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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 June 30, 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 000-26657
LIVEWORLD, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0426524
-------- ----------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
1919 South Bascom Avenue
Campbell, California 95008
-------------------- -----
(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 August 14, 2001 was 25,306,149.
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LIVEWORLD, INC.
FORM 10-Q
INDEX
PAGE NUMBER
-----------
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Unaudited Condensed Balance Sheets at June 30, 2001 and
December 31, 2000 3
Unaudited Condensed Statements of Operations for the three and
six months ended June 30, 2001 and 2000 4
Unaudited Condensed Statements of Cash Flows for the six months
ended June 30, 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 10
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24
PART II. OTHER INFORMATION
Item 5. Other Information 25
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 27
-2-
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
LIVEWORLD, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands)
June 30, December 31,
2001 2000
--------------- --------------
Assets
Current assets:
Cash and cash equivalents $ 5,492 $ 6,989
Short term investments - 6,980
Accounts receivable, net 1,570 2,580
Prepaid expenses and other current assets 372 1,094
--------------- --------------
Total current assets 7,434 17,643
Property and equipment, net 4,608 8,234
Other assets 3,304 6,169
Goodwill, net 250 2,733
--------------- --------------
Total assets $ 15,596 $ 34,779
=============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, current portion $ 61 $ 86
Accounts payable 432 1,085
Accrued liabilities 2,080 3,138
Deferred revenue 716 746
--------------- --------------
Total current liabilities 3,289 5,055
Notes payable, less current portion - 21
--------------- --------------
Total liabilities 3,289 5,076
Stockholders' equity:
Common stock 25 25
Additional paid-in-capital 134,861 135,196
Deferred stock based compensation (54) (223)
Notes receivable from stockholders (174) (172)
Accumulated deficit (122,329) (105,101)
Treasury Stock, 54,687 common shares at cost (22) (22)
--------------- --------------
Total stockholders' equity 12,307 29,703
--------------- --------------
Total liabilities and stockholders' equity $ 15,596 $ 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 Six Months Ended
-------------------------------------- ----------------------------------
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
----------------- ------------------ ---------------- ----------------
Revenues:
Network services $ 66 $ 2,471 $ 282 $ 4,524
Community solutions services 599 785 1,385 1,319
Event services 470 831 940 1,366
Market research services 52 420 254 833
----------------- ------------------ ---------------- ----------------
Total revenue 1,187 4,507 2,861 8,042
Cost of revenue 1,953 4,118 4,984 7,737
----------------- ------------------ ---------------- ----------------
Gross margin (766) 389 (2,123) 305
Operating expenses:
Product development 1,067 1,935 2,644 3,700
Sales and marketing 612 4,629 1,804 9,563
General and administrative 2,081 2,766 4,073 5,817
Restructuring charges 297 469 504 469
Noncash advertising and promotional charges 1,156 443 2,171 1,161
Loss on sale of assets 1,792 - 1,792 -
Amortization of goodwill 2,312 171 2,483 342
----------------- ------------------ ---------------- ----------------
Total operating expenses 9,317 10,413 15,471 21,052
----------------- ------------------ ---------------- ----------------
Loss from operations (10,083) (10,024) (17,594) (20,747)
Interest income, net 115 595 344 1,316
----------------- ------------------ ---------------- ----------------
Net loss $ (9,968) $ (9,429) $ (17,250) $ (19,431)
================= ================== ================ ================
Basic and diluted net loss per common share $ (0.40) $ (0.38) $ (0.69) $ (0.79)
================= ================== ================ ================
Weighted average basic and diluted common shares
outstanding 25,201 24,806 25,110 24,668
================= ================== ================ ================
See accompanying notes to the condensed financial statements.
