the Corporation at such office that the holder elects to convert the
same; provided, however, that in the event of an automatic conversion pursuant
to Section A.4(b), the outstanding shares of Series E Preferred shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing
4
<PAGE>
such shares are surrendered to the Corporation or its transfer agent; provided
further, however, that the Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such automatic
conversion unless the certificates evidencing such shares of Series E Preferred
are either delivered to the Corporation or its transfer agent as provided above,
or the holder notifies the Corporation or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Corporation to indemnify the Corporation from any loss
incurred by it in connection with such certificates. The Corporation shall, as
soon as practicable after such delivery, or such agreement and indemnification
in the case of a lost certificate, issue and deliver at such office to such
holder of Preferred Stock, as applicable, a certificate or certificates for the
number of whole shares of Common Stock to which such holder shall be entitled.
Such conversion shall be deemed to have been made immediately prior to the close
of business on the date of such surrender of the shares of Preferred Stock to be
converted, or in the case of automatic conversion on the date of such
affirmative vote, and the persons or entities entitled to receive the shares of
Common Stock issuable upon such conversion shall be treated for all purposes as
the record holder or holders of such shares of Common Stock on such date.
(d) Adjustments of Conversion Prices For Diluting Issues.
(i) Special Definitions. For purposes of this
Section A.4(d), the following definitions shall apply:
(1) "Options" shall mean rights,
options or warrants to subscribe for, purchase or otherwise acquire either
Common Stock or Convertible Securities.
(2) "Original Issue Date" shall mean
the date on which the first share of Series E Preferred was first issued.
(3) "Convertible Securities" shall
mean any evidences of indebtedness, shares (other than the shares of Series E
Preferred authorized herein) or other securities convertible into or
exchangeable for Common Stock.
(4) "Additional Shares of Common
Stock" shall mean all shares of equity securities issued (or, pursuant to
Section A.4(d)(iii), deemed to be issued) by the Corporation, other than shares
of equity securities issued or issuable at any time:
(A) upon the exercise of
certain warrants to purchase up to 229,472 shares of Common Stock;
(B) upon conversion of the
shares of Preferred Stock authorized herein into shares of Common Stock;
(C) to officers, directors
and employees of, and consultants to, the Corporation pursuant to employee
benefit plans unanimously approved by the Board of Directors; and
5
<PAGE>
(D) as a dividend or
distribution on the Series E Preferred or pursuant to any event for which
adjustment is made pursuant to subparagraph (d)(vi) hereof.
(5) "Issue Price" with respect to
any issuance of Additional Shares of Common shall mean the price per share
obtained by dividing the total consideration received by the Corporation in
respect of such Additional Shares of Common, computed in accordance with Section
A.4(d)(v) hereof, by the aggregate number of shares of such Additional Shares of
Common issued, computed in accordance with Section A.4(d)(iii) hereof.
(ii) No Adjustment of Conversion Price. No
adjustment in the Series E Conversion Price shall be made hereunder in respect
of the issuance of Additional Shares of Common Stock unless the consideration
per share for an Additional Share of Common Stock issued or deemed to be issued
by the Corporation is less than the Series E Conversion Price, in effect on the
date of, and immediately prior to such issue.
(iii) Deemed Issue of Additional Shares of Common
Stock.
