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 September 30, 1998
or
[ ] TRANSACTION 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 and 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 November 4, 1998, 3,200,141 shares of the registrant's common stock were
issued and outstanding.
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HYPERMEDIA COMMUNICATIONS, INC.
BALANCE SHEET
(UNAUDITED)
September 30, December 31,
1998 1997
------------ --------------
ASSETS
Current assets:
Cash and cash equivalents $ 212,000 $ 269,000
Accounts receivable, net of allowance
for doubtful accounts of
$161,000 and $110,000 861,000 1,165,000
Prepaid expenses and other assets 1,002,000 567,000
------------ ------------
Total current assets 2,075,000 2,001,000
Property and equipment, net 413,000 451,000
------------ ------------
$ 2,488,000 $ 2,452,000
============ ============
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities:
Accounts payable $ 629,000 $ 956,000
Accrued liabilities 274,000 439,000
Deferred revenue 296,000 31,000
------------ ------------
Total current liabilities 1,199,000 1,426,000
------------ ------------
Shareholders' equity:
Convertible Preferred Stock, $.001 par
value; 10,064,516 shares authorized;
8,512,191 and 8,342,910 shares 3,924,000 2,003,000
issued and outstanding
Common Stock, $.001 par value; 50,000,000
shares authorized; 3,200,141 10,427,000 10,427,000
issued and outstanding
Accumulated deficit (13,062,000) (11,404,000)
------------ ------------
Total shareholders' equity 1,289,000 1,026,000
------------ ------------
$ 2,488,000 $ 2,452,000
============ ============
See the accompanying notes to these condensed financial statements.
2
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<TABLE>
HYPERMEDIA COMMUNICATIONS, INC.
STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
-------------------------- --------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,028,000 $ 1,721,000 $ 4,099,000 $ 5,437,000
----------- ----------- ----------- -----------
Expenses:
Editorial 201,000 294,000 723,000 869,000
Production 378,000 481,000 1,262,000 1,428,000
Circulation 432,000 501,000 1,427,000 1,597,000
Sales and marketing 544,000 434,000 1,622,000 1,238,000
Product development 12,000 10,000 35,000 29,000
General and administrative 208,000 246,000 711,000 699,000
----------- ----------- ----------- -----------
Total expenses 1,775,000 1,966,000 5,780,000 5,860,000
----------- ----------- ----------- -----------
Loss from operations (747,000) (245,000) (1,681,000) (423,000)
Interest and other (income) expense, net (13,000) 4,000 (22,000) 21,000
----------- ----------- ----------- -----------
Net loss $ (734,000) $ (249,000) $(1,659,000) $ (444,000)
=========== =========== =========== ===========
Basic and diluted net loss per shar$ (0.23) $ (0.08) $ (0.52) $ (0.14)
=========== =========== =========== ===========
Weighted average common and
common equivalent shares 3,200,141 3,200,137 3,200,141 3,200,137
=========== =========== =========== ===========
<FN>
See the accompanying condensed notes to these financial statements.
</FN>
</TABLE>
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HYPERMEDIA COMMUNICATIONS, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Nine months ended
September 30,
---------------------------
1998 1997
----------- -----------
Cash flow from operating activities:
Net loss $(1,659,000) $ (444,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 167,000 175,000
Allowance for doubtful accounts 51,000 (64,000)
Other -- 20,000
Change in assets and liabilities:
Accounts receivable 253,000 31,000
Prepaid expenses and other assets (434,000) (70,000)
Accounts payable (327,000) (164,000)
Accrued liabilities (165,000) 90,000
Deferred revenue 265,000 329,000
----------- -----------
Net cash used in operating activities (1,849,000) (97,000)
----------- -----------
Net cash used in investing activities for
purchase of fixed assets (129,000) (28,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of Preferred Stock 1,921,000 348,000
Proceeds from issuance of Common Stock -- 50,000
Repayment of note payable -- (285,000)
----------- -----------
Net cash provided by financing activities 1,921,000 113,000
----------- -----------
Net increase in cash (57,000) (12,000)
Cash and cash equivalents at beginning of period 269,000 107,000
----------- -----------
Cash and cash equivalents at end of period $ 212,000 $ 95,000
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,000 $ 21,000
=========== ===========
See the accompanying condensed notes to these financial statements.