4
LIVEWORLD, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
Six Months Ended
----------------------------------
June 30, June 30,
2001 2000
---------------- ----------------
Cash flows from operating activities:
Net loss $ (17,250) $ (19,431)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,895 1,865
Loss on sale of property and equipment 2,052 15
Stock compensation expense (171) 161
Noncash advertising and promotional charges 2,171 1,161
Provision for accounts receivable allowance 410 195
Changes in operating assets and liabilities:
Accounts receivable 601 (1,615)
Prepaid expenses and other current assets 722 801
Accounts payable (653) (2,611)
Accrued liabilities (1,058) 640
Deferred revenue (30) 268
---------------- ----------------
Net cash used in operating activities (9,311) (18,551)
---------------- ----------------
Cash flows from investing activities:
Purchases of property and equipment (324) (5,261)
Proceeds from sale of property and equipment 510 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 31,870
Other assets 694 (1,460)
---------------- ----------------
Net cash provided by (used in) used in investing activities 7,860 20,466
---------------- ----------------
Cash flows from financing activities:
Proceeds from stock option and warrant exercises - 1,212
Proceeds from repayment of stockholders' notes receivable - 25
Repayment of notes payable (46) (73)
---------------- ----------------
Net cash provided by financing activities (46) 1,164
---------------- ----------------
Net increase (decrease) in cash and cash equivalents (1,497) 3,079
Cash and cash equivalents at beginning of period 6,989 14,112
---------------- ----------------
Cash and cash equivalents at end of period $ 5,492 $ 17,191
================ ================
Cash paid during the period for interest $ 2 $ 23
================ ================
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 the footnotes, necessary for a fair presentation of the financial position at
June 30, 2001 and the operating results and cash flows for the three and six
months ended June 30, 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 June 30, 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 and six months ended June 30, 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 three to six months. Thereafter, we may need to raise
additional funds in order to meet our operating 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.
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 June 30, 2001. The Company had an accumulated deficit of
$122.3 million at June 30, 2001. On May 8, 2001 the Company formally changed its
name from Talk City, Inc. to LiveWorld, Inc.
-6-
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.
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. Due to the decline in current business conditions, the Company has
restructured certain of its businesses and realigned resources to focus on core
opportunities. As a result, the Company recorded a charge of $2.3 million in the
June 30, 2001 fiscal quarter related to the impairment of goodwill, measured as
the amount by which the carrying amount exceeded the value of the estimated
undiscounted future cash flows.
4. SALE OF WWW.TALKCITY.COM CONSUMER NETWORK
----------------
On May 16, 2001, LiveWorld completed the sale of its consumer business unit
and associated web site, www.talkcity.com (collectively, the "Consumer
----------------
Network"), to a wholly-owned subsidiary of myESP.com Corporation ("myESP"),
pursuant to a Purchase Agreement, dated May 16, 2001. The sale of the Consumer
Network was completed by means of an asset sale. As part of the transaction,
LiveWorld and myESP also signed an operating agreement, dated May 16, 2001, by
which the Company will operate the Consumer Network for one year.
Under the terms of the Purchase Agreement, myESP paid LiveWorld an initial
payment of $200,000, for the Consumer Network, with the total potential
consideration of $1.6 million, subject to certain earn-out criteria. Under the
terms of the Services Agreement, myESP will pay the Registrant a total of
$900,000 per year to operate the Talk City Network. The results of operations
for the period ended June 30, 2001 include a charge of approximately $1.8
million to record the loss resulting from the difference between the guaranteed
payment and the net book value of the assets included in this transaction.
5. 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.
-7-
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. The Company incurred noncash advertising and promotional charges of
approximately $1.2 million for the quarter ended June 30, 2001. As of June 30,
2001, all expenses relating to these agreements have been charged to operations
and no further charges will be incurred.
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.
6. ACCRUED LIABILITIES
Accrued liabilities consist of: June 30, December 31,
2001 2000
------------ ------------
(In thousands)
Accrued compensation and benefits $ 496 $ 1,375
Accrued general and administrative expenses 623 562
Accrued rent 436 350
Accrued sales and marketing expenses 124 321
Accrued moderator expenses 50 300
Other accrued liabilities 351 230
------------ ------------
$ 2,080 $ 3,138
============ ============
7. 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 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 June 30, 2001
-8-
none of the Company's clients was responsible for more than 10% of its revenue.
