________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 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, 2001
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 333-77455
LIVEWORLD, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0426524
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1919 South Bascom Avenue
Campbell, California 95008
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 871-5200
Former name, former address and former fiscal year, if changed
since last report: Talk City, Inc.
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
-
The number of shares of the Registrant's Common Stock, $0.001 par value,
outstanding at May 15, 2001 was 25,358,874.
________________________________________________________________________________
LIVEWORLD, INC.
FORM 10-Q
INDEX
PAGE NUMBER
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Unaudited Condensed Balance Sheets at March 31, 2001 and December 31, 2000 3
Unaudited Condensed Statements of Operations for the three months ended March
31, 2001 and 2000 4
Unaudited Condensed Statements of Cash Flows for the three months ended March
31, 2001 and 2000 5
Notes to Unaudited Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 9
Item 3. Quantitative and Qualitative Disclosures about Market Risk 23
PART II. OTHER INFORMATION
Item 5. Other Information 23
Item 6. Exhibits and Reports on Form 8-K 24
Signatures 25
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LIVEWORLD, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands)
March 31, December 31,
2001 2000
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 9,356 $ 6,989
Short term investments - 6,980
Accounts receivable, net 1,290 2,580
Prepaid expenses and other current assets 776 1,094
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Total current assets 11,422 17,643
Property and equipment, net 7,421 8,234
Other assets 4,653 6,169
Goodwill, net 2,562 2,733
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Total assets $ 26,058 $ 34,779
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, current portion $ 79 $ 86
Accounts payable 365 1,085
Accrued liabilities 2,745 3,138
Deferred revenue 635 746
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Total current liabilities 3,824 5,055
Notes payable, less current portion - 21
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Total liabilities 3,824 5,076
Stockholders' equity:
Common stock 25 25
Additional paid-in-capital 134,860 135,196
Deferred stock based compensation (72) (223)
Notes receivable from stockholders (174) (172)
Accumulated deficit (112,383) (105,101)
Treasury Stock, 54,687 common shares at cost (22) (22)
------------- -------------
Total stockholders' equity 22,234 29,703
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Total liabilities and stockholders' equity $ 26,058 $ 34,779
============= =============
See accompanying notes to the condensed financial statements.
3
LIVEWORLD, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
Three Months Ended
---------------------------------
March 31, March 31,
2001 2000
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Revenues:
Network and syndication services $ 216 $ 2,053
Community solutions services 786 534
Event services 470 535
Market research services 202 413
------------- -------------
Total revenue 1,674 3,535
Cost of revenue 3,031 3,619
------------- -------------
Gross margin (loss) (1,357) (84)
Operating expenses:
Product development 1,577 1,765
Sales and marketing 1,192 4,934
General and administrative 1,992 3,051
Restructuring charges 207 -
Noncash advertising and promotional charges 1,015 718
Amortization of goodwill 171 171
Total operating expenses 6,154 10,639
------------- -------------
Loss from operations (7,511) (10,723)
Interest income, net 229 721
------------- -------------
Net loss $ (7,282) $ (10,002)
============= =============
Basic and diluted net loss per common share $ (0.29) $ (0.41)
============= =============
Weighted average basic and diluted common shares
outstanding 25,017 24,530
============= =============
See accompanying notes to the condensed financial statements.
4
LIVEWORLD, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Three Months Ended
-----------------------------
March 31, March 31,
2001 2000
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Cash flows from operating activities:
Net loss $ (7,282) $ (10,002)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,135 861
Loss on sale of property and equipment - 15
Stock compensation expense (188) 78
Noncash advertising and promotional charges 1,015 717
Provision for accounts receivable allowance 150 60
Changes in operating assets and liabilities:
Accounts receivable 1,140 (253)
Prepaid expenses and other current assets 318 944
Accounts payable (720) (1,060)
Accrued liabilities (392) 678
Deferred revenue (111) 419
------------ -------------
Net cash used in operating activities (4,935) (7,543)
------------ -------------
Cash flows from investing activities:
Purchases of property and equipment (151) (3,392)
Proceeds from sale of property and equipment - 19
Cash paid for acquisition of Research Connections, Inc.,
net of cash acquired - (417)
Purchases of short-term investments - (4,285)
Proceeds from sale of short-term investments 6,980 27,280
Other assets 501 (1,500)
------------ -------------
Net cash provided by (used in) used in investing activities 7,330 17,705
------------ -------------
Cash flows from financing activities:
Proceeds from stock option and warrant exercises - 842
Proceeds from repayment of stockholders' notes receivable - 9
Repayment of notes payable (28) (36)
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Net cash provided by (used in) financing activities (28) 815
------------ -------------
Net increase (decrease) in cash and cash equivalents 2,367 10,977
Cash and cash equivalents at beginning of period 6,989 14,112
------------ -------------
Cash and cash equivalents at end of period $ 9,356 $ 25,089
============ =============
Cash paid during the period for interest $ 1 $ 13
============ =============
Supplemental disclosure of noncash financing activities:
Common stock issuance for acquisition of Research Connections, Inc. $ - $ 3,000
============ =============
See accompanying notes to the condensed financial statements.
5
LIVEWORLD, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements have been prepared by LiveWorld, Inc.,
pursuant to the rules and regulations of the Securities and Exchange Commission
and include the accounts of LiveWorld, Inc. ("LiveWorld" or the "Company").
Certain information and footnote disclosures, normally included in financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to such rules and regulations. In the
opinion of the Company, the unaudited financial statements reflect all
adjustments, consisting only of normal recurring adjustments except as described
in Note 3 and Note 10, necessary for a fair presentation of the financial
position at March 31, 2001 and the operating results and cash flows for the
three months ended March 31, 2001 and 2000. The condensed balance sheet at
December 31, 2000 has been derived from audited financial statements as of that
date. Certain reclassifications have been made to the prior period's financial
statements to conform to the March 31, 2001 presentation. These financial
statements and notes should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
April 2, 2001.
The results of operations for the three months ended March 31, 2001 are not
necessarily indicative of the results that may be expected for future quarters
or the year ending December 31, 2001.
We believe that our available cash and cash equivalents will be sufficient
to meet our anticipated needs for working capital and capital expenditures for
at least the next six months. Thereafter, we may need to raise additional funds
in order to meet our operational needs, to fund expansion, to develop new or
enhance existing services or products, to respond to competitive pressures, or
to acquire or invest in complementary businesses, technologies, services or
products. In addition, in order to meet our long term liquidity needs, we may
need to raise additional funds, establish a credit facility or seek other
financing arrangements. Additional funding may not be available on favorable
terms or at all.
The Company's financial statements have been prepared assuming that the
Company will continue as a going concern. Recovery of the carrying amounts of
certain assets, including property, equipment and goodwill, is dependent on
obtaining additional capital.
2. NATURE OF OPERATIONS
LiveWorld was incorporated in the state of California in March 1996 and
reincorporated in the state of Delaware in July 1999. LiveWorld is a provider
of online marketing services for businesses. The Company offers businesses a
wide range of services to help them develop and expand online relationships with
customers, suppliers and employees. These services include designing fully
integrated customized communities, producing online interactive events,
conducting online market research and providing outsourced chat and event feeds
through advertising and network services. As part of its network services, the
Company operates a network of online communities located at www.talkcity.com.