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 September 30, 1998 and 1997 and for the three and nine 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 nine months ended September 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 September 30, 1998 and 1997 and
for the nine month periods ended September 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
<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 within the meaning of Section 27a of the Securities
Act of 1933 and Section 21e of the Securities Exchange Act, that involve risks
and uncertainties, including but not limited to those statements that have been
identified by an asterisk (*) and other statements regarding the Company's
strategy, financial performance, and revenue sources. 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.
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 use 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, e-commerce, 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 per year 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, which took place
November 11-13, 1998, included a 6,000 square foot PLAYLAND Gallery, Evening New
Media Showcases and a two-day Digital Insight conference.*
HyperMedia also publishes newmedia.com, an award-winning World Wide Web site of
news, information, products and services for the digital content creation
market. The Company recently introduced i.Serv, 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 $1,028,000 and $1,721,000 for the quarters
ended September 30, 1998 and 1997, respectively, and $4,099,000 and $5,437,000
for the nine months then ended. The decrease in revenues is primarily 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. The reduction in the publication frequency of NewMedia magazine
from sixteen issues per year to one issue per month, which occurred in the
second quarter of 1998, also contributed to the decrease in revenues.
The Company's total expenses were $1,775,000 and $1,966,000 for the quarters
ended September 30, 1998 and 1997, respectively, and $5,780,000 and $5,860,000
for the nine months then ended. The reduction in expenses associated with the
lower number of issues published in 1998 was partially offset by increased
investment in sales and marketing.
The net loss for the first nine months of 1998 was $1,659,000 as compared to the
loss of $444,000 for the first nine months of 1997. The Company posted a net
loss of $734,000 in the third quarter of 1998 as compared to a net loss of
$249,000 for the same period of 1997. The increase in net loss in the third
quarter of 1998 as compared to 1997 is primarily a result of an increase in
sales and marketing expenses and to the decrease in NewMedia advertising
revenues.
- ---------------
* 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 $201,000 and $294,000 for the
quarters ended September 30, 1998 and 1997, respectively, and $723,000 and
$869,000 for the nine months then ended. The reductions in editorial expenses
are primarily attributable to cost control programs, some attrition, and a
reduction in the number of issues per quarter (from 4 to 3), starting in the
second fiscal quarter of 1998. Editorial expenses represented 20% and 17% of
revenue for the quarters ended September 30, 1998 and 1997, respectively. The
Company expects that editorial expenses will decrease for the balance of 1998
versus 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 $378,000 and $481,000 for the quarters ended
September 30, 1998 and 1997, respectively and $1,262,000 and $1,428,000 for the
nine months then ended. The decrease in production expenses for the third fiscal
quarter and first nine months of 1998 as compared to the same quarter and nine
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 37% of revenue in the third quarter of 1998
compared to 28% 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 $432,000 and $501,000 for the quarters ended September 30,
1998 and 1997, respectively, and $1,427,000 and $1,597,000 for the nine months
then ended. The Company currently capitalizes its circulation development
expenditures and amortizes them over a 12 month period. The decrease of $69,000,
or 14% during the quarter ended September 30, 1998 versus the same period in
1997, is primarily attributable to the smaller amount of circulation development
expenditure amortization included in the third 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 42% of revenues for the third 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 versus 1997 as a result
of the reduction in the number of issues published each quarter.*
- ---------------
* 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 $544,000 and $434,000 for the quarters ended
September 30, 1998 and 1997, respectively, and $1,622,000 and $1,238,000 for the
nine 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 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
40% of revenues for the first nine months of 1998 as compared to 23% of revenues
for the same period of 1997. Sales and marketing expenses represented 53% of
revenue for the third quarter of 1998 as compared to 25% 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
personnel, and higher expenditures associated with the expansion of the NewMedia
INVISION Awards Festival, which included a conference program.*
Product development expenses were $12,000 and $10,000 for the quarters ended
September 30, 1998 and 1997, respectively, and $35,000 and $29,000 for the nine