(1) Options and Convertible
Securities. In the event the Corporation at any time or from time to time after
the Original Issue Date shall issue any Options or Convertible Securities or
shall fix a record date for the determination of holders of any class of
securities entitled to receive any such Options or Convertible Securities, then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions contained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such Options or,
in the case of Convertible Securities and Options therefor, the conversion or
exchange of such Convertible Securities, shall be deemed to be Additional Shares
of Common Stock issued as of the time of such issue or, in case such a record
date shall have been fixed, as of the close of business on such record date,
provided that Additional Shares of Common Stock shall not be deemed to have been
issued unless the consideration per share (determined pursuant to Section
A.4(d)(v) hereof) of such Additional Shares of Common Stock would be less than
the Series E Conversion Price in effect on the date of and immediately prior to
such issue, or such record date, as the case may be, and provided further that
in any such case in which Additional Shares of Common Stock are deemed to be
issued:
(A) no further adjustment
in the Series E Conversion Price shall be made upon the subsequent issue of
Convertible Securities or shares of Common Stock upon the exercise of such
Options or conversion or exchange of such Convertible Securities;
(B) if such Options or
Convertible Securities by their terms provide, with the passage of time or
otherwise, for any increase in the consideration payable to the Corporation, or
decrease in the number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Series E Conversion Price computed upon the
original issue thereof (or upon the occurrence of a record date with respect
thereto), and any subsequent adjustments based thereon, shall, upon any such
increase or decrease becoming effective, be recomputed to reflect such increase
or decrease insofar as it affects such Options or the rights of conversion or
exchange under such Convertible Securities;
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(C) no readjustment
pursuant to clause (B) above shall have the effect of increasing the applicable
Series E Conversion Price to an amount which exceeds the lower of (i) the Series
E Conversion Price computed on the original adjustment date, or (ii) the Series
E Conversion Price that would have resulted from any issuance of Additional
Shares of Common Stock between the original adjustment date and such
readjustment date; and
(D) in the case of any
Options which expire by their terms not more than 30 days after the date of
issue thereof, no adjustment of the Series E Conversion Price shall be made
until the expiration or exercise of all such Options.
(iv) Adjustment of Conversion Price Upon Issuance
of Additional Shares of Common Stock. In the event that after the Original Issue
Date, the Corporation shall issue Additional Shares of Common Stock (including
Additional Shares of Common Stock deemed to be issued pursuant to Section
A.4(d)(iii)) for a consideration per share less than the Series E Conversion
Price in effect on the date of and immediately prior to such issue, then and in
such event, the Series E Conversion Price, as the case may be, shall be reduced,
concurrently with such issue, to a price equal to such consideration per share
of the Additional Shares of Common Stock.
(v) Determination of Consideration. For purposes of
this Section A.4(d), the consideration received by the Corporation for the issue
of any Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Such
consideration shall:
(A) insofar as it consists
of cash, be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(B) insofar as it consists
of property other than cash, be computed at the fair value thereof at the time
of such issue, as determined in good faith by the Board; and
(C) in the event Additional
Shares of Common Stock are issued together with other shares or securities or
other assets of the Corporation for consideration which covers both, be the
proportion of such consideration so received, computed as provided in clauses
(A) and (B) above, as determined in good faith by the Board.
(2) Options and Convertible
Securities. The consideration per share received by the Corporation for
Additional Shares of Common Stock deemed to have been issued pursuant to Section
A.4(d)(iii), relating to Options and Convertible Securities, shall be determined
by dividing
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(A) the total amount, if
any, received or receivable by the Corporation as consideration for the issue of
such Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(B) the maximum number of
shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such Options or the conversion or
exchange of such Convertible Securities.
(vi) Adjustments for Subdivisions, Dividends,
Combinations or Consolidation of Common Stock. In the event the outstanding
shares of Common Stock shall be subdivided (by stock split, stock dividend or
otherwise), into a greater number of shares of Common Stock, the Series E
Conversion Price then in effect shall concurrently with the effectiveness of
such subdivision, be proportionately decreased. In the event the outstanding
shares of Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, the Series E
Conversion Price then in effect shall, concurrently with the effectiveness of
such combination or consolidation, be proportionately increased.
(vii) Adjustments for Other Distributions. In the
event the Corporation at any time or from time to time makes, or fixes a record
date for the determination of holders of Common Stock entitled to receive, any
distribution payable in securities of the Corporation other than shares of
Common Stock and other than as otherwise adjusted in Section A.1 or this Section
A.4, then and in each such event provision shall be made so that the holders of
the Series E Preferred shall receive upon conversion thereof, in addition to the
respective number of shares of Common Stock receivable thereupon, the respective
amount of securities of the Corporation which they would have received had their
shares of Series E Preferred, as the case may be, been converted into Common
Stock on the date of such event and had they thereafter, during the period from
the date of such event to and including the date of conversion, retained such
securities receivable by them as aforesaid during such period, subject to all
other adjustments called for during such period under this Section A.4 with
respect to the rights of the holders of the Series E Preferred.