----------------
These communities offer services such as moderated chat, home pages, special
event production, message boards and online event guides. The Company generates
revenues by selling its online marketing services to corporations of various
sizes within several industries. LiveWorld has incurred operating losses since
inception through March 31, 2001. The Company had an accumulated deficit of
$112.4 million at March 31, 2001. On May 8, 2001 the Company formally changed
its name from Talk City, Inc. to LiveWorld, Inc.
3. ACQUISITION OF RESEARCH CONNECTIONS, INC.
On January 3, 2000, the Company acquired Research Connections, Inc.
("RCI"), a privately-held online market research company. The Company paid
$500,000 in cash and issued 242,424 shares of its Common Stock, with an
approximate fair market value of $3 million, in exchange for all outstanding
shares of RCI. The cash consideration of $500,000 was due as follows: $250,000
was paid on January 3, 2000; $125,000 was paid on April 3, 2000; and $125,000
was paid on July 3, 2000. In addition, contingent cash consideration of $1.5
million, subject to an employment agreement with the former sole shareholder of
RCI, was placed into an escrow fund and recorded as restricted cash in Other
Assets. Funds are released over four years with $375,000, or 25%, having been
released on January 3, 2001 and the remainder released evenly over the following
36 months. In the event the shareholder is terminated for cause or voluntarily
leaves employment of the Company, then all remaining cash in the escrow fund
shall be forfeited to the Company and the shareholder will have no further right
to such cash. The Company records the cash consideration as compensation expense
as the funds are released from escrow.
-6-
The Company accounted for the acquisition of RCI pursuant to the purchase
method of accounting. Thus, the results of operations of RCI and the fair value
of the assets acquired and liabilities assumed were included in the Company's
financial statements beginning on the acquisition date. The allocation of the
purchase price of $3.5 million resulted in cash and other assets of
approximately $100,000 and goodwill of approximately $3.4 million, which was
capitalized and is being amortized on a straight-line basis over five years.
4. ADVERTISING AND OPERATING AGREEMENTS
On April 15, 1999, certain advertising and operating agreements with the
National Broadcasting Company, Inc. ("NBC") and Hearst Communications, Inc.
("Hearst") were amended to effect the immediate issuance of warrants and shares
of Preferred Stock as follows:
. 600,000 shares of Series D Preferred Stock ("Series D Stock") and warrants
to purchase 266,667 shares of Series D Stock pursuant to the NBC
advertising agreement dated August 21, 1998;
. 750,000 shares of Series D Stock pursuant to the Hearst advertising
agreement dated October 30, 1998;
. A warrant to purchase 375,000 shares of Common Stock in exchange for and
upon cancellation of the previous warrant issued to NBC pursuant to the
operating agreement dated February 27, 1998; and
. A warrant to purchase 130,556 shares of Series D Stock in exchange for and
upon cancellation of the previous warrant issued to NBC pursuant to the
advertising agreement dated August 21, 1998.
All the warrants and Preferred Stock issued pursuant to the above are
noncancelable and nonforfeitable. Accordingly, the fair market value of these
instruments was measured and fixed on the date of their respective issuance. The
fair market value was recorded in Other Assets and is being charged to
operations as the advertisements are run. The fair market values attributable to
the amended NBC and Hearst agreements were based on the fair value of the Series
E Redeemable Convertible Preferred Stock issued at $8.00 per share on April 15,
1999. As of March 31, 2001, of the $4.7 million in Other Assets, $1.2 million
relates to the advertising and operating agreements and will continue to be
charged to operations as the related advertising is run or amortized over the
remaining term of the respective operating agreements. Of the $1.2 million,
approximately $800,000 relates to the Hearst advertising agreement and
approximately $400,000 relates to the NBC operating agreements. The Company
incurred noncash advertising and promotional charges of approximately $1.0
million for the quarter ended March 31, 2001.
In connection with the Company's Initial Public Offering, effective July
19, 1999 (the "IPO"), the Preferred Stock issued in the above arrangements was
converted to Common Stock at their respective ratios. In addition, the warrants
are exercisable into shares of Common Stock, determined based on the respective
conversion ratios.
-7-
5. ACCRUED LIABILITIES
Accrued liabilities consist of: March 31, December 31,
2001 2000
--------------- ----------------
(In thousands)
Accrued compensation and benefits $ 925 $1,375
Accrued general and administrative expenses 525 562
Accrued rent 393 350
Accrued sales and marketing expenses 356 321
Accrued moderator expenses 150 300
Other accrued liabilities 396 230
--------------- ----------------
$2,745 $3,138
=============== ================
6. SEGMENT REPORTING
The Company has one operating segment because it is not organized by
multiple segments for purposes of making operating decisions or assessing
performance. This operating segment is comprised of four main areas of online
business, including (i) live event services, (ii) market research services,
(iii) community solutions and (iv) network and syndication services. The chief
operating decision maker evaluates performance, makes operating decisions and
allocates resources based on financial data consistent with the presentation in
the accompanying financial statements.
The Company's operations and assets are based in the United States, and its
revenues have substantially all been earned from customers in North America. For
the three months ended March 31, 2001 one of the Company's clients was
responsible for $280,000 or 18% of its revenue. Total receivables from this
client were $93,000 on March 31, 2001. Another customer was responsible
$196,000, or 13% of its revenue. Total receivables from this client was $0.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the three months ended March 31, 2001 and 2000
equaled the net loss.
8. NET LOSS PER COMMON SHARE
Diluted net loss per common share does not include the effects of the
following potentially dilutive securities as of March 31, 2001 and 2000:
March 31, March 31,
2001 2000
----------------- -----------------
(In thousands)
Common Stock Options 6,969 2,468
Common Stock Warrants 991 991
Unvested Common Stock Subject to Repurchase 3 264
----------------- -----------------
7,963 3,723
================= =================
The average exercise price of the Common Stock Options was $3.32 and $4.11
as of March 31, 2001 and March 31, 2000, respectively. The average exercise
price of the Common Stock Warrants was $5.83 as of March 31, 2001 and 2000.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
-8-
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative financial instruments and
hedging activities and requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure them at fair
value. Gains and losses resulting from changes in fair value would be accounted
for depending on the use of the derivative and whether it is designated and
qualifies for hedge accounting. In June 1999, the FASB issued SFAS 137, which
defers the implementation of SFAS 133. In June 2000, the FASB issued SFAS 138,
which amends SFAS 133 with regards to specific hedging risks, foreign-currency-
dominated assets and liabilities, and inter-company derivatives. This statement
was effective for the Company beginning January 1, 2001. The adoption of SFAS
No. 133 did not have a material effect on its results of operations, financial
position or cash flows.