months then ended, and consisted of costs incurred in the development of new
products, including the Internet World Wide Web site, newmedia.com. The Company
plans to continue its product development efforts during 1998.*
General and administrative expenses were $208,000 and $246,000 for the quarters
ended September 30, 1998 and 1997, respectively, and $711,000 and $699,000 for
the nine months then ended. The increase of $12,000, or 2%, in the first nine
months of 1998 as compared to 1997 was due primarily to increased headcount
expenses. The decrease of $38,000, or 15%, in the third quarter of 1998 as
compared to the same period in 1997 primarily reflects a reduction in outside
services expense, including legal and consulting costs. General and
administrative expenses represented 20% of revenue for the third quarter of 1998
as compared to 14% 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 September 30, 1998, the Company had approximately $1,289,000 in net working
capital and its principal sources of liquidity consisted of approximately
$212,000 in cash, a $1 million line of credit limited to 70% of qualified
accounts receivable. The revolving credit facility is secured by the assets of
the Company and requires the Company to maintain certain quarterly financial
ratios. For the quarters ended June 30, 1998 and September 30, 1998, the Company
was not in compliance with certain financial covenants. However, the Company
obtained a waiver for both quarters and the line of credit remains available to
the Company. No borrowings were outstanding under this agreement at quarter end.
As of November 13, 1998, the Company had $350,000 of borrowings outstanding
under this agreement.
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.*
- ---------------
* 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
<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 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 reports on Form 10-Q for the quarters ended March 31, 1998 and
June 30, 1998.
History of Losses and Accumulated Deficits
The Company has incurred total net losses of $13,062,000 from inception to
September 30, 1998, including a net loss of $734,000 for the quarter ended
September 30, 1998. The Company expects to incur losses for at least the next
quarter 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
11
<PAGE>
$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.* 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 attract advertisements oriented to the
professional market for digital content creation. There can be no assurance that
the Company will be able to attract a sufficient number of advertisements
oriented 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 first quarter
of 1999, 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>
Illiquidity of Trading Market; Possible Delisting of Securities from the Pacific
Exchange; Risk of Penny Stock Status
The Company's Common Stock trades on the OTC Bulletin Board. The Company's
Common Stock is also quoted on the Pacific Exchange. In September 1998, the
Company was delisted from trading on the Nasdaq SmallCap Market. Currently, the
Company is not in compliance with continued listing criteria of the Pacific
Exchange. Specifically, the Company is not in compliance with the net tangible
asset requirements of the Pacific Exchange and the minimum share bid price
requirements of the Pacific Exchange. The Company, therefore, is subject to
possible delisting procedures. The Company will need to raise additional equity
capital or increase net worth through profitability in order to comply with the
Pacific Exchange listing criteria, and there can be no assurance that the
Company will be successful in doing so or that the share bid price of the Common
Stock will increase to $1 or more if the Company is capable of doing so. In such
case, there can be no assurance that the Pacific Exchange will not decide to
initiate delisting proceedings against the Company. If the Company's Common
Stock becomes delisted from the Pacific Exchange, the Company will become
subject to the Commission's "penny stock" rules and therefore an investor will
find it more difficult to dispose of, or to obtain accurate quotations as to the
price of, the Company's securities. The "penny stock" rules under the Securities
Exchange Act of 1934, as amended, also impose additional sales practice and
market making requirements on broker-dealers who sell and/or make a market in
such securities. For transactions covered by the penny stock rules, a
broker-dealer must make special suitability determinations for purchasers and
must have received the purchasers' written consent to the transactions prior to
sale. In addition, for any transaction involving a penny stock, unless exempt,
the rules require delivery prior to any transaction in a penny stock of a
disclosure schedule prepared by the Commission relating to the penny stock
market. Disclosure is also required to be made about commissions payable to both
the broker-dealer and the registered representative and current quotations for
the securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stocks. Consequently, the Company's delisting
from the Pacific Exchange and its becoming subject to the rules on penny stocks
would affect the ability or willingness of broker-dealers to sell and/or make a
market in the Company's securities and therefore would severely adversely affect
the market liquidity for the Company's securities.