(viii) Adjustments for Reclassification, Exchange
and Substitution. If the Common Stock issuable upon conversion of Series E
Preferred shall be changed into the same or a different number of shares of any
other class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision, combination or
consolidation of shares provided for above), the Series E Conversion Price then
in effect shall, concurrently with the effectiveness of such reorganization or
reclassification, be proportionately adjusted such that the Series E Preferred
shall be convertible into, in lieu of the respective number of shares of Common
Stock which the holders would otherwise have been entitled to receive, a number
of shares of such other class or classes of stock
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equivalent to the respective number of shares of Common Stock that would have
been subject to receipt by the holders upon conversion of the immediately before
that change.
(e) No Impairment. The Corporation will not, by amendment of
its Articles of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section A.4 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series E Preferred set forth in this Section A.4 against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Series E Conversion Price pursuant to this
Section A.4, the Corporation at its expense shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and furnish to
each holder of Series E Preferred a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series E Preferred furnish or cause to be furnished to
such holder a like certificate setting forth (i) such adjustments and
readjustments, (ii) the Series E Conversion Price at the time in effect, and
(iii) the number of shares of Common Stock and the amount, if any, of other
property which at the time would be received upon the conversion of Series E
Preferred.
(g) Notices of Record Date. In the event that this Corporation
shall propose at any time:
(i) to declare any dividend or distribution upon
its Common Stock, whether in cash, property, stock or other securities, whether
or not a regular cash dividend and whether or not out of earnings or earned
surplus;
(ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights;
(iii) to effect any reclassification or
recapitalization of its Common Stock outstanding involving a change in the
Common Stock; or
(iv) to merge or consolidate with or into any other
Corporation, or sell, lease or convey all or substantially all its property or
business, or to liquidate, dissolve or wind up; then, in connection with each
such event, this Corporation shall send to the holders of the Series E
Preferred:
(1) at least 20 days' prior written
notice of the date on which a record shall be taken for such dividend,
distribution or subscription rights (and specifying the date on which the
holders of Common Stock shall be entitled thereto) or for determining rights to
vote in respect of the matters referred to in (i) and (ii) above; and
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(2) in the case of the matters
referred to in (iii) and (iv) above, at least 20 days' prior written notice of
the date when the same shall take place (and specifying the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon the occurrence of such event).
Each such written notice shall be delivered personally or given by
first class mail, postage prepaid, addressed to the holders of the Series E
Preferred at the address for each such holder as shown on the books of this
Corporation.
5. Covenants. In addition to any other rights provided by law, this
Corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than a majority of such outstanding shares of
Series E Preferred:
(a) authorize or issue any class or series of shares having
rights, preferences or privileges senior to or on a parity with the Series E
Preferred as to dividends, liquidation or redemption rights;
(b) amend the rights, preferences, privileges or restrictions
of the Series E Preferred;
(c) amend the Corporation's Articles of Corporation or Bylaws
to change the number of directors from five (5);
(d) effect (i) any sale of all or substantially all the assets
of the Corporation, or (ii) any merger or other reorganization of the
Corporation with or into another Corporation;
(e) repurchase or redeem any outstanding securities (except
for repurchases of unvested employee stock upon the termination of employees);
or
(f) declare any dividend on the Corporation's outstanding
Common Stock;
6. Status of Converted Stock. In case any shares of Series E Preferred
shall be converted pursuant to Section A.4 hereof, the shares so converted shall
not be reissued.
B. Series F Preferred, Series G Preferred, Series H Preferred, Series I
Preferred and Series J Preferred.
1. Designation. The number of shares constituting the (i) Series F
Preferred shall be 82,250, (ii) Series G Preferred shall be 50,344, (iii) Series
H Preferred shall be 117,000, (iv) Series I Preferred shall be 28,800 and (v)
Series J Preferred shall be 250,000. For purposes of this Section B, the "Series
F Initial Sales Price", "Series G Initial Sales Price" , "Series H Initial Sales
Price", "Series I Initial Sales Price", and "Series J Initial Sales Price" shall
mean the price per share at which shares of Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred and Series J Preferred are
first sold to investors, and the "Series F Original Issue Date", "Series G
Original Issue Date", "Series H Original
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Issue Date", "Series I Original Issue Date", and "Series J Original Issue Date"
shall mean the date of such sale. The Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred and Series J Preferred shall have the
rights, preferences, privileges and restrictions granted to or imposed upon them
as specified below.