10. RESTRUCTURING CHARGES
In March 2001, the Company underwent a restructuring of operations to more
clearly focus LiveWorld as an online marketing services provider. As a result
of the restructuring, the Company reduced its total headcount by 40 employees,
or approximately 30% of its total workforce. The Unaudited Condensed Statement
of Operations for the three months ended March 31, 2001 includes a charge of
approximately $207,000, related to the restructuring. Such amount consists of
approximately $207,000 for employee severance. Substantially all liabilities
related to the restructuring were paid as of March 31, 2001.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. These forward-looking statements
-9-
represent our expectations or beliefs concerning future events and include
statements regarding our expectations or beliefs that: we will focus 100% on our
core fee-for-services business; we expect to exit the advertising and
sponsorship business, whether by partnering with another company or by selling
or otherwise divesting ourselves of our advertising network; product development
expenses will decrease as the impact of our restructurings is realized; sales
and marketing expenses will remain constant or decrease slightly in absolute
dollars; general and administrative costs will decrease; and our available cash
and cash equivalents will be sufficient to meet our anticipated needs for
working capital and capital expenditures for at least the next six months.
Actual results could differ materially from those projected in the forward-
looking statements as a result of known and unknown risk factors and
uncertainties, and you should not rely on these forward-looking statements. Such
factors may include, but are not necessarily limited to: whether we will
continue to incur significant losses; our ability to generate increased
revenues; the success of our recent restructuring; the feasibility of incurring
more dilution by selling equity in our Company; our ability to increase the
number of online marketing services clients, expand our online marketing
services offerings and effectively implement these services; our ability to
maintain or improve the number or quality of network participants and customers;
and attracting and retaining key personnel. In addition to the foregoing, please
see the section in this report entitled "Risk Factors That May Affect Results of
Operations and Financial Condition" for a description of other factors that
might cause actual results to differ from those projected in the forward-looking
statements herein. LiveWorld does not undertake any obligation to publicly
update any forward-looking statement to reflect events or circumstances after
the date on which any such statement is made or to reflect the occurrence of
unanticipated events.
The following discussion of financial condition and results of operations
of the Company should also be read in conjunction with the financial statements
and notes thereto and "Risk Factors That May Affect Results of Operations and
Financial Condition," both of which are included elsewhere in this report.
Overview
We provide online communities and customer relationship management for
businesses and consumers. From inception through March 2001, our operating
activities have primarily been focused on:
. developing the quality environment of our services;
. expanding the audience and usage of our services;
. establishing operating relationships with our network participants;
. building sales momentum and developing programs and content;
. developing a comprehensive computer software and hardware
infrastructure;
. recruiting personnel; and
. raising capital.
Substantially all of our revenues are derived from the sale of our online
marketing services. We are pursuing a strategy to focus 100% on our core fee-
for-services business, and as such, we expect to exit the advertising and
sponsorship business, whether by partnering with another company or by selling
or otherwise divesting ourselves of our advertising network. Our online
marketing services include designing customized communities, producing online
events, conducting online market research and facilitating online meetings.
These services help businesses develop and expand online relationships with
customers, suppliers and employees. Revenues derived from online marketing
services are recognized ratably over the term of the contract period, which
coincides with when the services are performed, provided that the collection of
the receivable is probable.
Advertising and sponsorship revenues are derived from two sources.
Advertising revenues generally come from short-term banner advertisement
contracts. Sponsorship revenues come from contracts under which we offer a
combination of custom programming, prominent logo placement, other onsite
promotions and additional banner ads. Our advertising and sponsorship clients
enter into short-term agreements pursuant
-10-
to which they generally receive a guaranteed number of advertising impressions
on our site. Advertising and sponsorship revenues are recognized in the period
in which the advertisement is displayed or the sponsorship event is run,
provided that no significant obligations remain, at the lesser of the ratio of
impressions delivered over total guaranteed impressions or on a straight-line
basis over the term of the contract. In some cases, where we contract with third
party sales representative firms to sell advertising revenues, we recognize
revenues net of the commissions paid.
Cost of revenues includes payroll and related expenses associated with
content and production personnel who conduct online market research, implement
customized communities, and produce online events. Also included are moderator
costs, Internet communication charges and server-related costs to support our
Web site.
Operating expenses consist primarily of product development, sales and
marketing, general and administrative and interest expenses. Product development
expenses consist primarily of salaries, payroll taxes and benefits and
expenditures related to software development, quality engineering and product
marketing. Sales and marketing expenses consist primarily of advertising and
promotion costs, salaries, commissions and other related costs of internal sales
and marketing personnel and program expenses, public relations costs and other
marketing expenses. General and administrative expenses consist of salaries,
payroll taxes and benefits and related costs for general corporate functions,
including executive management, finance, human resources, facilities, legal and
fees for other professional services.
Sales and marketing expenses exclude noncash advertising and promotional
charges related to our advertising on the NBC television network and in
magazines owned by Hearst along with promotional services attributable to the
operating agreements with NBC. These advertising activities are paid for through
noncash in-kind investments. This in-kind program includes $7.2 million of
television commercials and print ads valued at rates discounted from the rate
card to be incurred from 1998 through 2001. After March 31, 2001, noncash
charges of $1.2 million will be charged to operations as the related advertising
is run, promotional services are received, or the term of the agreement expires,
all of which we expect will be charged to operations during the year ended
December 31, 2001. These amounts were determined based on the fair value of our
common stock and warrants exchanged for the services received.
We incurred losses of $1.3 million in 1996, $6.4 million in 1997, $15.7
million in 1998, $40.1 million in 1999, $41.6 million in 2000, and $7.3 million
through the first three months of 2001. These losses include noncash advertising
and promotional charges of $17.4 million through March 31, 2001. At March 31,
2001, we had an accumulated deficit of $112.4 million. We anticipate that we
will incur additional operating losses for the foreseeable future.
In March 2001, we underwent a restructuring of operations to more clearly
focus LiveWorld as an online marketing services provider. As a result of the
restructuring, we reduced our total headcount by 40 employees, or approximately
30% of its total workforce. The Unaudited Condensed Statement of Operations for
the three months ended March 31, 2001 includes a charge of approximately
$207,000, related to the restructuring. Such amount consists of approximately
$207,000 for employee severance. Substantially all liabilities related to the
restructuring were paid as of March 31, 2001.
-11-
Results of Operations
The following table sets forth, for the periods indicated, the percentage of
net revenue represented by certain items reflected in LiveWorld's Condensed
Financial Statements:
Three Months Ended
March 31,
--------
2001 2000
----- -----
Net revenue 100% 100%
Cost of revenue 181 102
----- -----
Gross margin (81) (2)
Operating expenses:
Product development 94 50
Sales and marketing 72 140
General and administrative 119 86
Restructuring charges 12 --
Noncash advertising and promotional charges 61 20
Amortization of goodwill 10 5
----- -----
Total operating expenses 368 301
----- -----
Operating loss (449) (303)
Interest income, net 14 20
----- -----
Net loss (435)% (283)%
===== =====
Net Revenue. Net revenue decreased 53% to approximately $1.7 million for
the three months ended March 31, 2001 from $3.5 million for the three months
ended March 31, 2000, a decrease of approximately $1.8 million. This decrease
was primarily the result of decreased advertising sales as the Company shifted
the focus of the business to a fee-based services model. Substantially all of
LiveWorld's revenue is derived within North America.
