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 March 31, 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.
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(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
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(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 May 5, 1998, 3,200,137 shares of the Registrant's common stock were issued
and outstanding.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
HYPERMEDIA COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
<CAPTION>
March 31, December 31,
1998 1997
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<S> <C> <C>
ASSETS
Current assets:
Cash $ 770,000 $ 269,000
Accounts receivable, net of allowance for
doubtful accounts of $131,000 and $110,000 1,505,000 1,165,000
Prepaid expenses and other assets 587,000 567,000
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Total current assets 2,862,000 2,001,000
Property and equipment, net 426,000 451,000
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$ 3,288,000 $ 2,452,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 821,000 $ 956,000
Accrued liabilities 404,000 439,000
Deferred revenue 27,000 31,000
Note payable -- --
------------ ------------
Total current liabilities 1,252,000 1,426,000
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Shareholders' equity:
Convertible Preferred Stock, $.001 par value; 10,064,516
shares authorized; 8,454,660 and 8,342,910 shares 3,383,000 2,003,000
issued and outstanding
Common Stock, $.001 par value; 50,000,000 shares
authorized; 3,200,137 shares issued and 10,427,000 10,427,000
outstanding
Accumulated deficit (11,774,000) (11,404,000)
------------ ------------
Total shareholders' equity 2,036,000 1,026,000
------------ ------------
$ 3,288,000 $ 2,452,000
============ ============
</TABLE>
<PAGE>
<TABLE>
HYPERMEDIA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended March 31,
------------------------------------
1998 1997
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<S> <C> <C>
Revenues $ 1,754,000 $ 1,915,000
Expenses:
Editorial 283,000 291,000
Production 503,000 476,000
Circulation 524,000 564,000
Sales and marketing 526,000 420,000
Product development 12,000 9,000
General and administrative 271,000 243,000
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Total expenses 2,119,000 2,003,000
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Loss from operations (365,000) (88,000)
Interest and other expense, net 5,000 10,000
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Net loss $ (370,000) $ (98,000)
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Basic and diluted net loss per common share (Note 2) $ (0.12) $ (0.03)
=========== ===========
Weighted average common shares 3,200,137 3,109,570
=========== ===========
</TABLE>
<PAGE>
<TABLE>
HYPERMEDIA COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
Increase (Decrease) in Cash
(UNAUDITED)
<CAPTION>
Three months ended March 31,
------------------------------------
1998 1997
---- ----
<S> <C> <C>
Cash flow from operating activities:
Net loss $ (370,000) $ (98,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 56,000 59,000
Allowance for doubtful accounts 21,000 21,000
Change in assets and liabilities:
Accounts receivable (361,000) (111,000)
Prepaid expenses and other assets (21,000) 57,000
Accounts payable (136,000) (27,000)
Accrued liabilities (34,000) 29,000
Deferred revenue (4,000) 3,000
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Net cash used in operating activities (849,000) (67,000)
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Net cash used in investing activities for:
Purchase of fixed assets (30,000) (14,000)
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Cash flows from financing activities:
Proceeds from issuance of preferred stock 1,380,000 0
Proceeds from issuance of common stock -- 50,000
Repayment of shareholder note receivable -- --
Proceeds from note payable -- 5,000
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Net cash provided by financing activities 1,380,000 55,000
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Net increase (decrease) in cash 501,000 (26,000)
Cash at beginning of period 269,000 107,000
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Cash at end of period $ 770,000 $ 81,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 5,000 $ 10,000
=========== ===========
</TABLE>
<PAGE>
HYPERMEDIA COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
The financial statements of HyperMedia Communications, Inc. (the "Company") as
of March 31, 1998 and 1997 and for the three months then ended are unaudited,
and in the opinion of management, include 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. 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 months ended March
31, 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 months ended March 31, 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.
<PAGE>
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 will be implemented in the second quarter,
will return NewMedia to a monthly publishing frequency. * This publishing
schedule is the result of NewMedia's advertising clients expressing a strong
preference 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 will debut with the July 1998 issue. * The redesign is 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.*
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* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<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
Revenues decreased to $1,754,000 in the first fiscal quarter of 1998 from
$1,915,000 in a comparable period in 1997, 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 first quarter of 1998, Windows- and Unix-based systems advertising in
NewMedia magazine grew by 43 percent vs. the prior-year period, led by
advertising from Compaq, Dell, Digital, IBM, and Silicon Graphics. The Company
believes that part of this increase was driven by the strong results reported in
NewMedia magazine's most recent BPA International circulation audit. The
magazine's average annual subscriber purchase power has more than doubled in
1997 to $1.08 million from $516,000 in 1996, according to the audit conducted by
BPA International.
The Company incurred a net loss of $370,000 and $98,000 in the first quarters of
1998 and 1997, respectively. The increase in net loss in the first 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 from the first quarter of 1997
to 1998.