2. Dividends.
(a) No dividend (payable other than in Common Stock of the
Corporation) may be paid on or declared or set apart for the Common Stock in any
one fiscal year unless a dividend at the rate of five percent (5%) of the
Initial Sales Price is paid on, or declared and set apart for, each share of
Series F Preferred, Series G Preferred, Series H Preferred, Series I Preferred
and Series J Preferred Stock. The amount of dividend shall be prorated for a
share of Series F Preferred, Series G Preferred, Series H Preferred, Series I
Preferred and Series J Preferred Stock which is not issued and outstanding for
an entire fiscal year. The dividends on the Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred and Series J Preferred Stock
shall be paid out of any assets legally available therefor, when, as and if
declared by the Board of Directors. Dividends on the Series F Preferred, Series
G Preferred, Series H Preferred, Series I Preferred and Series J Preferred shall
not be cumulative and no rights shall accrue to the holders of the Series F
Preferred, Series G Preferred, Series H preferred, Series I Preferred, nor the
holders of the Series J Preferred in the event the Corporation shall fail to
declare or pay dividends on the Series F Preferred, Series G Preferred, Series H
Preferred, Series I Preferred or Series J Preferred in the amount of five
percent (5%) of the Initial Sales Price per share per fiscal year or in any
amount in any prior year of the Corporation, whether or not the earnings of the
Corporation in that previous fiscal year were sufficient to pay such dividends
in whole or in part. In the event the Board of Directors of the Corporation
declares dividends in a fiscal year in an amount less than the aggregate of all
the dividend preferences of the Series E Preferred, the Series F Preferred, the
Series G Preferred, the Series H Preferred, the Series I Preferred and the
Series J Preferred Stock, then the entire amount of dividends declared by the
Board of Directors shall be distributed ratably among the holders of the Series
E Preferred Stock, the Series F Preferred Stock, the Series G Preferred Stock,
the Series H Preferred Stock, the Series I Preferred Stock and the Series J
Preferred Stock such that the same percentage of the annual dividend to which
each series of Preferred Stock is entitled is paid on each share of Series E
Preferred Stock, Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred, Series I Preferred and the Series J Preferred Stock.
(b) As authorized by Section 402.5(c) of the California
Corporations Code, the provisions of Sections 502 and 503 of the California
Corporations Code shall not apply with respect to repurchases by the Corporation
of shares of Common Stock issued to or held by employees, officers, directors or
consultants of the Corporation or its subsidiaries upon termination of their
employment or services pursuant to agreements providing for the right of said
repurchase.
3. Liquidation Preference. In the event of any voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation, after
the payment to which the holders of the Series E Preferred Stock, are entitled
as set forth in Article III.A.2 (the "Series E Distribution") has been made, no
distribution shall be made on the shares of Common Stock without first making a
distribution on the
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shares of Series F Preferred Stock, Series G Preferred Stock, Series H Preferred
Stock Series I Preferred Stock and Series J Preferred Stock (the "Series F,
Series G, Series H, Series I and Series J Distribution") equal to the amount of
the Initial Sales Price per share for each share of Preferred Stock, plus all
declared but unpaid dividends thereon. If upon occurrence of such event, and
after the Series E Distribution, the assets and property thus distributed among
the holders of the Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock, Series I Preferred Stock and Series J Preferred Stock shall be
insufficient to permit the payment to such holders of their full respective
preferential amounts, then the entire remaining assets and property of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Series F Preferred Stock, Series G Preferred Stock,
Series H Preferred Stock, Series I Preferred Stock and Series J Preferred Stock
such that the same percentage of the preferential amount to which each series of
Series F Preferred Stock, Series G Preferred Stock, Series H Preferred Stock,
Series I Preferred Stock and Series J Preferred Stock is entitled is paid on
each share of Series F Preferred Stock, Series G Preferred Stock, Series H
Preferred Stock, Series I Preferred Stock and Series J Preferred Stock. A
consolidation or merger of the Corporation with or into any other corporation or
corporations, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) at least fifty percent (50%) of
the total voting power represented by the voting securities of the Corporation
or such surviving entity outstanding immediately after such merger or
consolidation, or a sale of all or substantially all of the assets of the
Corporation, shall be deemed to be a liquidation, dissolution, or winding up of
the Corporation.
