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FILED PURSUANT TO RULE 424(B)(4)
REGISTRATION NO. 333-77455
PROSPECTUS
5,000,000 Shares
[TALK CITY LOGO]
Common Stock
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This is our initial public offering of shares of common stock. We are offering
5,000,000 shares.
The shares have been approved for listing on the Nasdaq National Market under
the symbol "TCTY."
Investing in the shares involves risks. Risk Factors begin on page 9.
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<CAPTION>
Per
Share Total
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<S> <C> <C>
Public Offering Price........................................ $12.00 $60,000,000
Underwriting Discount........................................ $ 0.84 $ 4,200,000
Proceeds to Talk City........................................ $11.16 $55,800,000
</TABLE>
We have granted the underwriters a 30-day option to purchase up to 750,000
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments, if any.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is accurate or complete. Any representation to the contrary is
a criminal offense.
Lehman Brothers expects to deliver the shares on or about July 23, 1999.
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Lehman Brothers
Volpe Brown Whelan & Company
U.S. Bancorp Piper Jaffray
E*TRADE Securities, Inc.
July 19, 1999
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[INSIDE FRONT COVER AND GATEFOLD]
Center Caption: The Talk City Network Participants
[NAMES OF NETWORK PARTICIPANTS]
Text: Talk City provides community services for 35 network
participants. These network participants, in turn, drive user
volume to our network and provide broad exposure for the Talk
City brand. We share costs to produce and market our network
participants' online community offerings and share the
resulting revenue. Our agreements with our network
participants range in duration from six months to three years.
No individual network participant was responsible for a
material amount of our revenue for the three months ended
March 31, 1999, except WebTV Network which was responsible for
17% of our revenues for that quarter.
Caption: Talk City Business Services
Text: We offer businesses interactive services that help them develop and
expand relationships with customers and employees. These services range
from producing online events to hosting customized online communities.
[This page will contain three business client screen shots.]
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TABLE OF CONTENTS
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Page
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Prospectus Summary.................. 4
Risk Factors........................ 9
Use of Proceeds..................... 24
Dividend Policy..................... 24
Capitalization...................... 25
Dilution............................ 26
Selected Financial Data............. 27
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 28
Business............................ 36
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Page
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Management....................... 57
Certain Transactions............. 67
Principal Stockholders........... 71
Description of Capital Stock..... 74
Shares Eligible for Future Sale.. 77
Underwriting..................... 79
Legal Matters.................... 82
Experts.......................... 82
Available Information............ 83
Index to Financial Statements.... F-1
</TABLE>
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You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus.
Until August 14, 1999, all dealers selling shares of the common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the obligation of dealers to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
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About This Prospectus
Unless stated otherwise, the information contained in this prospectus
reflects a one for two reverse stock split of the preferred stock and common
stock completed in July 1999 and also reflects the automatic conversion of all
outstanding shares of preferred stock into shares of common stock and the
conversion of all outstanding warrants to purchase preferred stock into
warrants to purchase common stock prior to the closing of this offering. The
information contained in this prospectus also assumes no exercise of the
underwriters' over allotment option and reflects our reincorporation in
Delaware in July 1999. References in this prospectus to "we," "our" and "us"
refer to Talk City, Inc., unless the context otherwise requires.
Prospectus Summary
Risks of Investment
An investment in our common stock involves a high degree of risk. Since our
inception in March 1996, we have incurred significant losses, and as of March
31, 1999, we had an accumulated deficit of $30.3 million. We expect our
operating losses and negative cash flow to continue for the foreseeable future.
In addition, we encounter a number of risks, including our unpredictable
quarterly operating results, new and unproven revenue model and dependence on
our business services revenues, advertising revenues, the maintenance of our
brand identity and our network participants, particularly WebTV Network, a
wholly-owned subsidiary of Microsoft Corporation. You should carefully consider
these risks and uncertainties as well as the other risks and uncertainties
described in the section of this prospectus entitled "Risk Factors" before
deciding whether to invest in shares of our common stock.
Talk City, Inc.
We provide online communities and interactive services for businesses and
consumers. An online community is a group of people who interact via the
Internet with each other around common areas of interest. We have over 2,000
trained community leaders and moderators, consisting of approximately 270 paid
and 1,800 volunteer individuals, who facilitate this interaction, maintain our
standards of conduct and supervise our online community services, such as
online events, chats, home pages and message boards. Based on our review and
internal analysis of Media Metrix's April 1999 report, we ranked sixteenth out
of the top 500 sites on the Internet based on average minutes spent per usage
day for home users in April 1999. In addition, based on our review and internal
analysis of the Media Metrix report, we ranked second out of the top
15 Internet sites whose primary focus is providing online community services.
We offer businesses a wide range of moderated interactive services to help
them develop and expand online relationships with customers, suppliers and
employees. These services include designing fully integrated, customized
communities, producing online events, conducting online market research and
facilitating online meetings. In delivering our business services, our trained
community leaders and moderators direct the flow of the interaction to maintain
the quality and focus of programming desired by the client.
For consumers, we operate a network of online communities located at
www.talkcity.com. Our network is organized into 20 topical categories and
includes over 50 themed communities. A topical
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category corresponds to common human interests, such as sports or collectibles,
or broad characteristics, such as age or locale. A themed community is a
particular Talk City online forum with a distinctive style, personality,
mission statement and regularly returning participants.
In March 1999, we had approximately 2.6 million unique visitors to our
community, according to Internet Profiles Corporation or I/PRO. These users
generated over 6 million hours of activity on www.talkcity.com in March 1999.
During our peak periods, which tend to be early evening hours, we had over
18,000 users simultaneously chatting or engaging in other interactive
activities. Our users spend a significant amount of time on our site, averaging
over 2 hours per user in the month of March. We believe that these statistics
demonstrate the attractiveness of our community services.
We provide online community services for over 50 Internet sites managed by 35
companies whom we refer to as our network participants. We provide our network
participants with a co-branded Web site linked to our community, including our
community building tools, chats, home pages and other community services, and
the services of our trained community leaders and moderators. A co-branded Web
site means that the brands of both the network participant and Talk City
receive equal treatment in use or placement of logos. Our network participants
provide us with content, access to their users and advertising for the Talk
City Web site and brand. We share advertising revenues on our co-branded Web
sites with our network participants. Our network participants include three
Fortune 500 major media companies, multiple Internet service providers and
numerous Internet content companies. Our network participants are as follows:
Talk City Network Participants
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Major Media Companies Internet Content Companies
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@Music
Cox Interactive Media, Inc. Auto OnRamp
Hearst Communications, Inc. CheckOut.com
National Broadcasting Donna Wick Radio Show
Company, Inc. Girl Geeks?
GreenTree
----------------------------- Hispanic Online
Internet Service Providers Learfield Communications
----------------------------- Lifetime Television
The Lottery Channel
Excite@Home LucasFilm Ltd.
AT&T WorldNet Service NetNoir
BellSouth.Net POV Magazine
Cable & Wireless USA Religions and Spirituality
Internet, LLC Riffage.com
Concentric Network Sony Music
MindSpring Enterprises Transformations
WebTV Network UKMax.com
Virtual Communities
Women Online Worldwide
Zapa Digital Arts
ZineZone
The above list of network participants does not include three of our network
participants who have an internal corporate policy of not consenting to use of
their names in prospectuses.
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For the quarter ended March 31, 1999, none of our network participants
individually drove user volume responsible for more than 1% of our revenues,
except for WebTV Network which was responsible for approximately 17% of our
revenues during that quarter.
We believe our business services and online community network provide
significant benefits to businesses, consumers, advertisers and network
participants, as summarized below:
<TABLE>
<CAPTION>
Customers Benefits
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<C> <S>
Businesses . Online community-based marketing, sales and support
solutions
. Professional production and moderated environment
. Reduced customer acquisition and maintenance costs
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Consumers . Welcoming and friendly culture
. Family-oriented environment
. Variety of interactive programming
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Advertisers . Positive, effective branding venue
. Segmented, targetable and mainstream audience
. Loyal, engaged viewers
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Network Participants . Professional production and moderated environment
. Critical mass of traffic and variety of programming
. Co-branding and customization of community services
</TABLE>
Corporate Information
We were incorporated in California in March 1996 and reincorporated in
Delaware in July 1999. Our principal office is located at 307 Orchard City
Drive, Suite 350, Campbell, CA 95008. Our telephone number at that location is
(408) 871-5200 and our Internet addresses are www.talkcity.com and
www.onnow.com. Information contained on our Web sites does not constitute part
of this prospectus.
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The Offering
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Common stock offered by us................ 5,000,000 shares
Common stock to be outstanding after the
offering................................. 24,175,763 shares
Excludes 2,523,951 shares of common
stock that have been reserved for
issuance under our stock plans and
1,318,246 shares of common stock
that have been reserved for
issuance upon exercise of
outstanding warrants
Use of proceeds........................... For general corporate purposes,
principally brand promotion,
expansion of our sales and
marketing operations and our
moderator network
Approved Nasdaq National Market Symbol.... TCTY
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Summary Financial Information
(in thousands, except per share data)
The following table summarizes the financial data for our business. The pro
forma net loss per share data reflects our sale in April 1999 of additional
preferred stock for aggregate proceeds of $20.0 million, our issuance of
preferred stock and warrants in connection with the NBC and Hearst agreements
in April 1999, and the automatic conversion of all outstanding shares of our
redeemable convertible preferred stock into shares of our common stock.
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<CAPTION>
Three Months
March 29, 1996 Years Ended Ended
(Inception) to December 31, March 31,
December 31, ----------------- ----------------
1996 1997 1998 1998 1999
-------------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Business services.......... $ -- $ 25 $ 522 $ 60 $ 357
Advertising and
sponsorships.............. 14 183 931 65 623
------- ------- -------- ------- -------
Total revenues........... 14 208 1,453 125 980
Operating expenses,
including noncash
advertising and
promotional charges....... 1,358 6,938 16,745 3,026 8,033
------- ------- -------- ------- -------
Loss from operations....... (1,344) (6,730) (15,292) (2,901) (7,053)
Net loss applicable to
common stockholders....... (1,316) (6,429) (16,217) (2,911) (6,971)
Net loss per share:
Basic and diluted......... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90)
Weighted average shares... 2,679 3,068 3,295 3,332 3,661
Pro forma net loss per
share:
Basic and diluted......... $ (1.66) $ (0.47)
Weighted average shares... 9,762 14,741
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
data reflects our sale in April 1999 of additional preferred stock for
aggregate proceeds of $20.0 million, our issuance of preferred stock and
warrants in connection with the NBC and Hearst agreements in April 1999, and
the automatic conversion of all outstanding shares of our redeemable
convertible preferred stock into shares of our common stock. The as adjusted
column reflects the sale of 5,000,000 shares of common stock in this offering
at the initial public offering price of $12.00 per share after deducting
underwriting discounts and commissions and estimated offering expenses. See
"Use of Proceeds" and "Capitalization."
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As of March 31, 1999
-------------------------------
Actual Pro Forma As Adjusted
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<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and short-term
investments.................................. $ 9,224 $29,223 $83,923
Working capital............................... 7,768 39,250 93,950
Total assets.................................. 14,572 46,403 101,103
Long-term obligations, net of current
portion...................................... 237 237 237
Redeemable convertible preferred stock and
warrants..................................... 39,979 -- --
Total stockholders' equity (deficit).......... (28,359) 43,451 98,151
</TABLE>
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Risk Factors
You should carefully consider the following factors and other information in
this prospectus before you decide to invest in our shares of common stock. If
any of the negative events referred to below occur, our business could suffer.