Cost of Revenue. Cost of revenue was $3.0 million, or 181% of total
revenue, for the three months ended March 31, 2001 compared to $3.6 million, or
102% of total revenue, for the three months ended March 31, 2000. Cost of
revenue decreased in absolute dollars by $588,000 compared to the same period in
the prior years primarily from lower personnel-related costs, resulting from the
reductions in headcount stemming from the recent restructurings.
Product Development. Product development expenses for the three months
ended March 31, 2001 and 2000 were approximately $1.6 million, or 94% of total
revenue, and $1.8 million, or 50% of total revenue, respectively. The decrease
in absolute dollars was primarily attributable to lower personnel-related costs
as the impact from the restructurings was more fully realized. LiveWorld
expects that product development expenses will decrease for the foreseeable
future as the impact of the March 2001 restructuring is more fully realized.
Sales and Marketing. Sales and marketing expenses for the three months
ended March 31, 2001 and 2000 were approximately $1.2 million, or 72% of total
revenue, and approximately $4.9 million, or 140% of total revenue, respectively.
The decrease in absolute dollars in sales and marketing expenses for the quarter
was primarily attributable to a decrease in online advertising expenses.
LiveWorld expects that sales and marketing expenses will remain constant or
decrease slightly in absolute dollars in the foreseeable future.
General and Administrative. General and administrative expenses for the
three months ended March 31, 2001 and 2000 were approximately $2.0 million, or
119% of total revenue, and $3.1 million, or 86% of
-12-
total revenue, respectively. The decrease in general and administrative costs
was primarily attributable to a reduction in headcount. LiveWorld expects that
general and administrative costs will decrease in the future.
Noncash Advertising and Promotional Charges. Noncash advertising and
promotional charges for the three months ended March 31, 2001 and 2000 were $1.0
million, or 61% of total revenue, and $718,000, or 20% of total revenue,
respectively. The increase in noncash and promotional charges for the three
months ended March 31, 2001 was primarily due to increased amortization of
advertising provided under the Hearst advertising agreement.
Amortization of Goodwill. The Company recorded amortization of $171,000 in
the three months ended March 31, 2001 and 2000. This amortization was recorded
in connection with the acquisition of RCI in January 2000. The goodwill of
approximately $3.4 million related to this acquisition is being amortized over
the expected period of benefit of five years.
Interest Income, Net. Interest income, net, includes income from
LiveWorld's cash and investments and expenses related to its equipment financing
obligations. Interest income, net, for the three months ended March 31, 2001
and 2000 was approximately $229,000 and $721,000, respectively. The reduction
in interest income, net, resulted from declining interest income on lower cash,
cash equivalent and short-term investment balances for the three months ended
March 31, 2001.
Income Taxes. FASB Statement No. 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. Based
upon historical operating performance and the reported cumulative net losses in
all prior years, LiveWorld has provided a full valuation allowance against its
net deferred tax assets. The Company evaluates the realizability of the deferred
tax assets on a quarterly basis.
Restructuring. Pursuant to the March 16, 2001 restructuring, and the
associated reduction in workforce of 40 employees, or approximately 30% of the
total workforce, the Unaudited Condensed Statement of Operations for the three
months ended March 31, 2001 includes a charge of approximately $207,000. This
charge is comprised of costs for employee severance. Substantially all
liabilities related to the restructuring were paid as of March 31, 2001. Such
restructuring charges represent 12% of revenue for the three months ended March
31, 2001. There was no similar charge in the same period in 2000. We cannot be
certain that additional expenditures or charges will not be required in the
future. In addition, LiveWorld cannot be certain that its restructuring will be
successfully accepted or adopted by the market, including its current investors
or security analysts, the Company's current or potential business or consumer
clients, the Company's current or potential network participants, or its current
or potential advertisers. If the restructuring is not accepted or adopted by
parties above, among others, our business could be adversely affected.
Liquidity and Capital Resources
Since our inception in March 1996, we have financed our operations
primarily through the private placement of our preferred stock, our initial
public offering in July 1999 and, to a lesser extent, through equipment
financing. As of March 31, 2001, we had approximately $9.4 million in cash and
cash equivalents.
Our capital requirements depend on numerous factors, including market
acceptance of our services, the resources we allocate to our community network,
marketing and selling our services, brand promotions and other factors. We have
experienced substantial increases in our expenditures since inception consistent
with growth in our operations and personnel. Additionally, we will continue to
evaluate possible acquisitions of and investments in complementary businesses,
technologies, services or products and to expand our sales and marketing
programs. We believe that our available cash and cash equivalents will be
sufficient to meet our anticipated needs for working capital and capital
expenditures for at least the next six months. Thereafter, we may need to raise
additional funds in order to meet our operating needs, to fund expansion, to
develop new
-13-
or enhance existing services or products, to respond to competitive pressures,
or to acquire or invest in complementary businesses, technologies, services or
products. In addition, in order to meet our long term liquidity needs, we may
need to raise additional funds, establish a credit facility or seek other
financing arrangements. Additional funding may not be available on favorable
terms or at all.
Net cash used in operating activities was approximately $4.9 million and
$7.5 million for the three months ended March 31, 2001 and 2000, respectively.
Cash used in operating activities in each of these periods was primarily the
result of net operating losses excluding the effects of noncash advertising
expenses as well as depreciation and amortization.
Net cash provided by investing activities was approximately $7.3 million
and $17.7 million for the three months ended March 31, 2001 and 2000,
respectively. Cash provided by investing activities for the three months ended
March 31, 2001 consisted of approximately $7.0 million in sales of short-term
investments partially offset by approximately $151,000 in purchases of
equipment.
Net cash used in financing activities was approximately $28,000 for the
three months ended March 31, 2001. Net cash provided by financing activities
was $815,00 for the three months ended March 31, 2000. Net cash used in
financing activities for the three months ended March 31, 2001 consisted of
principal payments on notes payable.
As of March 31, 2001, the Company's principal commitments consisted of
obligations outstanding under operating leases. In October 1999, the Company
signed a nine-year, three and one-half month lease for a new 56,000 square foot
corporate headquarters in Campbell, California, which commenced on December 15,
1999. The Company is required to provide a $2,100,000 letter of credit as
security for the lease. Under the lease agreement, the letter of credit may be
reduced by $300,000 per year after every twelve months through December 14,
2005, provided no default has occurred. As of March 31, 2001, a $1,800,000
certificate of deposit with a one year maturity is held as collateral by a bank
for guarantee of the letter of credit. The certificate of deposit is included
in Other Assets. Future minimum lease payments under all non-cancelable
operating leases total approximately $15.3 million as of March 31, 2001.
In May 1998, LiveWorld obtained an equipment line of credit with a
financial institution in the amount of approximately $2.0 million. This line of
credit is secured by the Company's fixed assets and has a four-year term that
expires in April 2002. As of March 31, 2001, the amount outstanding under this
line of credit was approximately $79,000.