4. Conversion. The holders of Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series F Preferred, Series
G Preferred, Series H Preferred, Series I Preferred and Series J Preferred Stock
shall be convertible, at any time after the date of issuance, at the option of
the holder thereof, of such share at the office of the Corporation or any
transfer agent for the Series F Preferred, Series G Preferred, Series H
Preferred, Series I Preferred and Series J Preferred Stock, into that number of
fully-paid and nonassessable shares of Common Stock that is equal to the Initial
Sales Price for each respective Series of Preferred Stock divided by the
appropriate Conversion Price (as hereinafter defined) for each Series of
Preferred Stock. The Initial Sales Price shall be $3.039 per share for the
Series F Preferred, $1.992 per share for the Series G Preferred, $2.136 per
share for the Series H Preferred, $1.56 for the Series I Preferred and $.619 per
share for the Series J Preferred. The price at which shares of Common Stock
shall be deliverable upon conversion (individually the "Series F Conversion
Price", "Series G Conversion Price", "Series H Conversion Price", "Series I
Conversion Price" and "Series J Conversion Price", and collectively, the
"Conversion Prices") shall initially be $3.039 per share of Common Stock for
conversions of Series F Preferred, $1.992 per share of Common Stock for
conversions of Series G Preferred, $2.136 per share of Common Stock for
conversions of Series H Preferred, $10.00 per share of Common Stock for
conversions of Series I Preferred and $20.00 per share of Common Stock for
conversions of Series J Preferred. Such initial Conversion Prices shall be
subject to adjustment as hereinafter provided.
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(b) Automatic Conversion. All shares of Series F Preferred,
Series G Preferred, Series H Preferred, Series I Preferred and Series J
Preferred then outstanding shall automatically convert into shares of Common
Stock upon the election of at least 67% of the outstanding shares of each of the
respective Series F Preferred, Series G Preferred, Series H Preferred, Series I
Preferred and Series J Preferred (voting separately as a class) to convert
shares of the respective Series of Preferred Stock into Common Stock.
(c) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred or Series J Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then fair
market value of such fractional shares as determined by the Board of Directors
of the Corporation. Before any holder of Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred or Series J Preferred Stock shall be
entitled to convert the same into full shares of Common Stock, and to receive
certificates there for, he shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for Series F Preferred, Series G Preferred, Series H Preferred, Series I
Preferred or Series J Preferred Stock, and shall give written notice to the
Corporation at such office that he elects to convert the same; provided,
however, that in the event of an automatic conversion pursuant to paragraph
B.4(b) above, the outstanding shares of Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred or Series J Preferred Stock shall be
converted automatically without any further action by the holders of such shares
and whether or not the certificates representing such shares are surrendered to
the Corporation or its transfer agent; provided further, however, that the
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such automatic conversion unless either the
certificates evidencing such shares of Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred or Series J Preferred Stock are delivered
to the Corporation or its transfer agent as provided above, or the holder
notifies the Corporation or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates.
The Corporation shall, as soon as practicable after such
delivery, or after such agreement and indemnification, issue and deliver at such
office to such holder of Series F Preferred, Series G Preferred, Series H
Preferred, Series I Preferred or Series J Preferred Stock a certificate or
certificates for the number of shares of Common Stock to which he shall be
entitled as aforesaid and a check payable to the holder in the amount of any
cash amounts payable as the result of a conversion into fractional shares of
Common Stock, plus any declared and unpaid dividends on the converted Series F
Preferred, Series G Preferred, Series H Preferred, Series I Preferred or Series
J Preferred Stock. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series F Preferred, Series G Preferred, Series H Preferred, Series I Preferred
or Series J Preferred Stock to be converted, and the person or persons entitled
to receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date.
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(d) Adjustments to Conversion Price for Diluting Issues.