We have incurred losses since inception and we may be unable to achieve
profitability or generate positive cash flow
We incurred net losses of $1.3 million in 1996, $6.4 million in 1997, $15.7
million in 1998 and $6.9 million for the three months ended March 31, 1999 and
we may be unable to achieve profitability in the future. If we continue to
incur net losses in future periods, we may be unable to achieve one or more key
elements of our strategy, including the following:
. increase the number of business services personnel;
. increase our sales and marketing activities, including increasing the
number of our sales personnel;
. expand our content and community offerings for our consumers;
. expand our moderator network; or
. introduce additional ecommerce services.
We expect to continue to incur significant operating expenditures, as well as
noncash advertising and promotional charges, and as a result we will need to
generate significant revenues to achieve and maintain profitability. As of
March 31, 1999, we had an accumulated deficit of approximately $30.3 million,
including noncash advertising and promotional charges of $4.3 million. We may
not achieve profitability if our revenues increase more slowly than we expect,
or if operating expenses exceed our expectations or cannot be adjusted to
compensate for lower than expected revenues. If we do achieve profitability, we
may be unable to sustain or increase profitability on a quarterly or annual
basis. Any of the factors discussed above could cause our stock price to
decline.
Fluctuations in our quarterly operating results may cause our stock price to
decline
It is likely that our operating results in one or more future quarters may be
below the expectations of our investors, and as a result the price of our
common stock could decline. We have historically experienced fluctuating
quarterly operating results. Our net loss decreased from $2.9 million as of
March 31, 1998 to $2.4 million as of June 30, 1998. However, our net loss
increased from $2.4 million as of June 30, 1998 to $5.0 million as of September
30, 1998. We expect that our quarterly operating results will continue to
fluctuate significantly and be affected by many factors, the more important of
which include:
. our dependence on increased business services and advertising and
sponsorship revenues;
. expansion of our sales force;
. the length of our sales cycle, particularly our business services sales
cycle;
. our ability to increase our audience of loyal, engaged users;
. management of growth; and
. potential technical difficulties or system down time affecting the
Internet generally or us specifically.
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These factors are described in more detail in the risk factors described
below. Many of these factors are beyond our control.
Our revenue model is new and unproven and we must continue to generate and
develop multiple revenue streams
The success of our revenue model will depend on our ability to generate
multiple revenue streams through our community network. To be successful, we
must, among other things, develop and market products and services that achieve
broad market acceptance by our users, business clients and advertisers. Our
inability to generate multiple revenue streams will contribute to our not
achieving profitability and may cause our accumulated deficit to increase.
Our growth will depend on our ability to increase our business services
revenues
We derive a substantial portion of our revenues from the sale of business
services and we expect to continue to rely on these revenues for the
foreseeable future. If we do not continue to develop business services
revenues, our revenues may not meet our expectations or may decline and we will
need to revise our revenue model to reflect this. Business services represented
12% of our total revenues in 1997, 36% of our total revenues in 1998 and 36% of
our total revenues in the three months ended March 31, 1999. Our growth and
future success will depend on our ability to increase the number of our
business services clients, expand our business services offerings, effectively
implement these services and increase the average revenue per project and per
client. Our ability to generate significant business services revenues will
also depend, in part, on our ability to create new business services offerings
without diluting the value of our existing programs. We have only recently
begun to hire business services sales personnel.
Our growth will depend upon the acceptance of the Internet as an attractive
medium for our business services clients
Our 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 business services may not continue to
develop and may not be sustainable. The Internet as a business services
solution has not been available for a sufficient period of time for us to gauge
its effectiveness as compared with traditional methods, such as trade shows,
phone and mail surveys and video conferencing.
We rely heavily on advertising and sponsorship revenues, and if our advertising
and sponsorship revenues decline due to lack of acceptance of the Internet as
an advertising medium, our business will not grow or will decrease
We currently derive a substantial portion of our revenues from sponsorships
and advertising and expect to continue to do so. As a result, our success is
highly dependent on the increased use of the Internet as an advertising medium.
Our business will not grow or will decrease if the market for Internet
advertising fails to develop or develops slower than expected. Most of our
current or potential advertising customers have little or no experience using
the Internet for advertising purposes and they have allocated only a limited
portion of their advertising budgets to Internet advertising. Use of the
Internet by consumers is at a very early stage of development and market
acceptance of the Internet as
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a medium for advertising is subject to a high level of uncertainty. No
standards are widely accepted to measure the effectiveness of Internet
advertising. If these standards do not develop, existing sponsors or
advertisers may not continue their current level of Internet-based programming,
and sponsors or advertisers who are not currently advertising on the Internet
may be reluctant to do so.
If we do not provide our advertisers with the guaranteed number of impressions
required by our contracts with them, our reputation would be harmed and our
advertising inventory would be decreased
The terms of our advertising contracts generally range from one week to six
months. Our advertising contracts guarantee the advertiser a minimum number of
impressions, or times that an advertisement is seen by users of our sites. If
minimum impression levels are not achieved for any reason, we may be required
to provide additional impressions after the contract term which could reduce
the availability of advertising inventory for our other current and potential
advertisers. Continued inability to deliver the guaranteed number of
impressions to our advertisers would hurt our reputation and could cause our
current as well as potential advertisers to not advertise on our sites. If
minimum guaranteed impressions are not met, we defer recognition of the
corresponding revenues until guaranteed impression levels are achieved.
We rely on our network participants for user volume and increased revenues
Our network participants currently drive approximately 52% of the volume of
our sites, which is defined as the number of Internet page views or Internet
advertisement views seen by our users. The volume is considered to be "driven"
by the network participant if the user comes to our sites via the participant's
site. If we were to terminate or otherwise lose the benefit of all of our
network participant contracts, we would risk losing as much as 52% of our
volume. Our network participant contracts typically have terms of six months to
three years each.
In addition, we sell advertisements based on the volume of our sites, a
portion of which volume is provided by our network participants. Of our total
revenues for the quarter ended March 31, 1999, approximately 20% were generated
through advertisements that ran based on volume provided by our network
participants. If we were to terminate or otherwise lose the benefit of all of
our network participant contracts, we could lose as much as 20% of our
revenues. We would need to replace these revenues with increased revenues from
our other product lines, such as business services or ecommerce. For the
quarter ended March 31, 1999, none of our network participants individually
drove volume responsible for more than 1% of our revenues, except WebTV Network
which was responsible for approximately 17% of our revenues for that quarter.
We rely on WebTV Network for a substantial amount of our volume and revenues,
and if our contract with WebTV Network were not renewed or terminated, we would
need to replace this volume and revenues through other sources
We have a two-year contract with WebTV Network which runs through July 2000.
If this contract were to be terminated or not renewed, we could lose as much as
47% of our volume. We would need to replace this volume with volume from our
other network participants, through the growth of our sites or with volume
generated through other means, such as increased marketing, any
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of which would result in an unexpected diversion of management efforts or
increased operating expenses. If we were unable to replace this volume, we
would also be unable to replace the 17% of our revenues lost from WebTV Network
as well. For the year ended 1998, none of our network participants individually
drove more than 2% of our volume, except WebTV Network which was responsible
for approximately 24% of our volume. For the quarter ended March 31, 1999, none
of our network participants individually drove more than 3% of our volume,
except for WebTV Network which was responsible for approximately 47% of our
volume. In addition, WebTV Network was responsible for approximately 13% and
17% of our revenues for the year ended 1998 and the quarter ended March 31,
1999, respectively.
Our uncertain sales cycle may cause us to incur substantial expenses and expend
management time without generating the corresponding revenues which would slow
our cash flow
Our sales cycle, particularly with our business clients, is generally lengthy
and uncertain. During the sales cycle, we may expend substantial funds and
management resources without generating corresponding revenues. The time
between the date of our initial contact with a potential client and the
execution of a contract with that potential client typically ranges from a few
weeks for smaller agreements to several months for larger agreements. Our sales
cycle is also subject to delays as a result of factors over which we have
little or no control, including the following:
. budgetary constraints;
. internal acceptance reviews;
. the success and continued internal support of advertisers', business
services clients' and network participants' own development efforts; and
. the possibility of cancellation or delay of projects by advertisers,
business services clients or network participants.
The length and uncertainty of our sales cycle also may harm our billing and
collection efforts. The length of the sales cycle prevents us from rendering
our services on a more accelerated basis, which slows our cash flow and reduces
our ability to fund the expenditures we incur during the sales cycle.
We depend on our users for content, promotion and sustaining an engaged
audience, and if our users become dissatisfied or do not become engaged with
our service, we would need to increase our expenditures for these activities
We depend largely on our users for content, word-of-mouth promotion and for
sustaining an involved audience for our advertisers and, to a lesser extent,
our business clients. If our users become dissatisfied or do not become engaged
with our service, they will not generate significant content or promote our
site and we will have to increase the expenditure of our own resources for
these activities. In addition, dissatisfied or disengaged users would not
continue to attract other users to our site. Loss of our users and failure to
increase our number of engaged users would hurt our efforts to generate
increased revenues. Our users may become dissatisfied with our service as a
result of the increased focus on commercialization of our services due to their
continued exposure to advertising or ecommerce activities on our sites or the
use of their information for commercial purposes. Our users may also become
dissatisfied with our service if we do not maintain our structured environment,
if we experience system failures or we do not continually upgrade our software
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functionality. In addition, users may visit our community for a single event,
such as a live event regarding the Grammy Awards, or to explore our community
and not return.
We depend on our trained community leaders and moderators to engage our users
and maintain our structured and moderated programming
We depend on our network of trained community leaders and moderators, which
consisted of over 2,000 individuals as of March 31, 1999, to draw our users
into our community and maintain our structured and moderated programming. Most
of our 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 community leadership position and
generally have fun participating in such a novel form of communication. As the
Internet evolves and online communication becomes more common, our trained
community leaders and moderators may view moderating as less exciting or less
of a novelty than it is now. Loss of our trained community leaders and
moderators, or loss of our ability to attract these individuals to our service,
would cause us to implement new programs to engage our users and maintain our
structured environment. The implementation of these new programs would cause us
to expend unexpected management time and resources which would increase our
operating expenses.
Maintaining and promoting our brand identity is a critical aspect of
maintaining and expanding our user base, business clients and the number of our
network participants
We intend to substantially increase our financial commitment to the
maintenance and promotion of our brand loyalty through advertising campaigns in
several forms of media, including television, print and billboards. These
campaigns may not successfully enhance our brand, and we may incur excessive
expenses in connection with our efforts to promote and maintain our brand
without generating a corresponding increase in revenues, which would contribute
to our not achieving profitability. We spent approximately $7.4 million in 1998
and $4.2 million in the quarter ended March 31, 1999 on these activities. We
expect to spend over $10 million in the next 12 months, consisting of a
combination of cash and noncash in-kind advertising. The amounts include co-
branding, ingredient branding, where the Talk City brand receives a less
prominent position than the brand, usually as an ingredient of the overall
service offered, such as "chat powered by Talk City," and other marketing
activities with our network. These other marketing activities will consist of
activities in which we work with our network participants to promote the
services in a way which highlights both brands' involvement in the services
offered.