For the six months ended June 30, 2001, one of the Company's clients represented
$280,000, or 10% of its revenue. Total receivables from this client were
$208,000 on June 30, 2001.
8. COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the three and six months ended June 30, 2001 and
2000 equaled the net loss.
9. NET LOSS PER COMMON SHARE
Diluted net loss per common share does not include the effects of the
following potentially dilutive securities as of June 30, 2001 and 2000:
June 30, June 30,
2001 2000
---------- ---------
(In thousands)
Common Stock Options 5,471 3,630
Common Stock Warrants 991 991
Unvested Common Stock Subject to Repurchase 2 107
---------- ---------
6,464 4,728
========== =========
The average exercise price of the Common Stock Options was $3.43 and $10.63
as of June 30, 2001 and June 30, 2000, respectively. The average exercise price
of the Common Stock Warrants was $5.83 as of June 30, 2001 and 2000.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), "Business Combinations" and Statement of Financial
Accounting Standards No. 141 ("SFAS 142"), "Goodwill and Intangible Assets."
SFAS 141 addresses the accounting for and reporting of business
combinations. SFAS 141 requires that all business combinations be accounted for
using the purchase method of accounting for acquisitions and eliminates the use
of the pooling-of-interests method. SFAS 141 is effective for all business
combinations initiated after June 30, 2001.
SFAS 142 addresses the accounting and reporting for acquired goodwill and
other intangible assets. SFAS 142 changes the accounting for goodwill from an
amortization method to an impairment-only method. The amortization of goodwill,
including goodwill recorded in past business combinations, will cease upon
-9-
adoption of SFAS 142. For goodwill acquired by June 30, 2001, SFAS 142 is
effective for all fiscal years beginning after December 2001. Goodwill and
intangible assets acquired after June 30, 2001 will be subject to immediate
adoption of SFAS 142. The Company believes the adoption of SFAS 142 will not
have a material effect on its financial statements.
11. RESTRUCTURING CHARGES
In May 2001, the Company underwent a restructuring of operations to reduce
expenses. As a result of the restructuring, the Company reduced its total
headcount by 21 employees, or approximately 25% of its total workforce. The
Unaudited Condensed Statement of Operations for the three months ended June 30,
2001 includes a charge of approximately $297,000, related to the restructuring,
consisting entirely of employee severance. Substantially all liabilities related
to the restructuring were paid as of June 30, 2001.
12. SUBSEQUENT EVENT
On July 27, 2001, the Company underwent a restructuring of operations to
further reduce expenses. As a result of the restructuring, the Company reduced
its total headcount by 25 employees. The Company expects to take a charge of
approximately $340,000 for the quarter ended September 30, 2001 related to the
restructuring, consisting entirely of employee severance.
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 represent our
expectations or beliefs concerning future events and include statements
regarding our expectations or beliefs that we will not derive revenues from
advertising and sponsorships; we will incur additional operating losses for the
foreseeable future; product development expenses will decrease as the impact of
our restructurings is realized; sales and marketing expenses will decrease
slightly in absolute dollars; general and administrative costs will decrease; we
will continue to evaluate possible acquisitions and investments; 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 three
to 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 restructurings; 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.
Overview
We provide online communities and customer relationship management for
businesses and consumers. From inception through June 2001, our operating
activities have primarily been focused on:
-10-
. 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. 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 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. As announced in the Report on Form 8-K filed May 31, 2001, LiveWorld sold
its consumer unit and associate web site. As a result, the Company does not
anticipate any future revenues will be derived from advertising and
sponsorships.
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 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. These amounts were determined based
on the fair value of our common stock and warrants exchanged for the services
received. At June 30, 2001, all of the Company's noncash in-kind investments
were fully amortized.