(i) Special Definition. For purposes of this
paragraph B.4(d), "Additional Shares of Common" shall mean all shares of Common
Stock issued (or, pursuant to paragraph B.4(d)(iii), deemed to be issued) by the
Corporation after the Original Issue Date, other than shares of Common Stock
issued or issuable:
(1) upon conversion of shares of
Preferred Stock;
(2) to the Corporation's employees,
officers, directors and consultants as may be determined by the Corporation's
Board of Directors from time to time;
(3) as a dividend or distribution on
Preferred Stock or pursuant to any event for which adjustment is made pursuant
to paragraph B.4(e)(i) or (ii) hereof;
(4) pursuant to commercial
borrowing, secured lending or lease financing transactions approved by the Board
of Directors;
(5) in any transaction, other than
the issuance by the Company of Series J Preferred, in which the issuance (or,
pursuant to paragraph 4(d)(iii), deemed issuance) by the Corporation of such
shares of Common Stock results in net proceeds to the Corporation of less than
$500,000;
(6) upon exercise of any options or
warrants outstanding as of the Original Issue Date to purchase the Company's
Common Stock or Preferred Stock.
(ii) No Adjustment of Conversion Price. No adjustment
in the Conversion Price of a particular share of Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred or Series J Preferred Stock
shall be made in respect of the issuance of Additional Shares of Common unless
the consideration per share for an Additional Share of Common issued or deemed
to be issued by the Corporation is less than the Conversion Price in effect on
the date of, and immediately prior to such issue, for such share of Preferred
Stock.
(iii) Deemed Issue of Additional Shares of Common. In
the event the Corporation at any time or from time to time after the Original
Issue Date shall issue any options, warrants or convertible securities or shall
fix a record date for the determination of holders of any class of securities
entitled to receive any such options, warrants or convertible securities, then
the maximum number of shares (as set forth in the instrument relating thereto
without regard to any provisions con tained therein for a subsequent adjustment
of such number) of Common Stock issuable upon the exercise of such options or
warrants or, in the case of convertible securities and options or warrants
therefor, the conversion or exchange of such convertible securities or exercise
of such options or warrants, shall be deemed to be Additional Shares of Common
issued as of the time of such issue or, in case such a record date shall have
been fixed, as of the close of business on such record date, provided that
Additional Shares of Common shall not be deemed to have been issued unless the
consideration per share
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(determined pursuant to paragraph 4(d)(v) hereof) of such Additional Shares of
Common would be less than the Conversion Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common are
deemed to be issued:
(1) no further adjustment in the
Conversion Price shall be made upon the subsequent issue of convertible
securities or shares of Common Stock upon the exercise of such options or
warrants or conversion or exchange of such convertible securities;
(2) if such options, warrants or
convertible securities by their terms provide, with the passage of time or
otherwise, for any increase or decrease in the consideration payable to the
Corporation, or increase or decrease in the number of shares of Common Stock
issuable, upon the exercise, conversion or exchange thereof, the Conversion
Price computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto), and any subsequent adjustments based thereon,
shall, upon any such increase or decrease becoming effective, be recomputed to
reflect such increase or decrease insofar as it affects such options or warrants
or the rights of conversion or exchange under such convertible securities;
(3) no readjustment pursuant to
clause (2) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion Price on the original
adjustment date, or (ii) the Conversion Price that would have resulted from any
issuance of Additional Shares of Common between the original adjustment date and
such readjustment date;
(4) upon the expiration of any such
options or warrants or any rights of conversion or exchange under such
convertible securities which shall not have been exercised, the Conversion Price
computed upon the original issue thereof (or upon the occurrence of a record
date with respect thereto) and any subsequent adjustments based thereon shall,
upon such expiration, be recomputed as if:
(A) in the case of
convertible securities or options or warrants for Common Stock, the only
Additional Shares of Common issued were the shares of Common Stock, if any,
actually issued upon the exercise of such options or warrants or the conversion
or exchange of such convertible securities and the consideration received
therefor was the consideration actually received by the Corporation for the
issue of such exercised options or warrants plus the consideration actually
received by the Corporation upon such exercise or for the issue of all such
convertible securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Corporation upon such
conversion or exchange, and
(B) in the case of options
or warrants for convertible securities, only the convertible securities, if any,
actually issued upon the exercise thereof were issued at the time of issue of
such options or warrants, and the consideration received by the Corporation for
the Additional Shares of Common deemed to have been then issued was the
consideration actually received by the Corporation for the issue of such
exercised options or warrants, plus the consideration deemed to have been
received by the Corporation (determined pursuant to paragraph B.4(d)(v)) upon
the issue of the
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convertible securities with respect to which such options or warrants were
actually exercised; and
(5) if such record date shall have
been fixed and such options, warrants or convertible securities are not issued
on the date fixed therefor, the adjustment previously made in the Conversion
Price which became effective on such record date shall be canceled as of the
close of business on such record date, and thereafter the Conversion Price shall
be adjusted pursuant to this paragraph 4(d)(iii) as of the actual date of their
issuance.