Promotion and enhancement of our brand also will depend, in part, on our
ability to continue to provide a clean, well lighted community experience. The
value of our brand could diminish if businesses, users, network participants
and advertisers do not perceive the www.talkcity.com community experience to be
of high quality or if we introduce new services or enter into new business
ventures that are not well received.
We are growing rapidly and must effectively manage and support our growth in
order for our business strategy to succeed
We have grown rapidly and will need to continue to grow in all areas of
operation in order to execute our business strategy. Managing and sustaining
our growth will place significant demands on
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management as well as on our administrative, operational and financial systems
and controls. If we are unable to do this effectively, we would have to divert
resources away from the continued growth of our business and implementation of
our business strategy, such as management time and our limited revenues. We had
31 employees as of March 31, 1998 compared to 82 employees as of March 31,
1999. We anticipate further significant increases in the number of our
employees, especially in our sales and marketing departments in order to take
full advantage of our relationships with Cox, Hearst and NBC. This rapid growth
has caused us to potentially outgrow our current principal office facilities
sooner than we expected. As a result, we are currently considering leasing
additional space in the very competitive Silicon Valley office leasing market.
Our chief executive officer and vice president of community are critical to our
business and they may not remain with us in the future
Our future success will depend to a significant extent on the continued
services of Peter Friedman, our Chairman of the Board, Chief Executive Officer
and President, and Jenna Woodul, our Vice President of Community. The loss of
the services of Mr. Friedman or Ms. Woodul could cause us to incur increased
operating expenses and divert other senior management time in searching for
their replacements. The loss of their services could also harm our reputation
as our business clients, advertisers and network participants could become
concerned about our future operations. We do not have long-term employment
agreements with Mr. Friedman or Ms. Woodul and we do not maintain any key
person life insurance policies.
We must continually attract and retain our sales, technical, marketing and
other personnel or we will be unable to execute our business strategy
Our future success also will depend on our ability to attract, retain and
motivate other highly skilled sales, technical, managerial, marketing and
customer support personnel. Competition for these personnel is intense,
especially in the Internet industry, and we may be unable to successfully
attract, integrate or retain sufficiently qualified personnel. We have in the
past experienced, and we expect to continue to experience, difficulty in hiring
and retaining highly skilled employees with appropriate qualifications as a
result of our rapid growth and expansion.
We may be unable to consummate potential acquisitions or investments or
successfully integrate them with our business which would slow our growth
strategy
As part of our continued strategy to expand the range of our community
applications and features, to acquire additional community audiences and to
expand our business services products, we may acquire or make investments in
complementary businesses, technologies, services or products if appropriate
opportunities arise. We 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, we may
be unable to consummate future acquisitions or investments, which could harm
our growth strategy. If we do acquire a company or make other types of
acquisitions, we could have difficulty integrating the acquired products,
personnel or technologies. These difficulties could disrupt our ongoing
business, distract our management and employees and increase our expenses.
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We will need to raise additional capital to achieve our business objectives
We will need to raise additional capital to continue to develop our business.
Additional financing may not be available on favorable terms or at all. If
adequate funds are not available or are not available on acceptable terms, we
would be unable to continue to develop our business, take advantage of
acquisition opportunities, develop or enhance our services and products or do
one or more of the following:
. expand our business services;
. increase the number of our network participants;
. develop our brand;
. expand our moderator base;
. grow our traffic;
. increase our revenues; or
. respond to competitive pressures.
Our paid moderators could be viewed as employees rather than independent
contractors which could subject us to adverse tax and employee benefit
consequences
We treat our 270 paid moderators as independent contractors. Our paid
moderators sign independent contractor agreements and are paid a flat monthly
fee or per hour. One or more jurisdictions may deem our paid moderators to be
employees rather than independent contractors and seek to impose taxes, and any
applicable interest and penalties, on us. The law regarding the distinction
between independent contractors and employees is not entirely clear. We could
be subject to substantial tax and employee benefit liabilities if it were
ultimately determined that our paid moderators are actually employees.
Our volunteer community leaders could be viewed as employees, which would
substantially increase our operating expenses
If our volunteer community leaders, consisting of approximately 1,800
individuals, were viewed as employees, we could be subject to payment of back
wages and other penalties and our operating expenses could substantially
increase. Former volunteers of America Online, Inc. recently filed a complaint
with the Labor Department and a class action lawsuit claiming they were treated
like employees and should have been paid.
System failures or slow downs would harm our reputation and thus reduce our
attractiveness to our current and future business clients, users, network
participants and advertisers
System failures could harm our reputation and reduce our attractiveness to
businesses, users, network participants and advertisers. Our ability to attract
potential business clients, users, network participants and advertisers to
promote our brand will depend significantly on the performance of our network
infrastructure. In addition, a key element of our strategy is to generate a
high level of user volume. An increase in the volume of user traffic could
strain the capacity of our infrastructure, resulting in a slowing or outage of
our services and reduced traffic to our Web sites. We may be unable to improve
our technical infrastructure in relation to increased user volume. Our users
depend on Internet service providers, online service providers and other Web
site operators for access to our
15
<PAGE>
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 our systems.
Our communications and other computer hardware operations are subject to
disruptions which are out of our control and for which we may not have adequate
insurance
Fire, floods, earthquakes, power loss, telecommunications failures, break-ins
and similar events could damage our communications hardware and other computer
hardware operations. These operations are located separate from our principal
offices at Frontier Global Centers facilities in Sunnyvale, California. In
addition, computer viruses, electronic break-ins or other similar interruptions
also could disrupt our Web sites. Our insurance policies may not adequately
compensate us for any losses that may occur due to any failures or
interruptions in our systems.
Our business is largely dependent on the development and growth of the
Internet, which may not grow, or if it does grow, may be unable to support the
demands placed on it by this growth
Our market is new and rapidly evolving. The usage of our Web sites, which
drives our volume and in turn our revenues, may not grow if Internet usage in
general does not continue to grow. If Internet usage does continue to grow, the
Internet infrastructure may be unable to support the demands placed on it by
this growth and its performance and reliability may decline. Varying factors
could inhibit future growth in Internet usage, including:
. inadequate network infrastructure;
. security concerns;
. inconsistent quality of service; and
. unavailability of cost effective, high speed service.
Many Web sites have experienced interruptions in their service as a result of
outages and other delays occurring throughout the Internet network
infrastructure. Internet usage, as well as the usage of our Web sites, could
decline or grow at a slower rate than expected if these outages or delays
frequently occur in the future.
We must keep pace with rapid technological change and the intense competition
of the Internet industry in order to succeed
Our market is characterized by rapidly changing technologies, frequent new
product and service introductions and evolving industry standards. The recent
growth of the Internet and intense competition in our industry exacerbate these
market characteristics. To succeed, we will need to effectively integrate the
various software programs and tools required to enhance and improve our product
offerings and manage our business. Any enhancements or new services or features
must meet the requirements of our current and prospective users and must
achieve significant market acceptance. Our success also will depend on our
ability to adapt to rapidly changing technologies by continually improving the
performance features and reliability of our services. We may experience
difficulties that could delay or prevent the successful development,
introduction or marketing of new products and services. We could also incur
substantial costs if we need to modify our services or infrastructure to adapt
to these changes.
16
<PAGE>
We may be liable for misappropriation by others of our users' personal or
credit card information
If third parties were able to penetrate our network security or otherwise
misappropriate our users' personal information or credit card information, we
could be subject to liability. These could include claims for unauthorized
purchases with credit card information, impersonation or other similar fraud
claims.
We may be liable for our use or sale of our users' personal information
We could be subject to liability claims by our users for misuses of personal
information, such as for unauthorized marketing purposes. In addition, the
Federal Trade Commission has been investigating various Internet companies
regarding their use of personal information. We could incur additional expenses
if new regulations regarding the use of personal information are introduced or
if our privacy practices are investigated. We currently use our users' personal
information internally to determine how to improve our service, applications
and features and to target our advertisements and communications. We also use
this information externally to provide our advertisers with the demographics of
our user base. We may, in the future, sell our user information on an
aggregate, not individual, basis.
We may be subject to liability for products sold through our Web sites
Consumers may sue us if any of the products that we sell online are
defective, fail to perform properly or injure the user. Liability claims
resulting from our sale of products could require us to spend significant time
and money in litigation or to pay significant damages. To date, we have had
very limited experience in the sale of products online and the development of
relationships with manufacturers or suppliers of such products. We plan to
develop a range of ecommerce opportunities, such as shopping events hosted by
celebrity guests to promote particular products.
Year 2000 problems with our internal systems and third-party systems of our
suppliers and Web infrastructure could require significant time and expense and
could reduce our future revenues
We may be exposed to a loss of revenues and our operating expenses could
increase if the systems on which we are dependent to conduct our operations are
not year 2000 compliant. Our potential areas of exposure include products
purchased from third parties, computers, software telephone systems and other
equipment used internally. The reasonably likely worst case scenario for year
2000 issues would be if a significant defect exists in key hardware or software
and if a solution for this problem were not immediately available. If a problem
is detected in these subsystems during our year 2000 compliance testing
process, these components will need to be revised or replaced. If our present
efforts to address the year 2000 compliance issues are not successful, or if
suppliers and other third parties with which we do business do not successfully
address these issues, our business could be harmed.
In the event that our Web-hosting facilities are not year 2000 compliant, our
production Web sites would be unavailable and we would be unable to deliver
services to our users. In the event that our production and operational
facilities that support our Web sites are not year 2000 compliant,
17
<PAGE>
portions of our Web site may become inaccessible. A prolonged disruption in our
operations could cause our business clients and network participants to stop
doing business with us.
Internet security and concerns could hinder ecommerce
The need to securely transmit confidential information over the Internet has
been a significant barrier to ecommerce and communications over the Internet.
We may incur significant costs to protect against the threat of security
breaches or to alleviate problems caused by breaches like this. Our insurance
policies carry coverage limits that may not be adequate to reimburse us for
losses caused by security breaches. Any well publicized compromise of security
could deter people from using the Internet or using it to conduct transactions
that involve transmitting confidential information.
Changes in government regulation could limit our Internet activities or result
in additional costs of doing business on the Internet
Currently few laws or regulations exist that specifically regulate
communications or commerce on the Internet, but we expect more stringent laws
and regulations to be enacted due to the increasing popularity and use of the
Internet. Any new legislation or regulations or the application of existing
laws and regulations to the Internet could limit our user volume and increase
our operating expenses. In addition, the application of existing laws to the
Internet is uncertain, may take years to resolve and could expose us to
substantial liability for which we 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;
. intellectual property;
. information security;
. anticompetitive practices;
. the convergence of traditional channels with Internet commerce;
. taxation and pricing; and
. the characteristics and quality of products and services.
Those laws that do reference the Internet, such as the recently passed
Digital Millennium Copyright Act, have not yet been interpreted by the courts
and their applicability and reach are not defined. The Federal Trade Commission
has submitted proposals to the Internet industry regarding the rights and
safety of children using the Internet and is expected to issue regulations in
this area.
If Internet service providers become regulated in a manner similar to long
distance telephone carriers, Internet growth may grow at a slower pace which
would cause our revenues to decrease
If Internet growth slows due to proposals to regulate Internet service
providers similar to long distance telephone carriers, our user volume and the
demand for our business services would decline which would cause our revenues
to decrease. Increased use of the Internet has burdened the existing
telecommunications infrastructure and led to interruptions in phone service in
areas with high
18
<PAGE>
Internet use. Several telecommunications companies and local telephone
carriers, such as Pacific Bell, 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.