Risk Factors That May Affect Results of Operations and Financial Condition
LiveWorld will need substantial additional capital to fund continued business
operations in 2001 and 2002 and LiveWorld cannot be sure that additional
financing will be available.
LiveWorld requires substantial amounts of capital to fund its business
operations. The rate at which LiveWorld's capital is utilized is affected by
the operational and developmental costs incurred and the extent to which
LiveWorld becomes profitable on a cash-flow basis. To date LiveWorld has not
been profitable on a cash-flow basis and substantial capital has been used to
fund the operating losses. LiveWorld cannot assure you that it will operate at
or near levels that are necessary to become profitable on a cash-flow basis.
Since inception, LiveWorld has experienced negative cash flow from operations
and expects to experience significant negative cash flow from operations for the
near future.
LiveWorld continues to evaluate alternative means of financing to meet its
needs on terms that are attractive to LiveWorld. LiveWorld currently
anticipates that its available funds will be sufficient to meet its projected
needs to fund operations for the next six months. LiveWorld expects that it
will need to raise
-14-
additional capital to fund operations during the fourth quarter of 2001. From
time to time LiveWorld has considered and discussed various financing
alternatives and expects to continue such efforts to raise additional funds to
support its operational plan for 2001 and beyond. LiveWorld cannot be certain
that additional financing will be available to it on favorable terms when
required, or at all. The report of LiveWorld's independent auditors in its Form
10-K filed with the SEC on April 2, 2001, contains a statement expressing
substantial doubt regarding LiveWorld's ability to continue as a going concern.
If LiveWorld is not able to obtain such capital, it will take actions to
conserve its cash balances, including, significantly reducing its operating
expenses, downsizing its corporate headquarters staff and closing existing
facilities, all of which could have a material adverse effect on its business,
financial condition and LiveWorld's ability to reduce losses or generate
profits. For example, in June 2000, December 2000 and March 2001, LiveWorld
underwent a number of different restructurings.
In the past, LiveWorld has funded its operating losses and capital
expenditures through proceeds from equity offerings and, to a lesser extent,
proceeds from debt financing and equipment leases. Changes in equity markets in
the past year have adversely affected LiveWorld's ability to raise equity
financing and have adversely affected the markets for debt financing and
equipment leasing for companies with a history of losses such as LiveWorld. If
LiveWorld raises additional funds through the issuance of equity, equity-linked
or debt securities, those securities may have rights, preferences or privileges
senior to those of the rights of its common stock and, in light of LiveWorld's
current market capitalization, LiveWorld's stockholders may experience
substantial dilution.
LiveWorld's common stock was recently delisted from Nasdaq, which could result
in a decrease in liquidity of our stock
LiveWorld common stock was recently delisted from trading on the Nasdaq
National Market due to a failure to comply with the required $1.00 minimum bid
price, and it now trades on the over-the-counter bulletin board market under the
symbol TCTY.OB. This delisting could result in significantly decreased
liquidity for LiveWorld stock, making it much more difficult to purchase or sell
LiveWorld stock or obtain accurate quotations as to the price of the Company's
securities.
LiveWorld's stock price has traded far below the initial offering price and
could remain at this low price, which could affect its ability to acquire other
companies, leave it vulnerable to take over attempts and result in securities
class action litigation
Since LiveWorld's initial public offering ("IPO") in July 1999, the market
price of its common stock has traded at or significantly below the initial
offering price of $12.00 per share, and has traded below $1.00 continuously
since October 2000. If the price per share does not increase, the Company's
investors may incur a substantial loss on their investment. In addition, the
sustained depression of the market price of its common stock may hamper the
Company's ability to conduct business, and in particular, could make it more
difficult to pursue acquisitions of potential complementary businesses, leaving
it vulnerable to a hostile takeover and result in securities class action
litigation.
LiveWorld's stock price may continue to be depressed due to broad economic,
market and industry factors beyond its control
LiveWorld's stock price may continue to be depressed due to a variety of
factors, including factors beyond its control. These broad market and industry
factors could continue to harm the market price of its Common Stock, regardless
of the Company's performance. These factors include:
. announcements of or new programming by the Company or its competitors,
including the Company's announcement of its restructurings;
. conditions or trends in the Internet services industry;
-15-
. changes in the market valuations of Internet companies;
. additions or departures of key personnel; and
. sales of substantial amounts of its Common Stock or other securities in
the open market.
General political and economic conditions, such as recession or interest
rate or currency rate fluctuations, also could harm the market price of the
Company's Common Stock.
If the recent restructurings of LiveWorld, designed to increase awareness of and
refocus the Company's business on online marketing services, are not accepted,
the Company's results of operations may decrease and the business may be
adversely affected
In June 2000, the Company underwent a restructuring of operations to more
clearly focus LiveWorld as an online marketing services provider, pursuant to
which it reorganized its business into four main areas of operations, which
include online live events services, market research services, community
solutions, and network and syndication services. As a result of the June
restructuring, the Company reduced its total headcount by 35 employees, or
approximately 15% of its total workforce. In December 2000, the Company
underwent a separate restructuring to further align the Company to sell and
implement fee-based services. As a result of the December restructuring, the
Company reduced its total headcount by 55 employees, or 30% of the total
workforce. On March 16, 2001, the Company announced a further restructuring to
recognize changes in the economic environment and complete its transition to a
100% fee-based marketing services model, including a reduction of its total
headcount by 30%. If the restructurings do not increase awareness or generate
sales of the Company's online marketing services at the level it anticipates, or
at all, the Company's management and other resources will have been expended
with no increase in revenues, which could decrease its results of operations,
and otherwise adversely affect the business.
The reductions in workforce related to the restructurings could result in market
uncertainty and decreased employee morale
The reductions in workforce of LiveWorld related to the restructurings
could result in market concerns about the operations of the Company. Reductions
in workforce sometimes result in operational concerns about a company in the
market and, while the Company's reductions were in connection with the
restructurings, the Company may not be able to respond adequately to reports of
securities analysts or the market. In addition, the Company must take the
appropriate steps to sustain and prevent any decrease in employee morale due to
the reductions in workforce.
Fluctuations in quarterly operating results may cause the stock price to decline
The Company's operating results in one or more future quarters may be below
the expectations of its investors, and as a result the price of its Common Stock
could decline. LiveWorld expects that its quarterly operating results will
continue to fluctuate significantly and be affected by many factors, the more
important of which include:
. general economic conditions;
. its dependence on increased online marketing services revenues;
. the length of its sales cycle;
. its ability to increase its audience of loyal, engaged clients and
consumers;
. management of growth; and
. potential technical difficulties or system down time affecting the
Internet generally or the Company specifically.
These factors are described in more detail in the risk factors described
below. Many of these factors are beyond the Company's control.
-16-
LiveWorld's growth will depend on its ability to increase its online marketing
services revenues
LiveWorld has derived, and will continue to derive, a substantial portion
of its revenues from the sale of online marketing services. If the Company does
not continue to develop online marketing services revenues, its revenues may not
meet its expectations or may decline and LiveWorld will need to revise its
revenue model to reflect this. The Company's growth and future success will
depend on its ability to increase the number of its online marketing services
clients, expand its online marketing services offerings, effectively implement
these services and increase the average revenue per project and per client.