(iv) Adjustment of Conversion Price Upon Issuance
of Additional Shares of Common. In the event the Corporation, on or before the
earlier of (i) the first anniversary of the final sale by the Corporation of
Series F Preferred prior to June 30, 1996, the first anniversary of the final
sale by the Corporation of Series G Preferred prior to December 31, 1996, the
first anniversary of the final sale by the Corporation of Series H Preferred and
Series I Preferred prior to June 30, 1998, and the first anniversary of the
final sale by the Company of Series J Preferred prior to August 22, 1998,
respectively and (ii) June 30, 1997 (with respect to the Series F Preferred),
December 31, 1997 (with respect to the Series G Preferred), June 30, 1999 (with
respect to the Series H Preferred and Series I Preferred), and August 22, 1999
(with respect to the Series J Preferred) (the earlier of which dates is referred
to as the "Determination Date"), issues Additional Shares of Common (including
Additional Shares of Common deemed to be issued pursuant to paragraph
B.4(d)(iii)) without consideration or for a consideration per share less than
the Conversion Price for the respective Series of Preferred Stock in effect on
the date of and immediately prior to such issue (a "Dilutive Issuance"), then
and in such event such Conversion Price shall be reduced, concurrently with such
issue, to a price equal to such consideration per share of the Additional Shares
of Common. The Conversion Price of the Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred and Series J Preferred Stock shall not be
reduced as a result of any Dilutive Issuance that occurs after the Determination
Date.
(v) Determination of Consideration. For purposes of
this subsection 4(d), the consideration received by the Corporation for the
issue of any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such
consideration shall:
(a) insofar as it consists of
cash, be computed at the aggregate amount of cash received by the Corporation
excluding amounts paid or payable for accrued interest or accrued dividends;
(b) insofar as it consists of
property other than cash, be computed at the fair value thereof at the time of
such issue, as determined in good faith by the Board of Directors; and
(c) in the event Additional
Shares of Common are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses a) and b)
above, as determined in good faith by the Board of Directors.
16
<PAGE>
(2) Options and Convertible
Securities. The consideration per share received by the Corporation for
Additional Shares of Common deemed to have been issued pursuant to paragraph
4(d)(iii), relating to options, warrants and convertible securities, shall be
determined by dividing
(a) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
options, warrants or convertible securities, plus the minimum aggregate amount
of additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such options
or warrants or the conversion or exchange of such convertible securities, or in
the case of options or warrants for convertible securities, the exercise of such
options for convertible securities and the conversion or exchange of such
convertible securities by
(b) the maximum number of
shares of Common Stock (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such number) issuable upon the exercise of such options or warrants or the
conversion or exchange of such convertible securities.
(e) Adjustments to Conversion Rate.
(i) Adjustments for Subdivisions, Splits,
Combinations, Consolidations, Reorganizations or Reclassifications of Common
Stock. In the event that after the date of the first issuance of the Series F
Preferred, Series G Preferred, Series H Preferred, Series I Preferred and Series
J Preferred Stock the outstanding shares of Common Stock shall be (a) subdivided
or split into a greater number of shares of Common Stock; (b) combined or
consolidated, by reclassification or otherwise, into a lesser number of shares
of Common Stock or (c) changed into a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise, the holders of the shares of Preferred Stock shall receive upon
conversion, the stock and/or securities to which the holder would have been
entitled had the holder held, at the time of said split, subdivision,
combination, consolidation, reorganization or reclassification, the same number
of shares of Common Stock as the number of Series J Preferred Stock converted.