-11-
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 $17.3 million
through the first six months of 2001. These losses include noncash advertising
and promotional charges of $19.6 million through June 30, 2001. At June 30,
2001, we had an accumulated deficit of $122.4 million. We anticipate that we
will incur additional operating losses for the foreseeable future.
In May 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 21 employees, or
approximately 25% of its total workforce. The Unaudited Condensed Statement of
Operations for the three months ended June 30, 2001 includes a charge of
approximately $297,000, related to the restructuring, consisting entirely of
employee severance. Substantially all liabilities related to the restructuring
were paid as of June 30, 2001.
-12-
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 Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net revenue 100 % 100 % 100 % 100 %
Cost of revenue (165) 91 (174) 96
------ ------ ------ ------
Gross margin (65) 9 (74) 4
Operating expenses:
Product development 90 43 92 46
Sales and marketing 52 103 63 119
General and administrative 175 61 142 72
Restructuring charges 25 10 18 6
Noncash advertising and promotional charges 97 10 76 15
Loss on Sale of Assets 151 - 63 -
Amortization of goodwill 195 4 87 4
------ ------ ------ ------
Total operating expenses 785 231 541 262
------ ------ ------ ------
Operating loss (850) (222) (615) (258)
Interest income, net 10 13 12 16
------ ------ ------ ------
Net loss (840)% (209)% (603)% (242)%
====== ====== ====== ======
Net Revenue. Net revenue decreased 74% to approximately $1.2 million for
the three months ended June 30, 2001, from $4.5 million for the three months
ended June 30, 2000, a decrease of approximately $3.3 million. This decrease was
primarily the result of decreased advertising sales as the Company sold off the
business in May 2001 that previously generated that revenue. In addition,
revenue for the fee based services were lower as a result of the more difficult
economic conditions. For the six months ended June 30, 2001 net revenue
decreased 64%, to $2.9 million, from $8.0 million for the six months ended June
30, 2000. This decrease is primarily the result of lower advertising revenue as
well as lower fee-based services as a result of a slowdown in marketing spending
by clients in response to the changing economic conditions. This decrease was
partially offset by revenue of $112,500 from the one year operating agreement
made in connection with the sale of the of its consumer unit and associated web
site, www.talkcity.com. Substantially all of LiveWorld's revenue is derived
----------------
within North America.
Cost of Revenue. Cost of revenue was $2.0 million, or 165% of total
revenue, for the three months ended June 30, 2001 compared to $4.1 million, or
91% of total revenue, for the three months ended June 30, 2000. Cost of revenue
decreased in absolute dollars by $2.2 million 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. Cost of revenue
was $5.0 million, or 174% of total revenue, for the six months ended June 30,
2001 compared to $7.7 million, or 96% of total revenue, for the six months ended
June 30, 2000. Cost of revenue decreased in absolute dollars by $2.7 million
compared to the same period in the prior years primarily from lower personnel-
related costs, resulting from the headcount reductions stemming from the recent
restructurings.
Product Development. Product development expenses for the three months
ended June 30, 2001 and 2000 were approximately $1.1 million, or 90% of total
revenue, and $1.9 million, or 43% of total revenue,
-13-
respectively. The decrease in absolute dollars was primarily attributable to
lower personnel-related costs as the impact from the restructurings was more
fully realized. Product development expenses for the six months ended June 30,
2001 and 2000 were approximately $2.6 million, or 92% of total revenue, and $3.7
million, or 46% of total revenue, respectively. The decrease in absolute dollars
was primarily attributable to lower personnel-related costs. LiveWorld expects
that product development expenses will decrease for the foreseeable future as
the impact of the May and July 2001 restructurings are more fully realized.
Sales and Marketing. Sales and marketing expenses for the three months
ended June 30, 2001 and 2000 were approximately $612,000, or 52% of total
revenue, and approximately $4.6 million, or 103% of total revenue, respectively.