LiveWorld's ability to generate significant online marketing services revenues
will also depend, in part, on its ability to create new online marketing
services offerings without diluting the value of its existing programs.
Current and potential competitors could decrease LiveWorld's market share and
harm its business
Increases in the number of Web sites competing for the attention and
spending of businesses, consumers and advertisers could result in price
reductions, reduced margins or loss of market share, any of which could decrease
LiveWorld's revenues and contribute to the Company not achieving profitability
and failing. The barriers to entry in the Internet services market are low and
the Company expects the number of its competitors to increase. Any company or
individual can establish and maintain a Web site for minimal cost. LiveWorld
competes for business clients with numerous companies, including Prospero
Technologies Corporation, Yahoo Broadcast, PeopleLink and Participate.com.
Year to year revenue growth in past periods may not be indicative of future
growth
The Company achieved significant revenue growth in 2000 as compared to
1999, although the Company experienced sequential declines in quarterly revenue
from Q2 of 2000 through Q1 of 2001. Accurate predictions of future growth are
difficult because of its limited operating history as well as of the rapid
changes in its markets as a result of increased competition, evolving technology
and clients' business requirements. Accordingly, current and potential investors
should not rely on past revenue growth as a prediction of future growth.
LiveWorld's variable sales cycle may cause the Company to incur substantial
expenses and expend management time without generating the corresponding
revenues, which would slow its cash flow
LiveWorld's sales cycle varies in length of time. During the sales cycle,
the Company may expend substantial funds and management resources without
generating corresponding revenues. The time between the date of its initial
contact with a potential client and the execution of a contract with that client
typically ranges from a few weeks for smaller agreements to several months for
larger agreements. Its sales cycle is also subject to delays as a result of
factors over which the Company has little or no control, including the
following:
. budgetary constraints;
. internal acceptance reviews;
. the success and continued internal support of advertisers', online
marketing services clients' and network participants' own development
efforts; and
. the possibility of cancellation or delay of projects by advertisers,
online marketing services clients or network participants.
The length and uncertainty of its sales cycle also may harm its billing and
collection efforts. The length of the sales cycle might prevent the Company
from rendering its services on a more accelerated basis, which slows its cash
flow and reduces its ability to fund the expenditures the Company incurs during
the sales cycle.
-17-
LiveWorld depends on the clients of its online marketing services, including
business clients, advertisers, network participants and end users of its
network, for content, promotion and sustaining an engaged audience, and if its
clients or users become dissatisfied or do not become engaged with its services,
the Company would need to increase its expenditures for these activities
LiveWorld depends largely on clients of its online marketing services,
including business clients, advertisers, network participants and end users of
its network, for content, word-of-mouth promotion and for sustaining an involved
audience for its advertisers and business clients. If such clients or users
become dissatisfied or do not become engaged with its services, they will not
generate significant content or promote its Web sites or services and the
Company will have to increase the expenditure of its own resources for these
activities. In addition, dissatisfied or disengaged clients or users would not
continue to attract other clients or users to the Company's sites. Loss of its
clients or users and failure to increase its number of engaged clients or users
would hurt the Company's efforts to generate increased revenues. The Company's
clients or users may become dissatisfied with its services as a result of the
increased focus on commercialization of its services due to their continued
exposure to advertising activities on its Web sites or the use of their
information for commercial purposes. LiveWorld's clients or users may also
become dissatisfied with its services if the Company experiences system failures
or does not maintain its structured environment, attract quality business
clients, or continually upgrade its software functionality.
LiveWorld relies on WebTV Network for a substantial amount of traffic on its
advertising network and, to a lesser extent its revenue, and if its contract
with WebTV Network were terminated, the Company would need to replace this
volume and revenue through other sources
In July 2000, LiveWorld renewed its contract with WebTV Network for a term
of one year, expiring in July 2001. If this contract were to be terminated or
not renewed, the Company could lose as much as 30% of the traffic on its
advertising network. The Company would need to replace this volume with volume
from its other network participants, through the growth of its own Web sites, or
with volume generated through other means, such as increased marketing, any of
which would result in an unexpected diversion of management efforts or increased
operating expenses. In addition, if LiveWorld were unable to replace this
volume, the Company might be unable to replace its advertising and sponsorship
revenues generated by WebTV Network, which, for the twelve months ended December
31, 2000, were 14% of all advertising and sponsorship revenues.
LiveWorld's growth will depend upon the acceptance of the Internet as an
attractive medium for its online marketing services clients
LiveWorld's current and potential business clients must accept the Internet
as an attractive and sustainable substitute medium for the traditional methods
to which they are accustomed. The market for online marketing services may not
continue to develop and may not be sustainable. The Internet, as an online
marketing services solution, has not been available for a sufficient period of
time for the Company to gauge its effectiveness as compared with traditional
methods, such as trade shows, phone and mail surveys and video conferencing.
LiveWorld depends on its trained community leaders and moderators to engage its
users and maintain its structured and moderated environment
LiveWorld depends on its network of trained community leaders and
moderators, which consisted of approximately 1,150 active individuals as of
March 31, 2001, to draw its users into its services and maintain its structured
and moderated environment. Most of its trained community leaders and moderators
are volunteers. These people volunteer because they like to meet and help
people from all over the world, enjoy the recognition they receive in a
"leadership" position and generally have fun participating in such a novel form
of communication. As the Internet evolves and online communication becomes more
common, the
-18-
Company's trained community leaders and moderators may view moderating as less
exciting or less of a novelty than it is now. Loss of its trained community
leaders and moderators, or loss of its ability to attract these individuals to
its services, could require the Company to implement new programs to engage its
users and maintain its structured environment. The implementation of these new
programs would cause the Company to expend unexpected management time and
resources, which would increase its operating expenses.
LiveWorld's paid moderators could be viewed as employees rather than independent
contractors, which could subject the Company to adverse tax and employee benefit
consequences
LiveWorld treats its paid moderators, consisting of approximately 325
individuals as of March 31, 2001, as independent contractors. The Company's
paid moderators sign independent contractor agreements and are paid a flat
monthly fee or per hour. Laws governing the distinction between independent
contractors are not entirely clear, and some jurisdictions may rule that the
Company's paid moderators are employees rather than independent contractors. If
this happens, the Company could be subject to substantial tax and employee
benefit liabilities as well as other penalties.
LiveWorld's volunteer community leaders could be viewed as employees, which
would substantially increase its operating expenses
If the Company's active volunteer community leaders, consisting of
approximately 825 individuals as of March 31, 2001, were viewed as employees,
LiveWorld could be subject to payment of back wages and other penalties, and its
operating expenses could substantially increase. Previously, former volunteers
of America Online/Time Warner filed a complaint with the Labor Department and a
class action lawsuit claiming they were treated like employees and should have
been paid.