We may be subject to liability for publishing or distributing content over the
Internet
We may be subject to claims relating to content that is published on or
downloaded from our sites. We also could be subject to liability for content
that is accessible from our Web sites through links to other Web sites or that
is posted by members in chat rooms or bulletin boards. Although we carry
general liability insurance, our insurance may not cover potential claims of
this type, such as defamation or trademark infringement, or may not be adequate
to cover all costs incurred in defense of potential claims or to indemnify us
for all liability that may be imposed. In addition, any claims like this, with
or without merit, would result in the diversion of our financial resources and
management personnel.
Current and potential competitors could decrease our market share and harm our
business
Increases in the number of Web sites competing for the attention and spending
of businesses, users and advertisers could result in price reductions, reduced
margins or loss of market share, any of which could decrease our revenues,
contribute to our not achieving profitability and hurt our reputation. The
barriers to entry in the Internet services market are low and we expect the
number of our competitors to continue to increase. Any company or individual
can establish and maintain a Web site for minimal cost. We compete for business
clients, users and advertisers with numerous companies, including the
following:
. online services or Web sites that produce business services, such as
market research, customized communities or online events, including Well
Engaged and broadcast.com, Inc.;
. online services or Web sites with a focus on community services, such as
America Online, GeoCities, Inc., a subsidiary of Yahoo! Inc., Tripod,
Inc., a subsidiary of Lycos, Inc., Delphi, theglobe.com, Inc., Xoom Inc.,
Fortune City, Homestead.com, WBS.net and Angelfire;
. vertical community online services that focus on specific market or
demographic segments, such as iVillage Inc., which is focused on women,
or iTurf, which is focused on teens;
. Web retrieval and other Web portal companies that offer community
applications, such as chat and home pages, as part of their site,
including Excite@Home, Infoseek Corporation, Lycos and Yahoo!; and
. publishers and distributors of traditional media, such as television,
radio and print.
None of the above identified competitors is dominant in its respective area
of operation. See "Business--Competition."
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<PAGE>
We depend on third-party software to measure user demographics and for other
related services and if this software does not function properly, we would need
to purchase new software or write the software ourselves, each of which could
cause a temporary disruption in our business
If software we have purchased from third parties to perform our services does
not function properly or is not updated, we would need to purchase new software
from other third party providers. Even though the third-party software we
currently use is easily replaced through multiple other third party providers,
or by our writing the necessary software programs ourselves, each of these
alternatives would require an unplanned increase in operating expenses and
could cause a one to two month disruption in our business.
It is important to advertisers that we accurately measure the demographics of
our user base and the delivery of advertising impressions on our Web sites.
Companies may choose not to advertise on our Web sites or may be less willing
to pay the fees we intend to charge for advertising if they do not perceive our
measurements to be reliable. We have purchased third-party software from Oracle
Corporation and NetGravity, Inc. for these measurement services. We may be
unable to accurately evaluate the demographic characteristics of our users if
the third-party software does not function properly or is not enhanced to
support our needs. Our ability to deliver our services to our users may also be
harmed if other software we have purchased from third parties, such as
Microsoft Exchange for real-time chat and Netscape Web for ad serving and
management, is not reliable or does not function properly.
We are dependent on the trademarks "Talk City" and "OnNow" and if we could not
use these marks we would need to reimplement our Web sites and re-build our
brand identity
We are dependent on the trademarks "Talk City" and "OnNow." We have not yet
received trademark registration of "OnNow." If we were prevented from using the
trademarks "Talk City" or "OnNow," we would need to reimplement our Web sites
and devise new hard copy materials, such as letterhead and merchandise. We
would also need to re-build our brand identity with our business clients,
users, network participants and advertisers. Our operating expenses would
substantially increase if we had to re-build our brand identity or reimplement
our Web sites.
Possible infringement of our intellectual property rights by third parties
could substantially increase our operating expenses
Other parties may assert claims of infringement of intellectual property or
other proprietary rights against us. These claims, even if without merit, could
require us to expend significant financial and managerial resources. Further,
if claims like this are successful, we may be required to change our
trademarks, alter our content or pay financial damages, any of which could
substantially increase our operating expenses. We also may be required to
obtain licenses from others to refine, develop, market and deliver new
services. We 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. We have been subject to claims and expect to be subject
to legal proceedings and claims from time to time in the ordinary course of our
business, including claims of alleged infringement of trademarks and other
intellectual property rights of third parties by us and our licensees.
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<PAGE>
The allocation of proceeds from this offering may not yield significant returns
for our stockholders
Our management will have the discretion to allocate the net proceeds of this
offering to uses that our stockholders may not deem desirable. Pending any
specific needs, we expect to invest the net proceeds in short-term, interest-
bearing, investment grade securities for an indefinite period of time. We
cannot guarantee that any invested proceeds will yield a significant return.
See "Use of Proceeds."
Our stock price is likely to be extremely volatile as the market for Internet
companies' stock has recently experienced extreme price and volume fluctuations
The market price of our common stock is likely to be extremely volatile as
the market for Internet-related and technology companies has experienced
extreme price and volume fluctuations in recent months. Despite the strong
pattern of operating losses of Internet-related companies, the market demand,
valuation and trading prices of these companies has been high. At the same
time, the share prices of these companies' stocks have been highly volatile and
have recorded lows well below their historical highs. As a result, investors in
these companies often buy the stock at very high prices only to see the price
drop substantially a short time later, resulting in an extreme drop in value in
the stock holdings of these investors. Historically, we have experienced
significant losses, which totaled $15.7 million in 1998. In addition, we have
experienced fluctuations in our volume of users and usage patterns, which could
also lead to extreme volatility of our stock price. We cannot assure you that
our stock will trade at the same levels as other Internet stocks or that
Internet stocks in general will sustain current market prices. Volatility in
the market price of our common stock could result in securities class action
litigation. Any litigation would likely result in substantial costs and a
diversion of management's attention and resources.
Our stock price is likely to be extremely volatile due to broad market and
industry factors beyond our control
We expect our stock price to be subject to wide fluctuations in response to a
variety of factors, including factors beyond our control. These broad market
and industry factors could harm the market price of our common stock,
regardless of our performance. These factors include:
. actual or anticipated variations in our quarterly operating results;
. announcements of technological innovations or new programming by us or
our competitors;
. conditions or trends in the Internet and online services industries;
. changes in the market valuations of other Internet companies;
. announcements by us or our competitors of significant acquisitions,
strategic partnerships, joint ventures or capital commitments;
. additions or departures of key personnel; and
. sales of substantial amounts of our 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 our common
stock.
An active public market for our common stock may not develop
An active public market for our common stock may not develop or be sustained
after this offering. The initial public offering price for the shares has been
determined by negotiations between
21
<PAGE>
us and the representatives of the underwriters and may not be indicative of
prices that will prevail in the trading market.
You will incur immediate and substantial dilution in the net tangible book
value of the stock you purchase
The initial public offering price is substantially higher than the net
tangible book value of $4.06 per share that our outstanding common stock will
have immediately after this offering. Accordingly, if you purchase shares of
our common stock, you will incur immediate and substantial dilution of $7.94
per share. If the holders of outstanding options or warrants exercise those
options or warrants, you will suffer further dilution. See "Dilution."
If we raise additional capital through the issuance of new securities, you will
incur additional dilution
If we raise additional capital through the issuance of new securities, our
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 our stockholders.
A large number of shares becoming eligible for sale after this offering could
cause our stock price to decline
Sales of a substantial number of shares of common stock in the public market
following this offering, or the perception that sales could occur, could cause
the market price of our common stock to decline. See "Shares Eligible for
Future Sale."
Exercise of registration rights after this offering could adversely affect our
stock price
If holders of registration rights exercise those rights after this offering,
a large number of securities could be registered and sold in the public market,
which could result in a decline in the price of our common stock. If we were to
include in a company-initiated registration shares held by these holders
pursuant to the exercise of their registration rights, our ability to raise
needed capital could suffer. After this offering, the holders of 17,569,709
shares of common stock and warrants to purchase 1,318,246 shares of our common
stock, which will represent a total of approximately 80% of our outstanding
stock after completion of this offering, will be entitled to rights with
respect to registration under the Securities Act of 1933.
Our undesignated preferred stock may inhibit potential acquisition bids for us,
cause the market price for our common stock to fall and diminish the voting
rights of the holders of our common stock
If our board of directors issues preferred stock, potential acquirors may not
make acquisition bids for us, our stock price may fall and the voting rights of
existing stockholders may diminish as a result. Our board of directors has the
authority to issue up to 5,000,000 shares of preferred stock in one or more
series. Our board of directors can fix the price, rights, preferences,
privileges and
22
<PAGE>
restrictions of the preferred stock without any further vote or action by our
stockholders. See "Description of Capital Stock--Preferred Stock."
We have anti-takeover defenses that could delay or prevent an acquisition of
our company
Provisions of our certificate of incorporation, bylaws and Delaware law could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. See "Description of Capital Stock."
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<PAGE>
Use of Proceeds
Our net proceeds from the sale of 5,000,000 shares of common stock in this
offering at the initial public offering price of $12.00 per share, after
deducting underwriting discounts and commissions and estimated offering
expenses, will be approximately $54.7 million. If the underwriters' over-
allotment option is exercised in full, our net proceeds will be approximately
$63.1 million.
We currently expect to use approximately $27.0 million of the net proceeds of
this offering for marketing, including brand development and promotion and
growth of our user volume, $18.1 million for expansion of our sales
infrastructure and the remaining $9.6 million will be used for working capital
and general corporate purposes, including expansion of our trained community
leader and moderator network, development of software and content for user
services, relocation of our offices and additional personnel. We believe
opportunities may exist to expand our current business through acquisitions or
investments in complementary businesses, technologies, services or products,
and we may utilize a portion of the net proceeds for this purpose. Pending
these uses, our net proceeds from this offering will be invested in short-term,
interest-bearing, investment grade securities.
Dividend Policy
We have never declared or paid any cash dividends on our common stock or
other securities. We currently anticipate that we will retain all of our future
earnings for use in the expansion and operation of our business and do not
anticipate paying any cash dividends for the foreseeable future.
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<PAGE>
Capitalization
The following table sets forth our capitalization as of March 31, 1999:
. on an actual basis after giving effect to the one for two reverse
stock split of the common stock and preferred stock;
. on a pro forma basis to reflect the sale of 2,499,884 shares of
preferred stock for aggregate proceeds of $20.0 million and the
issuance of 1,350,000 shares of preferred stock, with an assigned
value of $4.00 per share for reporting purposes, and warrants in
connection with the NBC and Hearst agreements during April 1999 and
the automatic conversion of all outstanding shares of preferred
stock into common stock upon the closing of this offering; and
. on an as adjusted basis to reflect the sale of the 5,000,000 shares
of common stock at the initial public offering price of $12.00 per
share in this offering, less underwriting discounts and commissions
and estimated offering expenses to be paid by us. Please see "Use of
Proceeds."