(ii) Adjustments for Other Dividends and
Distributions. In the event the Corporation at any time after the date of the
first issuance of the Series F Preferred, Series G Preferred, Series H
Preferred, Series I Preferred and Series J Preferred Stock makes, or fixes a
record date for, the determination of holders of Common Stock entitled to
receive, a dividend or other distribution payable in the securities of the
Corporation, then the holders of the shares of Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred and Series J Preferred Stock
shall receive upon conversion, in addition to the number of sharers of Common
Stock receivable thereupon, the stock or securities to which the holder would
have been entitled had the holder held, at the time of said dividend or other
distribution, the same number of shares of Common Stock as the number of Series
F Preferred, Series G Preferred, Series H Preferred, Series I Preferred and
Series J Preferred converted, and had they thereafter during the period from the
date of such event to and including the date of conversion, retained
17
<PAGE>
such stock or securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section B.4 with respect to the respective rights of the holders of the Series F
Preferred, Series G Preferred, Series H Preferred, Series I Preferred and Series
J Preferred.
5 Voting Rights. Except as otherwise required by law, the
holders of Series F Preferred, Series G Preferred, Series H Preferred, Series I
Preferred and Series J Preferred Stock shall be entitled to notice of any
shareholders' meeting in accordance with the Bylaws of the Corporation and to
vote together as a single class with the holders of the Common Stock (except
with respect to those matters required by law to be submitted to a separate
class or series vote) upon the election of directors and upon any other matter
submitted to shareholders for a vote, on the following basis:
(a) Series F Preferred, Series G Preferred, Series H
Preferred, Series I Preferred and Series J Preferred Stock Vote. Each share of
Preferred Stock issued and outstanding shall have the number of votes equal to
the number of shares of Common Stock into which it is convertible, as adjusted
from time to time under Section 4 hereof. Fractional votes shall not, however,
be permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of Preferred Stock held by each
holder could be converted) shall be rounded to the nearest whole number (with
one-half being rounded upward).
(b) Cumulative Voting. Notwithstanding the above, for the
election of directors each holder of Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred and Series J Preferred, shall after
giving the notice required by Section 708 of the California Corporations Code,
as amended from time to time, be entitled to the number of votes as determined
pursuant to paragraph (a) above multiplied by the number of directors to be
elected, with each shareholder being entitled to cumulate such votes for one
candidate or to distribute such votes among the candidates as the shareholder
sees fit.
6. Covenants. In addition to any other rights provided by law, so
long as 33% of the originally issued Series F Preferred, Series G Preferred,
Series H Preferred, Series I Preferred and Series J Preferred shall be
outstanding respectively, this Corporation shall not, without first obtaining
the affirmative vote or written consent of the holders of not less than a
majority of the outstanding shares of each of the Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred and Series J Preferred stock
voting separately as single classes.
a. amend or repeal any provision of, or add any provision to,
this Corporation's Articles of Incorporation if such action would materially and
adversely alter or change the preferences, rights, privileges or powers of, or
the restrictions provided for the benefit of, the Series F Preferred, Series G
Preferred, Series H Preferred, Series I Preferred and Series J Preferred Stock
authorized hereby;
b. authorize or issue shares of any class of stock having any
preference or priority as to dividends or assets superior to any such preference
or priority of the Series F Preferred, Series G Preferred, Series H Preferred,
Series I Preferred and Series J Preferred Stock; or
18
<PAGE>
c. reclassify any shares of Common Stock into shares having
any preference or priority as to dividends or assets superior to any such
preference or priority of the Series F Preferred, Series G Preferred, Series H
Preferred, Series I Preferred and Series J Preferred Stock.
Article IV
Section 1. Limitation of Directors' Liability. The liability of the
directors of this Corporation for monetary damages shall be eliminated to the
fullest extent permissible under California law.
Section 2. Indemnification of Corporation Agents. This Corporation is
authorized to provide through bylaw provisions, agreements with its agents, vote
of shareholders or disinterested directors or otherwise; indemnification of its
agents (as defined in Section 317 of the California General Corporation Law) in
excess of the indemnification otherwise permitted by such Section 317, subject
to the limits set forth in Section 204 of the California General Corporation Law
for breach of duty to this Corporation or its shareholders.
Section 3. Repeal or Modification. Any repeal or modification of the
foregoing provisions of this Article IV by the shareholders of the Corporation
shall not adversely affect any right of indemnification or limitation of
liability of an agent of the Corporation relating to acts or omissions occurring
prior to such repeal or modification.
19
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<PERIOD-START> APR-01-1998
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