LiveWorld's chief executive officer, chief operating officer and chief community
officer are critical to its business and they may not remain with the Company in
the future
LiveWorld's future success will depend, to a significant extent, on the
continued services of Peter Friedman, its Chairman of the Board and Chief
Executive Officer, V. David Watkins, its President and Chief Operating Officer
and Jenna Woodul, its Chief Community Officer. The loss of the services of Mr.
Friedman, Mr. Watkins or Ms. Woodul could cause the Company to incur increased
operating expenses and divert other senior management time in searching for
their replacements. The loss of their services could also harm its reputation
as its business clients and advertisers and network participants could become
concerned about its future operations. The Company does not have long-term
employment agreements with Mr. Friedman, Mr. Watkins or Ms. Woodul, and the
Company does not maintain any key person life insurance policies.
LiveWorld must continually attract and retain its sales, engineering and other
key personnel or the Company will be unable to execute its business strategy
LiveWorld's future success also will depend on its ability to attract,
retain and motivate highly skilled sales, engineering and other key personnel.
Competition for such personnel is intense in the Internet industry, especially
in the Silicon Valley, and the Company may be unable to successfully attract,
integrate or retain sufficiently qualified personnel.
LiveWorld may be unable to consummate potential acquisitions or investments or
successfully integrate them with its business which could slow its growth
strategy
As part of its strategy to expand its online marketing services if
resources permit, the Company may acquire or make investments in complementary
businesses, technologies, services or products if appropriate opportunities
arise. LiveWorld may be unable to identify suitable acquisition or investment
candidates at reasonable prices or on reasonable terms. Additionally, regardless
of whether suitable candidates are
-19-
available, the Company may be unable to consummate future acquisitions or
investments, in part due to the low market price if its stock, which could harm
the Company's growth strategy. If LiveWorld does acquire a company or make other
types of acquisitions, the Company could have difficulty integrating the
acquired services, personnel or technologies. These difficulties could disrupt
its ongoing business, distract its management and employees, and increase its
expenses.
System failures or slow downs would harm the Company's reputation and thus
reduce its attractiveness to its current and future business clients, users,
network participants and advertisers
System failures would harm the Company's reputation and reduce its
attractiveness to businesses, network participants and advertisers. LiveWorld's
ability to attract potential business clients, network participants and
advertisers to promote its brand will depend significantly on the performance of
its network infrastructure. In addition, a key element of its strategy is to
effectively perform its online marketing services for its business clients in
order to increase the usage of its online marketing services by business
clients. Increased usage of the Company's online marketing services could
strain the capacity of its infrastructure, resulting in a slowing or outage of
its services and reduced traffic to its Web sites. LiveWorld may be unable to
improve its technical infrastructure in relation to increased usage of its
services. In addition, the Company's users depend on Internet service
providers, online service providers and other Web site operators for access to
its Web sites. Many of these providers and operators have also experienced
significant outages in the past, and they could experience outages, delays and
other difficulties due to system failures unrelated to the Company's systems.
LiveWorld's communications and other computer hardware operations are subject to
disruptions which are out of its control and for which the Company may not have
adequate insurance
A disaster could severely damage the Company's ability to deliver its
products and services to its customers. LiveWorld depends on its ability to
maintain and protect its facilities, which include communications hardware and
other computer hardware operations. These operations, which are separate from
its principal offices, are located at facilities in San Jose, California and
Elmsford, New York. San Jose may exist on or near a known earthquake fault
zone. Further, California is currently experiencing power outages due to a
shortage in the supply of power within the state, and these outages could
increase in frequency as the warm summer months approach. Power outages could
interrupt our operations and also the operations of our vendors and
subcontractors within the state of California. Although the facilities in which
we host our computer systems are designed to be fault tolerant, the systems are
susceptible to damage from fire, floods, earthquakes, power loss,
telecommunications failures, and similar events, such as computer viruses or
electronic break-ins, any of which could disrupt its Web sites. Although we
maintain general business insurance against fires, floods and some general
business interruptions, there can be no assurance that the amount of coverage
will be adequate in any particular case.
LiveWorld must keep pace with rapid technological change and the intense
competition of the Internet industry in order to succeed
LiveWorld's market is characterized by rapidly changing technologies,
frequent new product and service introductions and evolving industry standards.
The growth of the Internet and intense competition in the industry exacerbate
these market characteristics. In addition, in recent months many Internet-
related companies, similar to LiveWorld, have consolidated or restructured in
order to remain competitive within the Internet industry. To succeed, LiveWorld
will need to effectively implement its restructurings, integrate the various
software programs and tools required to enhance and improve its service
offerings and manage its business. Any enhancements or new services or features
must meet the requirements of its current and prospective clients and must
achieve significant market acceptance. The Company's success also will depend
on its ability to adapt to rapidly changing technologies by continually
improving the performance features and reliability of its services. The Company
may experience difficulties that could delay or prevent the successful
-20-
development, introduction or marketing of new services. LiveWorld could also
incur substantial costs if it needs to modify its services or infrastructure to
adapt to these changes.
LiveWorld depends on third-party software to measure user demographics and for
other related services and, if this software does not function properly, the
Company would need to purchase new software or develop the software itself,
which could cause a temporary disruption in its business
If software purchased from third parties to perform the Company's services
does not function properly or is not updated, the Company would need to purchase
new software from other third-party providers. Even though the third-party
software LiveWorld currently uses is easily replaced through multiple other
third-party providers, and although the Company could develop the necessary
software programs itself, each of these alternatives would require an unplanned
increase in operating expenses and could cause a disruption in its business.
It is important to advertisers that LiveWorld accurately measure the
demographics of its users and the delivery of advertising impressions on its Web
sites. Companies may choose not to advertise on the Company's Web sites or may
be less willing to pay the fees the Company intends to charge for advertising if
they do not perceive the Company's measurements to be reliable. LiveWorld has
purchased third-party software from Oracle Corporation and NetGravity, Inc. for
these measurement services. LiveWorld may be unable to accurately evaluate the
demographic characteristics of its users if the third-party software does not
function properly or is not enhanced to support the Company's needs.
LiveWorld's ability to deliver its services to its users may also be harmed if
other software the Company has purchased from third parties, such as Microsoft
Exchange for real-time chat and Netscape Web Servers for ad serving and
management, is not reliable or does not function properly.
Changes in government regulation could limit LiveWorld's Internet activities or
result in additional costs of doing business on the Internet
Although few laws or regulations exist that specifically regulate
communications on the Internet, LiveWorld expects more stringent laws and
regulations to be enacted due to the popularity and use of the Internet. Any
new legislation or regulations or the application of existing laws and
regulations to the Internet could limit user volume and increase operating
expenses. In addition, the application of existing laws to the Internet is
uncertain and may take years to resolve and could expose the Company to
substantial liability for which LiveWorld might not be indemnified by the
content providers or other third parties. Existing laws and regulations
currently, and new laws and regulations are likely to address a variety of
issues, including the following:
. user privacy and expression;
. the rights and safety of children;
. information security;
. the convergence of traditional channels with Internet commerce; and
. taxation and pricing.