You should read this information together with the financial statements and
the notes to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 1999
--------------------------------
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Notes payable, less current portion............ $ 237 $ 237 $ 237
Redeemable convertible preferred stock: $0.001
par value, 19,000,000 shares authorized,
actual; 11,101,212 shares issued and
outstanding, actual; no shares issued or
outstanding, pro forma and as adjusted......... 39,979 -- --
Stockholders' equity:
Preferred stock, $0.001 par value: no shares
authorized, issued or outstanding, actual;
5,000,000 shares authorized, pro forma and
as adjusted; no shares issued or
outstanding, pro forma and as adjusted...... -- -- --
Common stock, $0.001 par value: 60,000,000
shares authorized, actual; 100,000,000
shares authorized, pro forma and as
adjusted; 4,314,904 shares issued and
outstanding, actual; 19,160,080 shares
issued and outstanding, pro forma;
24,160,080 shares issued and outstanding, as
adjusted.................................... 4 19 24
Additional paid-in capital..................... 3,959 75,754 130,449
Deferred compensation.......................... (1,144) (1,144) (1,144)
Notes receivable from stockholders............. (921) (921) (921)
Accumulated deficit............................ (30,257) (30,257) (30,257)
-------- -------- --------
Total stockholders' equity (deficit)......... (28,359) 43,451 98,151
-------- -------- --------
Total capitalization....................... $ 11,857 $ 43,688 $ 98,388
======== ======== ========
</TABLE>
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<PAGE>
Dilution
Our pro forma net tangible book value as of March 31, 1999, after giving
effect to the one for two reverse stock split of all the outstanding common
stock and preferred stock, the sale of $20.0 million of preferred stock, the
issuance of preferred stock and warrants in connection with the NBC and Hearst
agreements and the conversion of all outstanding shares of preferred stock, was
$43.5 million, or $2.27 per share. Pro forma net tangible book value per share
represents total tangible assets less total liabilities, divided by the number
of outstanding shares of common stock.
Dilution in net tangible book value per share represents the difference
between the amount per share paid by purchasers of our common stock in this
offering and the net tangible book value per share of our common stock
immediately afterwards. After giving effect to our sale of the 5,000,000 shares
of common stock offered by this prospectus and after deducting underwriting
discounts and commissions and estimated offering expenses to be paid by us, our
net tangible book value at March 31, 1999 would have been $98.2 million, or
$4.06 per share. This represents an immediate increase in net tangible book
value to existing stockholders of $1.79 per share and an immediate dilution to
new public investors of $7.94 per share. The following table illustrates the
per share dilution:
<TABLE>
<S> <C> <C>
Initial public offering price................................. $12.00
Pro forma net tangible book value per share as of March 31,
1999......................................................... $2.27
Increase per share attributable to new public investors....... 1.79
-----
Pro forma net tangible book value per share after offering.... 4.06
------
Dilution per share to new public investors.................... $ 7.94
======
</TABLE>
The following table sets forth on a pro forma basis as of March 31, 1999,
after giving effect to a one for two reverse stock split of all the outstanding
common stock and preferred stock, the sale of $20.0 million of preferred stock,
the issuance of preferred stock and warrants in connection with the NBC and
Hearst agreements and the conversion of all outstanding preferred stock into
common stock, the number of shares of common stock purchased from us, the total
price paid, and the average price per share paid by the existing stockholders
and new public investors, after deducting underwriting discounts and
commissions and estimated offering expenses to be paid by us, at the initial
public offering price of $12.00 per share:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.. 19,160,080 79.3% $38,579,000 41.4% $2.01
New public investors... 5,000,000 20.7 54,700,000 58.6 10.94
---------- ----- ----------- -----
Total................ 24,160,080 100.0% $93,279,000 100.0%
========== ===== =========== =====
</TABLE>
The above discussion assumes no exercise of outstanding options or warrants.
You will experience additional dilution in the event these warrants or options
are exercised.
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<PAGE>
Selected Financial Data
(in thousands, except per share data)
The following selected financial data are qualified by reference to, and
should be read in conjunction with Management's Discussion and Analysis of
Financial Condition and Results of Operations and the financial statements and
notes thereto included elsewhere in this prospectus. The selected balance sheet
data as of December 31, 1996, 1997 and 1998 and selected statement of
operations data for the period from March 29, 1996 (inception) through December
31, 1996, and the years ended December 31, 1997 and 1998 have been derived from
our audited financial statements and the notes thereto included elsewhere in
this prospectus. The statement of operations data for each of the three-month
periods ended March 31, 1998 and 1999, and the balance sheet data at March 31,
1999, are derived from our unaudited interim financial statements included
elsewhere in this prospectus. In management's opinion, the unaudited financial
statements have been prepared on substantially the same basis as the audited
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the results of
operations for such periods.
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months ended
(Inception) to December 31, March 31,
December 31, ----------------- --------------------
1996 1997 1998 1998 1999
-------------- ------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data
Revenues:
Business services..... $ -- $ 25 $ 522 $ 60 $ 357
Advertising and
sponsorships......... 14 183 931 65 623
------- ------- -------- --------- ---------
Total revenues...... 14 208 1,453 125 980
Operating expenses:
Product development
and programming...... 771 3,472 5,383 1,175 2,224
Sales and marketing... 252 2,492 6,668 476 3,425
General and
administrative....... 335 974 1,804 336 974
Noncash advertising
and promotional
charges.............. -- -- 2,890 1,039 1,410
------- ------- -------- --------- ---------
Total operating
expenses........... 1,358 6,938 16,745 3,026 8,033
------- ------- -------- --------- ---------
Loss from
operations......... (1,344) (6,730) (15,292) (2,901) (7,053)
Interest income
(expense), net......... 36 339 (367) 10 154
------- ------- -------- --------- ---------
Net loss............ $(1,308) $(6,391) $(15,659) $ (2,891) $ (6,899)
Accretion of redeemable
convertible preferred
stock and warrants..... 8 38 558 20 72
------- ------- -------- --------- ---------
Net loss applicable
to common
stockholders....... $(1,316) $(6,429) $(16,217) $ (2,911) $ (6,971)
======= ======= ======== ========= =========
Net loss per share:
Basic and diluted..... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90)
Weighted average
shares............... 2,679 3,068 3,295 3,332 3,661
Pro forma net loss per
share:
Basic and diluted..... $ (1.66) $ (0.47)
Weighted average
shares............... 9,762 14,741
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31,
-------------------------- ---------------
1996 1997 1998 1999
------- ------- -------- ---------------
<S> <C> <C> <C> <C>
Balance Sheet Data
Cash, cash equivalents and short-
term investments................. $ 8,930 $ 2,055 $ 14,437 $ 9,224
Working capital................... 8,651 1,844 13,493 7,768
Total assets...................... 9,062 2,811 18,490 14,572
Long-term obligations, net of
current portion.................. 273 237
Redeemable convertible preferred
stock and warrants............... 10,042 10,081 38,973 39,979
Total stockholders' deficit....... (1,270) (7,669) (22,463) (28,359)
</TABLE>
See Note 2 of Notes to Financial Statements for information concerning the
calculation of shares used in computing net loss per share. The pro forma net
loss per share data reflects reflects our sale in April 1999 of additional
preferred stock for aggregate proceeds of $20.0 million, our issuance of
preferred stock and warrants in connection with the NBC and Hearst agreements
in April 1999, and the automatic conversion of all outstanding shares of our
redeemable convertible preferred stock into shares of our common stock.
27
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This section contains forward-looking statements. The outcome of the events
described in these forward-looking statements is subject to factors out of our
control. You should not rely on these forward-looking statements. Our actual
results could differ materially from those discussed in the forward-looking
statements contained in this section.
Overview
We provide online communities and interactive services for businesses and
consumers. From inception through March 1999, 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 to market the
Talk City brand name and attract users to our sites;
. developing a comprehensive computer software and hardware infrastructure;
. recruiting personnel; and
. raising capital.
To date, substantially all of our revenues have been derived from the sale of
our business services, advertising and sponsorships. Our business 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 business services are recognized ratably
over the term of the contract period, 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 sales representative firms to
sell advertising revenues, we recognize revenues net of the commissions paid.
Operating expenses consist primarily of product development and programming,
sales and marketing, general and administrative and interest expenses. Product
development and programming expenses consist primarily of salaries, payroll
taxes and benefits and expenditures related to editorial content, community
management and support personnel, server hosting costs and software development
and operations expenses. Sales and marketing expenses consist primarily of
advertising
28
<PAGE>
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, 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. 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, 1999, noncash
charges of $14.3 million will be charged to operations as the related
advertising is run or promotional services are received. We expect that $8.7
million of this $14.3 million will be charged to operations during the three
months ending June 30, 1999. These amounts were determined based on the fair
value of our common stock and warrants exchanged for the services received. See
Note 3 of the notes to our financial statements.
We incurred losses of $1.3 million in 1996, $6.4 million in 1997, $15.7
million in 1998 and $6.9 million for the three months ended March 31, 1999.
These losses include noncash advertising and promotional charges of $4.3
million through March 31, 1999. At March 31, 1999, we had an accumulated
deficit of $30.3 million. We anticipate that we will incur additional operating
losses for the foreseeable future.
Results of Operations
Three Months Ended March 31, 1999 and 1998
Revenues. Total revenues increased to $980,000 for the three months ended
March 31, 1999 from $125,000 for the three months ended March 31, 1998.
Business services revenues increased to $357,000, or 36% of total revenues for
the three months ended March 31, 1999, from $60,000, or 48% of total revenues,
for the three months ended March 31, 1998. Advertising and sponsorship revenues
increased to $623,000, or 64% of total revenues, for the three months ended
March 31, 1999 from $65,000, or 52% of total revenues, for the three months
ended March 31, 1998. The increases were primarily due to increased sales from
the expansion of our sales force. These increases in personnel resulted in
increases in the number of business clients, projects, advertisers and the
amounts spent per advertiser, as well as increases in our user volume, which
increased from 1.5 million unique visitors for the one month ended March 31,
1998 to 2.6 million unique visitors for the one month ended March 31, 1999, and
expansion of our consumer and business services offerings.
Operating Expenses:
Product Development and Programming. Product development and programming
expenses increased to $2.2 million, or 227% of total revenues, for the three
months ended March 31, 1999 from $1.2 million, or 940% of total revenues, for
the three months ended March 31, 1998. The increase was primarily attributable
to additional personnel-related costs of approximately $540,000 and an increase
in independent contractor costs of $310,000 associated with the increased
number of supervised chats we conducted and the enhancement of the
functionality of our Web sites.
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<PAGE>
Sales and Marketing. Sales and marketing expenses increased to $3.4 million,
or 349% of total revenues, for the three months ended March 31, 1999 from
$476,000, or 381% of total revenues, for the three months ended March 31, 1998.
The increase in sales and marketing expenses was primarily attributable to an
increase in sales personnel and commission-related costs of approximately
$470,000 and an increase of approximately $2.2 million in expenses associated
with the development and implementation of our branding, promotion and
marketing campaigns. We expect that sales and marketing expenses will increase
for the foreseeable future as we increase expenditures for branding, promotion
and marketing, expand our internal sales force and hire additional marketing
personnel.
General and Administrative. General and administrative expenses increased to
$974,000, or 99% of total revenues, for the three months ended March 31, 1999
from $336,000, or 269% of total revenues, for the three months ended March 31,
1998. The increase was primarily due to compensation expense of approximately
$169,000 related to the issuance of stock options and recruiting costs of
approximately $180,000. In addition, we incurred an increase in accounting and
legal fees of $130,000 and an increase in facilities expenses of $100,000 in
order to support the growth of our business. We expect general and
administrative expenses will increase in the future as we hire additional
personnel and incur additional costs related to the growth of our business and
operations as a public company. In addition, we expect to expand our facilities
and incur associated expenses to support our anticipated growth.