Sales and marketing expenses for the six months ended June 30, 2001 and 2000
were approximately $1.8 million, or 63% of revenue, and $9.6 million, or 119% of
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 and by a decrease in sales personnel and associated
expenses resulting from closing the Company's sales offices in New York City,
Chicago, San Francisco and Los Angeles. LiveWorld expects that sales and
marketing expenses will decrease slightly in absolute dollars in the foreseeable
future.
General and Administrative. General and administrative expenses for the
three months ended June 30, 2001 and 2000 were approximately $2.1 million, or
175% of total revenue, and $2.8 million, or 61% of total revenue, respectively.
General and administrative expenses for the six months ended June 30, 2001 and
2000 were approximately $4.1 million, or 142% of total revenue, and $5.8
million, or 72% of total revenue, respectively. The expenses for the three and
six months ended June 30, 2001 include the result of a realized gain of $250,000
from the sale of the Company's minority investment in Matchnet, which had
previously been written down to $0. The decrease in general and administrative
costs was also attributable to a reduction in headcount. LiveWorld expects that
general and administrative costs will decrease in the future.
Restructuring. Pursuant to the May 18, 2001 restructuring, and the
associated reduction in workforce of 21 employees, or approximately 25% of the
total workforce, the Unaudited Condensed Statement of Operations for the three
months ended June 30, 2001 includes a charge of approximately $297,000. This
charge is comprised of costs for employee severance. Substantially all
liabilities related to the restructuring were paid as of June 30, 2001. Such
restructuring charges represent 12% of revenue for the three months ended June
30, 2001. There was a $469,000 charge for restructuring 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. On June 27, 2001, the Company underwent a restructuring to
further reduce expenses and reduced its total headcount by 25 employees. The
Company expects to take a charge of approximately $340,000 for the quarter ended
September 30, 2001 related to the restructuring.
Noncash Advertising and Promotional Charges. Noncash advertising and
promotional charges for the three months ended June 30, 2001 and 2000 were $1.2
million, or 97% of total revenue, and $443,000, or 10% of total revenue,
respectively. For the six months ended June 30, 2001 and 2000, noncash
advertising and promotional charges were $2.2 million, or 76% of total revenue,
and $1.2 million, or 15% of total revenue, respectively. The increase in noncash
and promotional charges for both periods was primarily due to increased
amortization of advertising provided under the Hearst advertising agreement. All
noncash inkind investments have been fully amortized as of June 30, 2001.
Amortization of Goodwill. For the three months ended June 30, 2001, the
Company recorded a charge of $2.3 million related to the impairment of goodwill,
measured as the amount by which the carrying amount exceeded the value of the
estimated future cash flows for goodwill and purchased intangible assets. This
compares to a charge of $171,000 for the three months ended June 30, 2000. For
the six months ended June 30, 2001, and June 30, 2000, including the impairment
charge, amortization of goodwill was $2.5 million and $340,000 respectively.
Loss on Sale of Assets. For the three and six months ended June 30, 2001,
the Company recorded a charge of $1.8 million in connection with the sale of its
consumer unit, its web site, www.talkcity.com, and the associated server
----------------
infrastructure. There was no similar charge for the three and six months ended
June 30, 2000.
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 June 30, 2001 and
2000 was approximately $115,000 and $595,000, respectively. Interest income, net
for the six months ended June 30, 2001 and 2000 was approximately $344,000 and
$1.3 million, respectively. The reduction in interest income, net, resulted from
declining interest income on lower cash, cash equivalent and short-term
investment balances.
-14-
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.
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 June 30, 2001, we had approximately $5.5 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.
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 three to six
months. Thereafter, we may need to raise additional funds in order to meet our
operating 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.
Net cash used in operating activities was approximately $9.3 million and
$18.6 million for the six months ended June 30, 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 non-cash advertising
expenses and depreciation and amortization.
Net cash provided by investing activities was approximately $7.9 million
and $20.5 million for the six months ended June 30, 2001 and 2000, respectively.