If Internet Service Providers become regulated in a manner similar to long
distance telephone carriers, Internet growth may slow which would cause the
Company's revenues to decrease
If Internet growth slows due to proposals to regulate Internet Service
Providers in a way similar to long distance telephone carriers, LiveWorld's
volume and the demand for its online marketing services would decline, causing
its revenues to decrease. The use of the Internet has burdened the existing
telecommunications infrastructure and led to interruptions in phone service in
areas with high Internet use. Several telecommunications companies and local
telephone carriers have petitioned the Federal Communications Commission to
regulate Internet Service Providers and online service providers in a manner
-21-
similar to long distance telephone carriers and to impose access fees. If this
were to occur, the costs of communicating on the Internet could increase
substantially, potentially slowing the growth in use of the Internet.
LiveWorld may be subject to liability for publishing or distributing content
over the Internet
LiveWorld may be subject to claims relating to content that is published on
or downloaded from its Web sites. The Company also could be subject to liability
for content that is accessible from its Web sites through links to other Web
sites. Although LiveWorld carries general liability and multimedia liability
insurance, the Company's insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify the Company for all liability that may be imposed. In
addition, any claims like this, with or without merit, would result in the
diversion of its financial resources and management personnel.
LiveWorld may be liable for misappropriation by others of its users' personal
information
If third parties were able to penetrate the Company's network security or
otherwise misappropriate its users' personal information, LiveWorld could be
subject to liability. These could include claims for impersonation or other
similar fraud claims.
LiveWorld may be liable for its use or sale of its users' personal information
LiveWorld currently uses its users' personal information internally to
determine how to improve its services, applications and features, and to target
its advertisements and communications. The Company also uses this information
externally to provide its advertisers with the demographics of its user base.
LiveWorld may, in the future, sell its user information on an aggregate, not
individual, basis. LiveWorld could be subject to liability claims by its users
for misuses of personal information, such as for unauthorized marketing
purposes. In addition, the Federal Trade Commission has previously investigated
various Internet companies regarding their use of personal information. The
Company could incur additional expenses if new regulations regarding the use of
personal information are introduced or if its privacy practices are investigated
Possible infringement of LiveWorld's intellectual property rights by third
parties could substantially increase its operating expenses and harm its ability
to conduct business
Other parties may assert claims of infringement of intellectual property or
other proprietary rights against LiveWorld, and in fact, the Company has been
subject to such claims in the past. These claims, even if without merit, could
require the Company to expend significant financial and managerial resources.
Furthermore, if claims like this were successful, LiveWorld might be required to
change its trademarks, alter its content or pay financial damages, any of which
could substantially increase its operating expenses. The Company also may be
required to obtain licenses from others to refine, develop, market and deliver
new services. LiveWorld may be unable to obtain any needed license on
commercially reasonable terms or at all, and rights granted under any licenses
may not be valid and enforceable. LiveWorld has been subject to claims and
expects to be subject to legal proceedings and claims from time to time in the
ordinary course of its business, including claims of alleged infringement of
trademarks and other intellectual property rights of third parties by the
Company and its licensees.
If LiveWorld raises additional capital through the issuance of new securities,
existing stockholders will incur additional dilution
In order to meet its liquidity needs, the Company may need to raise
additional capital. However, if the Company raises additional capital through
the issuance of new securities, its stockholders will be subject to additional
dilution. In addition, any new securities issued may have rights, preferences
or privileges senior to those securities held by the Company's current
stockholders.
-22-
LiveWorld's undesignated Preferred Stock may inhibit potential acquisition bids
for the Company, cause the market price for its Common Stock to fall and
diminish the voting rights of the holders of its Common Stock
If the Company's Board of Directors ("Board") issues Preferred Stock,
potential acquirers may not make acquisition bids for the Company, the Company's
stock price may fall and the voting rights of existing stockholders may diminish
as a result. The Board has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series. The Board can fix the price, rights,
preferences, privileges and restrictions of the Preferred Stock without any
further vote or action by the stockholders.
LiveWorld has anti-takeover defenses that could delay or prevent an acquisition
of the Company
Provisions of LiveWorld's Certificate of Incorporation, Bylaws and Delaware
law could make it more difficult for a third party to acquire the Company, even
if doing so would be beneficial to the stockholders
Item 3. Quantitative and Qualitative Disclosures about Market Risk
LiveWorld's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company does not use derivative
financial instruments in its investment portfolio. LiveWorld places its
investments with high quality issuers and, by policy, limits the amount of
credit risk exposure to any one issuer. The Company is averse to principal loss
and ensures the safety and preservation of its invested funds by limiting
default, market and reinvestment risk. LiveWorld classifies its cash
equivalents and short-term investments as "fixed rate" if the rate of return on
such instruments remains fixed over their term. These "fixed rate" instuments
include fixed rate commercial paper, corporate notes, and market auction
preferred securities. We classify our cash equivalents and short-term
investments as "variable rate" if the rate of return on such investments varies
based on the change in a predetermined index or set of indices during their
term. These "variable rate" investments primarily include money market accounts
held at various securities brokers and banks. The table below presents the
amounts and related weighted average interest rates of the Company's investment
portfolio at March 31, 2001:
Average Book Fair
Interest Rate Value Value
------------------ ---------------- ----------------
(In thousands)
Cash and Cash equivalents:
Fixed rate 5.15% $6,415 $6,415
Variable rate 4.88% 2,942 2,942
PART II. OTHER INFORMATION
Item 5. Other Information
On May 1, 2001, the Company's common stock was delisted from trading on
the Nasdaq National Market due to a failure to comply with the required $1.00
minimum bid price. Our common stock currently trades on the OTC Bulletin Board
market under the symbol TCTY.OB.
On May 8, 2001, the Company formally changed its name from Talk City, Inc.
to LiveWorld, Inc. The Company is currently in the process of applying for a
new ticker symbol, and expects to announce a new ticker symbol consistent with
the new name shortly.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1(1) Agreement and Plan of Reorganization between the Company and Research
Connections, Inc., dated January 3, 2000.
3.2(2) Second Amended and Restated Certificate of Incorporation of the
Company.
3.3(2) Bylaws of the Company.
4.1(2) Form of the Company's Common Stock certificate.
4.2(2) Third Amended and Restated Shareholders Rights Agreement, dated April
23, 1999, between the Company and the parties named therein, as
amended on May 26, 1999.
______________
(1) Incorporated by reference from the Company's Annual Report on Form 10-K for
the period ended December 31, 1999.
(2) Incorporated by reference from the Company's 424(b) Prospectus, dated July
19, 1999, as declared effective by the Securities and Exchange Commission
on July 19, 1999.
(b) Reports on Form 8-K
On February 12, 2001, the Company filed a Report on Form 8-K disclosing the
resignation of Thomas P. Hirschfeld and Joseph A. Graziano from the Board of
Directors, effective January 1, 2001.
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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.
LIVEWORLD, INC.
(Registrant)
Date: May 15, 2001 By: /s/ V. David Watkins
--------------------
V. David Watkins
President and Chief Operational Officer
(principal financial or chief financial
officer and duly authorized signatory)
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