Significant Dilutive Effect of Shares Eligible for Future Sale on Market Price
of the Common Stock
As of September 30, 1998, there were an aggregate of 2,092,056 shares of the
Company Common Stock issuable upon the conversion of Series E Preferred Stock
plus additional shares for accrued dividends through the date of conversion, an
aggregate of 82,250 shares of the Company Common Stock issuable upon the
conversion of Series F Preferred Stock, an aggregate of 209,802 shares of the
Company Common Stock issuable upon the conversion of Series G Preferred Stock,
an aggregate of 522,827 shares of the Company Common Stock issuable upon the
conversion of Series H Preferred Stock, an aggregate of 941,120 shares of the
Company Common Stock issuable upon the conversion of Series I Preferred Stock
and an aggregate of 4,384,306 shares of the Company Common Stock issuable upon
the conversion of Series J Preferred Stock. (See Note 3 to the Financial
Statements). All of the common shares issuable upon conversion of the preferred
stock, to the extent that they are eligible for sale in the public market, could
have a materially adverse effect on the market price of the
13
<PAGE>
Company's Common Stock and therefore make it more difficult for the Company to
sell equity securities or equity-related securities in the future at a time and
price that the Company deems appropriate. Additionally, all of the Common Stock
issuable upon conversion of the Preferred Stock has certain registration rights,
which, if exercised, could significantly increase the number of common shares in
the market and could have a material adverse effect on the market price of the
Company's 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.
14
<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 75% of
the outstanding Common Stock (assuming conversion of all outstanding Preferred
Stock into 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. The Company also hired additional advertising
sales personnel in the first and second quarters 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 computer systems and software and electronic 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. In addition, certain systems and products do not correctly process "leap
year" dates. As a result, in the next 14 months, computer systems and software
("IT Systems") and other property and equipment not directly associated with
information systems ("Non-IT Systems"), such as elevators, phones, other office
equipment used by many companies, including the Company's customers and
potential customers of the Company, may need to be upgraded, repaired or
replaced to comply with such "Year 2000" requirements, and "leap year"
requirements.
Although the Company has determined that most of its principal IT Systems are
Year 2000 compliant, certain of such internal systems have not been evaluated by
the Company. The Company has not yet made an assessment of the status of its
Non-IT Systems.
The Company presently estimates that the total cost of addressing their Year
2000 and leap year issues will be immaterial. These estimates were derived
utilizing numerous assumptions, including the assumption that they have already
identified their most significant Year 2000 and leap year issues and that the
plans of its third-party suppliers will be fulfilled in a timely manner without
cost to the Company. However, these assumptions may not be accurate, and actual
results could differ materially from those anticipated.
15
<PAGE>
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.
The Company has not determined the state of compliance of certain third-party
suppliers of services such as phone companies, long distance carriers, financial
institutions and electric companies, the failure of any one of which could
severely disrupt the Company's ability to carry on its business as well as
disrupt the business of the Company's customers. The Company could be affected
through disruptions in the operation of the enterprises with which the Company
interacts or from general widespread problems or an economic crisis resulting
from noncompliant Year 2000 systems. Despite the Company's efforts to address
the Year 2000 effect on its internal systems and business operations, such
effect could result in a material disruption of its business or have a material
adverse effect on the Company's or the Company's business, financial condition
or results of operations. The Company has not developed a contingency plan to
respond to any of the foregoing consequences of internal and external failures
to be Year 2000 and leap year compliant.
16
<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, and John Topping, President and Publisher. 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.
17
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule
(b) No reports on Form 8-K were filed by the Company during
the fiscal quarter ended September 30, 1998.
Items 1,2,3,4 and 5 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: November 13, 1998 HyperMedia Communications, Inc.
By: /s/ Richard Landry
---------------------------------
Richard Landry
President and Chief Executive Officer
(Principal Financial and
Accounting Officer)
19
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