Noncash Advertising and Promotional Charges. We incurred charges of $1.4
million, or 143% of total revenues, for the three months ended March 31, 1999
and $1.0 million, or 831% of total revenues, for the three months ended March
31, 1998 for noncash expenses associated with advertising and operating
agreements with two of our major media network participants.
Interest Income (Expense), Net. Interest income (expense), net includes
income from our cash and investments and expenses related to our equipment
financing obligations. Interest income increased to $154,000, or 16% of total
revenues, for the three months ended March 31, 1999 from $10,000, or 8% of
total revenues, for the three months ended March 31, 1998. The increase was
primarily due to a higher average investment balance during the three months
ended March 31, 1999.
Periods Ended December 31, 1998, 1997 and 1996
Revenues. Total revenues were $1.5 million in 1998, $208,000 in 1997 and
$14,000 in 1996. Business services revenues were $522,000, or 36% of total
revenues, in 1998 and $25,000, or 12% of total revenues, in 1997. Advertising
and sponsorship revenues were $931,000, or 64% of total revenues, in 1998,
$183,000, or 88% of total revenues, in 1997 and $14,000, or 100% of total
revenues, in 1996. The increases were primarily due to increased sales from the
expansion of our sales force, which resulted in increases in the number of
business clients, projects, advertisers and amounts spent per advertiser, as
well as increases in our user volume and expansion of our consumer and business
services offerings.
Operating Expenses:
Product Development and Programming. Product development and programming
expenses were $5.4 million, or 370% of total revenues, in 1998, $3.5 million,
or 1,669% of total revenues, in 1997 and $771,000, or 5,507% of total revenues,
in 1996. In our first year of operations, we were
30
<PAGE>
building our infrastructure and did not begin to incur substantial expenses
until 1997. The increase in absolute dollars in product development and
programming from 1997 to 1998 was primarily attributable to an increase in
personnel and recruiting-related costs of $700,000 and an increase in chat
hosting and server-related costs of $1.1 million associated with the rapid
growth in user volume from our supervised chats and enhancements of
functionality to our Web sites. Product development expenses as a percentage of
total revenues decreased due to growth in total revenues.
Sales and Marketing. Sales and marketing expenses were $6.7 million, or 458%
of total revenues, in 1998, $2.5 million, or 1,198% of total revenues, in 1997
and $252,000, or 1,800% of total revenues, in 1996. In our first year of
operations, we did not dedicate significant resources to sales and marketing.
The increase in sales and marketing expenses from 1997 to 1998 was primarily
attributable to an increase of approximately $2.5 million in our online and
print advertising, public relations and other promotional expenditures and an
increase in personnel and recruiting-related expenses of $825,000 as a result
of implementing our sales and marketing strategy.
General and Administrative. General and administrative expenses were $1.8
million, or 124% of total revenues, in 1998, $974,000, or 468% of total
revenues, in 1997 and $335,000, or 2,393% of total revenues, in 1996. The
increase in general and administrative expenses in 1998 was primarily due to
increases in personnel and professional services, travel and facilities-related
expenses to support the growth of our operations. General and administrative
expenses decreased as a percentage of revenues in 1997 due to of the growth in
total revenues.
Noncash Advertising and Promotional Charges. In 1998, we charged $2.9
million, or 198% of total revenues, to operations, representing noncash
expenses associated with advertising and operating agreements with various
major media network participants and investors.
Interest Income (Expense), Net. Net interest expense was $367,000, or 25% of
total revenues, in 1998 and net interest income was $339,000, or 163% of total
revenues, in 1997 and $36,000, or 257% of total revenues, in 1996. We incurred
interest expense in 1998 as a result of our loan financing in 1998. Interest
income increased in 1997 compared to 1996 due to higher cash equivalent and
investment balances as a result of proceeds received from the sale of preferred
stock in the fourth quarter of 1996.
Income Taxes. Management has established a full valuation allowance against
its net deferred tax assets because it does not expect sufficient taxable
income to be generated during the 15-year carryforward period.
Quarterly Results of Operations
The following table presents certain statement of operations data for our
five most recent quarters ended March 31, 1999. In management's opinion, this
unaudited information has been prepared on the same basis as the audited annual
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, necessary for fair presentation of the unaudited
information for the quarters presented. This information should be read in
conjunction with our
31
<PAGE>
financial statements, including the notes thereto, included elsewhere herein.
The results of operations for any quarter are not necessarily indicative of
results that may be expected for any future periods.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31,
1998 1998 1998 1998 1999
-------- -------- --------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues:
Business services.......... $ 60 $ 66 $ 167 $ 229 $ 357
Advertising and
sponsorships.............. 65 202 231 433 623
------- ------- ------- ------- -------
Total revenues........... 125 268 398 662 980
Operating expenses:
Product development and
programming............... 1,175 1,298 1,268 1,642 2,224
Sales and marketing........ 476 697 1,983 3,512 3,425
General and
administrative............ 336 338 467 663 974
Noncash advertising and
promotional charges....... 1,039 118 1,411 322 1,410
------- ------- ------- ------- -------
Total operating
expenses................ 3,026 2,451 5,129 6,139 8,033
------- ------- ------- ------- -------
Loss from operations..... (2,901) (2,183) (4,731) (5,477) (7,053)
Interest income (expense),
net......................... 10 (251) (280) 154 154
------- ------- ------- ------- -------
Net loss................. (2,891) (2,434) (5,011) (5,323) (6,899)
Accretion of redeemable
convertible preferred stock
and warrants................ 20 20 478 40 72
Net loss applicable to
common stockholders..... $(2,911) $(2,454) $(5,489) $(5,363) $(6,971)
======= ======= ======= ======= =======
</TABLE>
Our revenues have increased in all quarters presented as a result of
increased sales from the expansion of our sales force which resulted in
increases in the number of business clients, projects, advertisers and amounts
spent per advertiser, as well as increases in our user volume and expansion of
our consumer and business services offerings. Seasonality may significantly
affect our revenues during the first and third quarters as advertisers and
business clients historically spend less during these periods. Because Internet
commerce, business services and advertising are emerging markets, additional
seasonal and other patterns may develop in the future as the market matures.
Any seasonality is likely to result in quarterly fluctuations in our operating
results, which could harm our business. Our operating results also may
fluctuate significantly in the future as a result of a variety of other
factors, many of which are outside of our control. For detailed information
regarding these factors, please see "Risk Factors--Fluctuations in our
quarterly operating results may cause our stock price to decline."
Liquidity and Capital Resources
Since our inception in March 1996, we have financed our operations primarily
through the private placement of our preferred stock and, to a lesser extent,
through equipment financing. As of March 31, 1999, we had $3.5 million in cash
and cash equivalents and $5.7 million in short-term investments. Net cash
provided by financing activities was $10.1 million in 1996 and $24.2 million in
1998, and was primarily attributable to net proceeds from the issuance of
stock. In April 1999, we completed a private placement of preferred stock with
aggregate gross proceeds of $20.0 million.
Net cash used in operating activities was $1.0 million in 1996, $6.3 million
in 1997, $11.0 million in 1998 and $4.6 million for the quarter ended March 31,
1999. Cash used in operating
32
<PAGE>
activities in each of these periods was primarily the result of net operating
losses and increases in accounts receivable, partially offset by increases in
accrued expenses and accounts payable.
Net cash used in investing activities was $137,000 for the inception period
in 1996, $572,000 in 1997, $6.6 million in 1998 and $535,000 for the three
months ended March 31, 1999. Cash used in investing activities in each period
was primarily related to purchases of property and equipment.
As of March 31, 1999, our principal commitments consisted of obligations
outstanding under operating leases. Although we have no material commitments
for capital expenditures, we anticipate a substantial increase in our capital
expenditures and lease commitments consistent with our anticipated growth in
operations, infrastructure and personnel.
In May 1998, we obtained an equipment line of credit with a financial
institution in the amount of $2.0 million. This line of credit is secured by
our fixed assets and has a three-year term that expires in May 2001. As of
March 31, 1999, the amount outstanding under this line of credit was $367,000.
This amount is due in monthly installments through May 2001.
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, our brand promotions and other factors. We
have experienced substantial increases in our expenditures since our inception
consistent with growth in our operations and personnel, and we anticipate that
our expenditures will continue to increase for the foreseeable future.
Additionally, we will continue to evaluate possible acquisitions of or
investments in complementary businesses, technologies, services or products and
plan to expand our sales and marketing programs. We currently believe that our
available cash and cash equivalents combined with the net proceeds from this
offering will be sufficient to meet our anticipated needs for working capital
and capital expenditures for at least the next 18 months. We may need to raise
additional funds, however, in order to fund more rapid expansion, including
significant increases in personnel and office facilities; 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.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 "Accounting for the Cost of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 is effective for financial
statements for years beginning after December 15, 1998. SOP 98-1 provides
guidance over accounting for computer software development or obtained for
internal use including the requirement to capitalize specified costs and
amortization of such costs. We do not expect the adoption of this standard to
have a material effect on our capitalization policy.
In June 1998, FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, collectively referred to as derivatives, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
33
<PAGE>
after June 15, 1999. This statement does not apply to us as we currently do not
have any derivative instruments or hedging activities.
Disclosures About Market Risk
Our exposure to market risk is limited to interest income sensitivity, which
is affected by changes in the general level of U.S. interest rates,
particularly since the majority of our investments are in short-term debt
securities issued by corporations. We place our investments with high quality
issuers and limit the amount of credit exposure to any one issuer. Due to the
nature of our short-term investments, we believe that we are not subject to any
material market risk exposure.
We do not have any foreign currency hedging or other derivative financial
instruments as of March 31, 1999.
Year 2000 Compliance
We may be exposed to a loss of revenues and our operating expenses could
increase if the systems on which we are dependent to conduct our operations are
not year 2000 compliant. Our potential areas of exposure include products
purchased from third parties, information technology, including computers and
software, and non-information technology, including telephone systems and other
equipment used internally. The reasonably likely worst case scenario for year
2000 issues would be if a significant defect exists in key hardware or software
and if a solution for such a problem were not immediately available. If a
problem is detected in these subsystems during our year 2000 compliance testing
process, these components will need to be revised or replaced.
We do not currently have a contingency plan to deal with the worst-case
scenario that might occur if technologies we are dependent upon are not year
2000 compliant and fail to operate effectively after the year 2000. We intend
to develop a plan for this scenario upon the completion of our compliance
assessment plan. This contingency plan is expected to be completed by the third
quarter of 1999.
All areas that are vital to our operations are being tested and validated for
year 2000 compliance. We expect to complete our year 2000 compliance assessment
plan early in the third quarter of 1999 and our compliance testing and related
documentation by the end of the third quarter. Until our assessment is
completed we will not be able to evaluate whether our systems will need to be
revised or replaced, or the cost involved. We have contacted all our major
third party vendors. Of these vendors, 95% have replied to us in writing. Of
the vendors that have replied, 72% are representing that they are year 2000
compliant, 23% are in the process of fixing any known year 2000 problems or
have already identified specific patches available that we will need to install
and verify and 5% are still assessing their year 2000 readiness. To the extent
that vendors fail to provide certification that they are year 2000 compliant,
we will seek to terminate and replace those relationships.