Editorial expenses, comprised principally of salaries and fees paid to the
writers for the Company's publications, were $283,000 for the quarter ended
March 31, 1998, as compared to $291,000 for the same quarter in 1997. Editorial
expenses stayed approximately the same in the first quarter of 1998 as a result
of various offsetting factors. As a percentage of revenues, editorial expenses
increased slightly from 15% in the first quarter of 1997 to 16% in the first
quarter of 1998. The Company expects that editorial expenses will decrease in
the balance of 1998 as a result of the lower number of issues associated with
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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<PAGE>
Production expenses, including costs for design, materials and printing of the
Company's publications, were $503,000 for the quarter ended March 31, 1998. This
compares to $476,000 for the quarter ended March 31, 1997. The increase of
$27,000, or 6%, is primarily attributable to higher paper prices. 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 $524,000 and $564,000 for the quarters ended March 31, 1998
and 1997, respectively. The Company currently capitalizes its circulation
development expenditures and amortizes them over a 12 month period. The decrease
of $40,000, or 7%, is primarily attributable to the smaller amount of
circulation development expenditure amortization included in the first 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 purchasing power of new media products and services of the average
subscriber 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 30% of revenues
for the first quarter of 1998 as compared to 29% of revenues for the same period
of 1997. Circulation expenses are expected to decrease in the balance of 1998 as
the result of the impact of the frequency based on the 1998 publishing
strategy.*
Sales and marketing expenses were $526,000 for the quarter ended March 31, 1998,
as compared to $420,000 for the same quarter in 1997. The increase of $106,000,
or 25%, 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 quarter of
1998. The NewMedia magazine sales force has almost doubled from the first
quarter of 1997 to 1998. Sales and marketing expenses represented 30% of
revenues for the first quarter of 1998 as compared to 22% of revenues 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 costs totaled $12,000 for the quarter ended March 31, 1998,
as compared to $9,000 for the comparable quarter in 1997, 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. *
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* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<PAGE>
General and administrative expenses were $271,000 and $243,000 for the quarters
ended March 31, 1998 and 1997, respectively. The increase of $28,000, or 12%,
primarily reflects increased compensation costs. General and administrative
expenses represented 15% of revenues for the first quarter of 1998 as compared
to 13% for the same period in 1997. General and administrative costs are
expected to grow in the balance of 1998 with expected increases in general and
administrative expenses that accompany anticipated revenue growth, if any.*
Liquidity and Capital Resources
At March 31, 1998, the Company had approximately $1,610,000 in net working
capital and its principal sources of liquidity consisted of approximately
$770,000 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
$600,000 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. At March 31, 1998, there were no borrowings outstanding under this line of
credit. As a result of the conditions of the line of credit and financial
results of the 1998 first fiscal quarter, the Company had unused borrowing
capacity of $872,000. Partial usage of unused borrowing capacity could be
restricted by financial operating covenants. In March 1998, the $1,000,000 line
of credit secured by 70% of qualified accounts receivable was renewed with
similar terms, conditions and covenants for a period through March 1999.
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, 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 and approximately an additional $100,000 of this capital
commitment in March 1998.
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 cash generated from
operations and borrowings 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."
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* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<PAGE>
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 would 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.
- ---------------
* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<PAGE>
History of Losses and Accumulated Deficits
The Company incurred total net losses of $11,773,000 from inception to March 31,
1998, including a net loss of $370,000 for the quarter ended March 31, 1998. The
Company expects to incur losses for at least the first three 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 that includes recently-hired sales people,
control its costs, and successfully implement its marketing and product strategy
in relation to the corporate digital content creation marketplace.* There can be
no assurance that the Company will be successful in any of these efforts.
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
increased revenues or in profitability. Certain components of production,
circulation and editorial expenses associated with this publishing strategy will
increase.* When 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 above mentioned 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 third or
fourth quarter of 1998, if at all.*
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* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<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 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 Common bid price 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 proforma 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 balance sheet. Based on current
financial projections for the second and third 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 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.
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* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<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 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.
- ---------------
* 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" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<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.
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, of the Company. 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
sections entitled "Factors Affecting Operating Results and Market Price of
Stock" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of factors that could affect future
performance.
<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. Each share of Series J Preferred Stock is
convertible at the option of the holder into 20 shares of the Company's common
stock. 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 tangible net
assets based on the Company's March 31, 1998 balance sheet. This leaves a
balance of up to approximately $600,000 which the MK GVD Fund has agreed to
invest, subject to MK Global's acceptance, in Series J Preferred Stock on or
before August 21, 1998.
Item 6. Exhibits and Reports on Form 8-K
(a) A Form 8-K was filed February 20, 1998 which reported
under Item 5. thereof the Company's issuance of $1.3 million of Series J
Preferred Stock and the Company's operating results for fiscal 1997.
Items 1, 3, 4, and 5 are not applicable and have been omitted.
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: May 12, 1998 HyperMedia Communications, Inc.
By: /s/ Richard Landry_______
Richard Landry
President and Chief Executive Officer
(Principal Financial and Accounting
Officer)
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