Cash provided by investing activities for the six months ended June 30, 2001 was
the primarily the result of sales of short-term investments and the proceeds
from the sale of assets, partially offset by purchases of equipment. Cash
provided by investing activities for the six months ended June 30, 2000
consisted of approximately $31.9 million in sales of short-term investments
partially offset by approximately $5.3 million in purchases of equipment,
approximately $4.3 million in purchases of short-term investments and $1.5
million placed into an escrow fund for an employment agreement with the former
sole shareholder of RCI.
-15-
Net cash used in financing activities was approximately $46,000 for the six
months ended June 30, 2001. Net cash provided by financing activities was $1.2
million for the six months ended June 30, 2000. Net cash used in financing
activities for the six months ended June 30, 2001 consisted of principal
payments on notes payable. Net cash provided by financing activities for the six
months ended June 30, 2000 consisted primarily of net proceeds of approximately
$1.2 million from stock option and warrant exercises partially offset by
principal payments on notes payable
As of June 30, 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 June 30, 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 $14.4 million as of June 30, 2001.
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 three to six months. LiveWorld expects that it will need
to raise 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, March 2001, May 2001 and July
2001, LiveWorld underwent separate restructurings.
-16-
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 LVWD.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;
. 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.
-17-
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%. On May 18, 2001 the Company announced a further restructuring
and reduced its headcount by 21 employees, or 25% of the workforce. On July 27,
2001, LiveWorld further reduced headcount by 25 employees. 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.
-18-
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 the second quarter of 2000 through the second quarter 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.
-19-
LiveWorld depends on the clients of its online marketing services, including
business clients, 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, 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'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'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 June 30, 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 500 individuals as of June 30, 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.
-20-
LiveWorld's chief executive 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 and Jenna Woodul, its Chief Community Officer. The loss of the
services of Mr. Friedman 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 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 available, the Company may be unable to
consummate future acquisitions or investments, in part due to the low market
price if its stock and the limited availability of cash, 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.
-21-
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. 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 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.
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.
-22-
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
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
-23-
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.
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" instruments
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 June 30, 2001:
Average Book Fair
Interest Rate Value Value
--------------- --------- ---------
(In thousands)
Cash and Cash equivalents:
Fixed rate 3.94% $2,537 $2,537
Variable rate 3.59% 2,955 2,955
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders:
At our Annual Stockholders' Meeting held on June 12, 2001, the following
proposals were adopted by the margins indicated.
Proposal 1: Election of Directors.
Nominee For Withheld
------- --- --------
Barry Weinman 13,594,195 112,153
The following directors, who were not up for election at the Annual
Meeting, continued to serve as directors after the Annual Meeting: Peter H.
Friedman and Kenneth A. Bronfin. Subsequent to the Annual Meeting, V. David
Watkins and Stephen Lake were appointed to the Board of Directors.
Proposal 2. Ratification of KPMG, LLP as Independent Public Accountants
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
13,641,318 57,605 7,425 0
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.
2.2(2) Purchase Agreement, dated as of May 16, 2001, by and between
myESP Acquisition Corporation, a Delaware corporation, and
LiveWorld, Inc., a Delaware corporation.
2.3(2) Web Site Services and Maintenance Agreement, dated as of May 16,
2001, by and between LiveWorld, Inc., a Delaware corporation and
myESP Acquisition Corporation, a Delaware corporation.
3.2(3) Second Amended and Restated Certificate of Incorporation of the
Company.
3.3(3) Bylaws of the Company.
4.1(3) Form of the Company's Common Stock certificate.
4.2(3) 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 Report on Form 8-K, filed on
May 31, 2001.
(3) 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
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(b) Reports on Form 8-K
On May 31, 2001, the Company filed a Report on Form 8-K disclosing the
sale of its consumer unit and associated web site, www.talkcity.com pursuant to
----------------
a purchase agreement dated May 16, 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: August 14, 2001 By: /s/ Peter H. Friedman
----------------------------
Peter H. Friedman
President and Chief Executive Officer
(principal financial or chief
financial officer and duly
authorized signatory)
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