We do not expect to spend more than $100,000 to assess and remediate the year
2000 problem based on the size of our operations, the percentage of our vendors
that are standard to our industry and the lack of dependency on older legacy
software in our production systems.
In the event that our production and operational facilities that support our
Web sites are not year 2000 compliant, portions of our Web sites may become
inaccessible. A prolonged disruption in our
34
<PAGE>
operations could cause our business clients and network participants to stop
doing business with us. Our review of our systems has shown that there is no
single application that would make our Web sites totally unavailable and we
believe that we can quickly address any difficulties that may arise. In the
event that our Web-hosting facilities are not year 2000 compliant, our Web
sites would be unavailable and we would not be able to deliver services to our
users.
If our present efforts to address the year 2000 compliance issues are not
successful, or if distributors, suppliers and other third parties with whom we
conduct business do not successfully address such issues, our business could be
significantly disrupted.
35
<PAGE>
Business
This section contains forward-looking statements. The outcome of the events
described in these forward-looking statements is subject to factors out of our
control. You should not rely on these forward-looking statements. Our actual
results could differ materially from those discussed in the forward-looking
statements contained in this section.
Overview
We provide online communities and interactive services for businesses and
consumers. We offer 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 events, conducting online market research and facilitating online
meetings. For consumers, we operate a network of online communities located at
www.talkcity.com. Our network includes 20 topical categories, over 50 themed
communities, 50 co-branded network participant communities and thousands of
user generated communities. These communities offer services such as moderated
chat, home pages, special event production, message boards and online event
guides. Based on our review and internal analysis of Media Metrix's April 1999
report, in April 1999 we ranked sixteenth out of the top 500 sites on the
Internet based on average minutes spent per usage day for home users in April
1999. In addition, based on our review and internal analysis of the Media
Metrix report, we ranked second out of the top 15 Internet sites whose primary
focus is providing online community services.
We have established relationships across multiple industries and media forms,
including relationships with major media companies, Internet service providers
and Internet content companies. We refer to these companies as our network
participants. We work with our network participants to produce and market
community services that leverage our network participants' content, brand or
customer relationships. By integrating these co-branded services into our
community network, we enjoy exceptional distribution, content and marketing
leverage.
For the quarter ended March 31, 1999, WebTV Network was responsible for
approximately 47% of our volume and approximately 17% of our revenues. We have
a two-year contract with WebTV Network which runs through July 2000. If this
contract was terminated or not renewed, we could lose as much as 47% of our
volume and, if we do not replace this volume with volume from our other network
participants or the growth of our sites, we could lose as much as 17% of our
revenues.
Our community network has achieved critical mass in terms of traffic,
registered users and the loyalty of our users. In March 1999, we had
approximately 2.6 million unique visitors according to I/PRO. These users
generated over 6 million hours of activity on our www.talkcity.com site during
March 1999. During our peak periods, which tend to be early evening hours, we
have as many as 18,000 users simultaneously chatting or engaging in other
interactive activities. As of March 31, 1999, we had over 2 million user
registrations and, during the quarter ended March 31, 1999, we averaged
approximately 200,000 new registrations per month. We believe the strong
loyalty of our users and engaging nature of our programming are reflected by
the significant amount of time that users spend on our site. Our users spend,
on average, over 2 hours per month on our site.
We began providing online community services in April 1996 as LiveWorld
Productions, Inc. and changed our name to Talk City, Inc. in August 1998. Since
April 1996, our operating activities
36
<PAGE>
have been focused on expanding our audience, establishing relationships with
our network participants, developing programs and content and building our
infrastructure.
Industry Background
The Continuing Growth and Evolution of the Internet
The Internet is an increasingly significant global communications medium,
enabling millions of people to directly interact, share information and conduct
business electronically. International Data Corporation estimates that the
number of Web users worldwide will increase from 142 million at the end of 1998
to more than 500 million by the year 2003. As Internet use becomes easier and
more widespread, users are shifting from an early adopter, computer-oriented
audience to a more mainstream consumer audience. Jupiter Communications
estimates that the number of Internet connected households in the United States
will grow from approximately 29 million at the end of 1998 to approximately 57
million by the end of 2002.
The Internet also provides businesses and advertisers with an attractive
means of selling and marketing products and services. According to
International Data Corporation, worldwide consumer commerce revenue on the
Internet is expected to increase from $14.9 billion at the end of 1998 to more
than $177 billion in 2003. As the Internet audience grows and the demographics
of the Web continue to evolve toward mainstream consumers, advertisers are also
expected to significantly increase Internet spending. Jupiter Communications
estimates that the amount of advertising dollars spent on the Internet will
increase from approximately $1.9 billion in 1998 to approximately $7.7 billion
by 2002, a compound annual growth rate of 42%.
The Increasing Importance of Online Communities
In addition to changing the nature of advertising and commercial
transactions, the Internet has also enabled the formation of online
communities. An online community is a group of people who interact via the
Internet with each other around common areas of interest. Online communities
facilitate this interaction by integrating published content, commerce
capabilities and communication resources, such as live events, message boards,
chat rooms, instant messaging, email and homepages.
Companies with strong brands, loyal customers and relevant content are
particularly well-positioned to organize online communities for their
customers. The more passionate a company's customers are about their common
interest, whether it be music, children, a profession or a favorite television
show, the greater the opportunity for that company to migrate its customers
into a robust online community. For example, a media company with a popular
television show can earn the gratitude of its fans by organizing an online
community in which fans can talk about the show, attend live chat events with
the stars, read about missed episodes and buy licensed merchandise at a
discount. We believe the benefits of online communities extend to businesses,
consumers and advertisers.
Online communities represent a significant opportunity for businesses to
deepen their relationship with existing customers or expand their markets by
doing the following:
. reducing customer acquisition, education and support costs;
. increasing customer satisfaction, loyalty and retention;
37
<PAGE>
. capitalizing on the propensity of customers to buy their products or
services;
. enhancing businesses' ability to target customers and understand their
individual needs;
. reducing fixed capital costs;
. broadening geographic reach; and
. providing an opportunity to minimize the use of middlemen such as
retailers, wholesalers, distributors and brokers.
Online communities can also provide significant benefits to consumers, such
as:
. satisfying consumers' basic social need for communication in a convenient
manner that is not limited by the same time and geographic constraints;
. serving as a venue for group meetings and events;
. enabling people to interact on focused topics of interest;
. allowing consumers to obtain increased product and services information
while protecting their privacy; and
. aggregating consumer buying power and helping them to obtain lower prices
from vendors.
Finally, online communities represent an increasingly attractive opportunity
for advertisers because their participants:
. can be segmented and targeted by their membership profiles and by the
discussion topics they select;
. have favorable usage patterns characterized by extended and frequent
visits to the site; and
. are loyal to their online community and associated brands, products and
services.
Shortcomings of Existing Online Communities
To date, many businesses, consumers and advertisers have been frustrated in
their attempts to capitalize on the benefits of online communities.
Despite the compelling benefits of online communities, many businesses find
it difficult to migrate their traditional customer bases into online
communities. First, businesses have difficulty initially attracting a critical
mass of users to the online community and often compete for consumers with
larger, more established Web sites. Second, many businesses lack the capability
to build a scalable technology platform to provide a range of interactive
services and support an online community and do not wish to incur the
substantial costs of developing this capability. Third, businesses often are
unable to hire and retain employees with the specialized skills required to
produce online events, host online discussions, manage user interests and
profiles and execute the many other tasks associated with providing interactive
services or effectively managing an online community.
Many mainstream consumers find existing community sites unsatisfactory.
First, many community sites lack a friendly and welcoming atmosphere. Second,
chat rooms on many existing community sites sometimes include participants who
behave in obnoxious or inappropriate ways, with no practical recourse for users
to object and stop such behavior. As a result, mainstream consumers,
particularly parents of young children, are often reluctant to participate or
allow their children to participate in the community. Third, many community
sites lack structured
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programming, which makes it difficult for newcomers to find community
programming that meets their needs and desires.
While advertisers have begun to promote their products on community sites,
several factors have limited their use of community sites as a marketing
vehicle. Advertisers are concerned that consumers might associate the
advertisers' brand with inappropriate behavior that may sometimes occur within
community Web sites. In addition, some Internet programming is so generic that
it is difficult for advertisers to focus on their targeted audiences.
The Talk City Solution
We have created a network of award-winning online communities and developed a
portfolio of interactive services that meet the needs of businesses, consumers,
advertisers and network participants. Key elements of our solution include the
following:
Online Interactive Services for Businesses. We provide businesses with the
tools, resources and infrastructure required to provide businesses Internet
community-based marketing, sales and support solutions. Our business services
range from online events, market research and online meetings to fully
integrated, customized communities. Our business services offer several key
advantages. First, our services allow businesses to communicate, interact and
build relationships with their customers. Second, our services help businesses
learn more about their customers through focus groups, market research and
online polls. Third, our interactive services provide an easily deployed and
cost-effective solution enabling our business clients to leverage our
technology infrastructure. Fourth, our experienced moderators enable businesses
to direct the flow of interaction and our trained city standards advisors help
to manage the environment in which businesses' brands and products are
discussed. Finally, our critical mass of users provides a foundation upon which
our business clients can build their own audience.
Clean Well Lighted Environment. We have structured our community as a clean
well lighted environment that is attractive to businesses, users, network
participants and advertisers. By "clean and well lighted," we mean that our
site is family-oriented, welcoming and friendly. We strive to maintain the
family-oriented nature of our service by enforcing a set of published behavior
standards. These standards are maintained by our trained city standards
advisors. These city standards advisors can be called upon at any time by our
users to resolve issues relating to standards violations. The friendly tone of
our service is further maintained by our network of over 2,000 community
leaders and moderators who personify the friendly culture and serve as role
models for all users.
Extensive Community Network. We have created an extensive network of
community sites which spans multiple industries and media forms and provides us
with exceptional distribution and marketing leverage. The Talk City community
consists of three types of network participants: major media companies,
Internet service providers and Internet content companies. Our major media
participants provide us with access to a vast majority of U.S. households
through a combination of national, local and cable broadcast television, radio,
newspapers, magazines and Internet properties. We derive substantial
distribution leverage and access to a growing audience through our Internet
service provider participants. Our Internet content participants bring
audiences of shared interests or demographic groups into our community. In
addition, our Chat@TalkCity program includes over
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77,000 registered Internet sites and individuals. This extensive community
provides us with one of the largest distributed and integrated networks of
community services on the Internet.
Structured and Moderated Programming. A key element of our programming is our
network of over 2,000 trained community leaders and moderators who work
together to maintain and enhance our culture. These leaders and moderators
facilitate interaction in our communities by drawing users into the
conversation, encouraging them to express their ideas or to interact with
celebrity guests, and provide an experience that makes our users want to stay
longer and return more frequently to our community. To make newcomers feel
welcome, our moderators send "how to chat" messages, hold special "welcome to
Talk City" chats for new users and can be called upon at any time to answer
questions. They also direct discussions in a manner consistent with the quality
programming requirements of our business clients and network participants. Our
trained community leaders and moderators manage over 75,000 supervised chats
each month and oversee the services offered within our community including
chats, message boards, home pages and user content.
Critical Mass. Our community network has achieved critical mass in terms of
traffic, registered users and the loyalty of our users. In March 1999, we had
approximately 2.6 million unique visitors according to I/PRO. These users
generated over 6 million hours of activity on our www.talkcity.com site during
March 1999 according to I/PRO. During our peak periods, which tend to be early
evening hours, we have as many as 18,000 users simultaneously chatting or
engaging in other interactive activities according to I/PRO. As of March 31,
1999, we had over 2 million user registrations and, during the quarter ended
March 31, 1999, we averaged approximately 200,000 new registrations per month.
We believe the strong loyalty of our users and engaging nature of our
programming are reflected by the significant amount of time that users spend on
our site. Our users spend, on average, over 2 hours per month on our site
according to I/PRO. We believe our critical mass provides our users with a
sense of excitement, camaraderie and activity. Moreover, business clients and
network participants who join our community network use our core audience as a
foundation upon which to build their own audience.
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Through our community network, we believe our business services and online
community network are able to provide significant benefits to businesses,
consumers, advertisers and network participants, as summarized below:
<TABLE>
<CAPTION>
Customers Benefits
- --------- --------
<S> <C>
Businesses . Online community-based marketing, sales and support solutions
. Professional production and moderated environment
. Reduced customer acquisition and maintenance costs
Consumers . Welcoming and friendly culture
. Family-oriented environment
. Variety of interactive programming
Advertisers . Positive, effective branding venue
. Segmented, targetable and mainstream audience
. Loyal, engaged viewers
Network Participants . Professional production and moderated environment
. Critical mass of traffic and variety of programming
. Co-branding and customization of community services
</TABLE>
Strategy
Our objective is to be the leading Internet provider of high quality online
communities and interactive services for businesses and consumers. Key elements
of our strategy include the following:
Expand Business Services. We intend to increase the revenues we generate from
our business services by:
. aggressively increasing the number of personnel dedicated to selling and
implementing our business services, including personnel with expertise in
specific industries;
. focusing on selling long-term customized communities which integrate a
wide range of our business services;
. creating specialized templates for targeted communities, such as
communities for employees, customers and suppliers; and
. enhancing the functionality and usability of our business services
products.
Build Brand Awareness. We intend to increase awareness of Talk City's brand
and our commitment to building clean well lighted online communities. We intend
to achieve this goal in a cost-efficient manner by:
. leveraging the broad reach of our major media participants' traditional
media properties. For example, we are increasing our presence on regional
radio, television, print and online properties owned by Cox Interactive
Media and promoting our Cox co-branded local properties, such as
accessatlanta.com and bayinsider.com. Likewise, Hearst will continue to
publish full-page advertisements promoting our co-branded properties in
magazines such as Good Housekeeping and Cosmopolitan. NBC airs
advertisements on its television network promoting our co-branded
property, www.nbc.talkcity.com.
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. expanding our co-branding and ingredient branding program. In this
program, we provide our community services in exchange for featured co-
branding or ingredient branding of the Talk City and OnNow logos and
brand names. Additionally, we plan to expand our Chat@TalkCity program,
which currently includes over 77,000 registered Web sites and
individuals.
Drive Sponsorship and Advertising Revenues. To increase our sponsorship and
advertising sales revenues, we intend to:
. increase the number of our sales personnel and focus their efforts on
longer term, high value sponsorship deals;
. sell more advertisements targeted to demographic groups within our
audience;
. align advertiser offerings more precisely with users' interests; and
. focus on selling integrated sponsorships.
Increase Usage of Consumer Community Services. We intend to significantly
increase the amount of time our users spend on our site and the frequency with
which they return. We plan to accomplish this goal in three ways. First, we
expect to expand professionally developed content and features which are
relevant to our particular themed communities. Second, we intend to add useful
new community tools and services which we believe will be attractive to our
users, such as calendaring which allows users to schedule event and group
activities, display the schedule on our site and notify others, via email,
instant messaging or Web page comment, of the scheduled event or activity,
group home pages and personalization. Finally, we plan to significantly expand
our trained community leader and moderator network. This will support the
growth of our consumer community services as users are more likely to stay
longer and return more frequently to our service if they are welcomed by and
interact with our moderators.
Increase Ecommerce Services. We plan to generate additional ecommerce
revenues by offering new services that capitalize on our users' interest in
social interaction and their distinct usage patterns. Examples of these types
of services include user-to-user auctions, themed shopping events, online
personals and classified ads.
Increase Involvement and Number of Our Network Participants. We intend to
increase the involvement and number of our network participants by:
. adding account executives to help manage and further develop our
relationships with our network participants;
. increasing the number of major media companies, Internet service
providers and Internet content companies;
. rolling out community services for our major media participants, online
properties; and
. increasing the number of tools and services we offer our network
participants.
Business Services
We provide businesses with online community-based marketing, sales and
support solutions. Our business services include designing fully integrated
customized communities, producing online events, conducting online market
research and facilitating online meetings. These services help our business
clients develop and expand online relationships with their employees, customers
and suppliers.
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Customized Community
Many businesses have the assets needed to build an online community, such as
strong brands, loyal customers and relevant content, but lack the skills to
operate a community effectively. We help these businesses deploy such assets to
build and organize online communities, improving their relationship marketing
and support. Customized communities are tailored to complement a client's
specific products, brands and targeted audience, and typically include
customized sets of one or more of the following:
. chats;
. message boards;
. home pages; and
. surveys and events.
For example, we created a customized community for Kemper to review and
exchange information and ideas on the latest financial products with their fund
managers.
Online Events
We utilize our professional production capabilities and our moderator network
to produce online events for business clients. Businesses use online events to
introduce new products, educate customers, make sales and marketing
presentations and communicate with and train employees. These online events
enable businesses to reach local, national and international audiences through
the Internet with real-time, two-way interaction, combining text chat and
message boards with graphics, audio and visual aids. For example, we produced
an online interactive press conference for Nokia.
Market Research
Our market research services include online focus groups, polls and
quantitative surveys. These services enable business clients to generate new
ideas, receive customer feedback and test product concepts, advertising and Web
sites on a national basis with rapid turnaround. We are able to deliver focus
groups and surveys based upon our ability to deliver the requisite demographics
of participants, the skill of our trained community leaders and moderators in
eliciting meaningful comments from all participants in the group and our
expertise in developing effective survey content.
We believe that our services produce the desired results for our business
clients on a more cost-effective basis than is generally achievable through
traditional methods. We have developed a specific set of online methodologies
and tools to provide these market research services. Examples of business
clients which use our market research services includes JWT Specialized
Communications, an affiliate of J. Walter Thompson, and Mattel.
Some of our online market research services are jointly produced with NFO
Research, one of the leading market research companies in the United States.
NFO contributes its national panel of over 1 million U.S. consumers, with an
average of 100 data points per household, its market research expertise,
presence in the market research industry and national market research sales
force. We contribute our expertise in online focus groups and surveys, our
registered audience base and our national sales force. We jointly produce focus
groups with NFO and share the associated revenues.
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Online Meetings
Online meetings allow our business clients to deliver standard presentations,
such as PowerPoint(TM), over the Internet to meetings attended by hundreds of
people. This service enables a business client to conveniently conduct a
meeting with attendees around the world without having to incur the cost of
travel and materials distribution. This service also allows the client to
maintain full real time control and two-way interaction through the use of text
chat, group polling and voting and phone conference calling.
Network Participants
Overview
As of March 31, 1999, our community included 35 network participants with
whom we produce co-branded versions of Talk City for their 50 Internet sites.
By building our service as a distributed and integrated community with many
network participants, we have created a network model which we believe will
continue to build on its own momentum. Through our network participants, we are
able to drive additional traffic to our sites and promote our brand, utilize
our network participants' content and programming expertise and access their
personnel and celebrity talent. Simultaneously, by increasing our usage, brand
identity and programming expertise, there is more incentive for additional
network participants to join our community and promote our brand.
With most of our network participants, we co-produce a custom link from the
participant's site into a customized view of our entire community. Each
participant version of Talk City is tailored to that particular participant,
co-branded with the participant's brand and co-marketed to promote our joint
programming. Network participants are given the flexibility to tailor or
promote any elements of our service they want featured on the joint site. The
network participant's user base has full access to our service, and each
network participant's users have access to the other participants' users. In
many cases, we have a revenue sharing agreement with the network participant in
which we are generally responsible for selling advertising for the joint
services and the resulting revenue is shared with the participant, thus
providing a financial incentive for both parties to make the joint services
successful. Our network participants consist of three types of companies: major
media, Internet service providers and Internet content.
For the year ended 1998, approximately 15% of our revenue was based on volume
driven by our network participants. The volume is considered to be "driven" by
a network participant if the user comes to our sites via the participant's
site. For this period, none of our network participants drove user volume
responsible for more than 1% of our revenues, except WebTV Network which was
responsible for approximately 13% of our revenues for that year. For the
quarter ended March 31, 1999, none of our network participants drove user
volume responsible for more than 1% of our revenues, except WebTV Network which
was responsible for approximately 17% of our revenues for that quarter.
Major Media Companies
Cox Interactive Media Web sites. In August 1998, we established our
relationship with Cox Interactive Media. We provide our interactive services,
including chat, home page creation
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capabilities and message boards, for a number of Cox Interactive Media
destinations including the following:
AccessArizona.com GoPBI.com
AccessAtlanta.com GreatOutdoors.com
ActiveDayton.com HamptonRoads.com
Austin360.com Insidecentralflorida.com
BayInsider.com OCNow.com
Fastball.com RealPittsburgh.com
GoBig12.com SanDiegoInsider.com
GoCarolinas.com SECAction.com
The agreement with Cox Interactive Media is for an initial term of three
years with automatic additional two-year terms, with the initial renewal term
at the discretion of Cox, unless either party notifies the other in writing of
its election to have the agreement expire at least 60 days in advance of the
end of the then-current term. Pursuant to our agreement with Cox, we share the
expenses and revenues arising under the agreement according to mutually agreed
upon percentages.
Hearst. In September 1998, we established our relationship with the Hearst
New Media and Technology division of Hearst Communications. We provide
interactive services for the following Hearst-related sites:
. William Morrow Books--We co-produce a weekly chat series called
"BookSpeak" which brings William Morrow authors online to interact with
the HomeArts' audience.
. Victoria Magazine--We provide the chat services for the editors and
readers of Victoria Magazine.
. CosmoGirl--We provide the chat services for the CosmoGirl Web site.
In addition to the above online co-branding and promotion, we receive
discounted advertising in various Hearst magazines. The community services
agreement with Hearst is for an initial three-year term with automatic
additional two-year terms unless either party notifies the other in writing of
its election to have the agreement expire at least 60 days in advance of the
end of the then-current term. Pursuant to our agreement with Hearst, we share
the expenses and revenues arising under the agreement according to mutually
agreed upon percentages.
NBC and affiliates. In 1998 and 1999, we entered into various agreements with
NBC and its affiliated companies pursuant to which we provide our interactive
services, on a local and national basis, to the following Web sites operated by
NBC:
. CNBC.com--We facilitate the online interaction and discussion between
CNBC.com's users and personalities on a variety of business related
topics.
. NBC.com--We provide general and featured celebrity chats for NBC daytime
and prime time programming, such as "Just Shoot Me," "Frasier" and "Days
of Our Lives."
. TNBC--We provide our chat service for NBC's teen oriented programming,
including television shows such as "Saved by the Bell" and "Hang Time."
In addition, we co-produce TNBC's "At the Max" chat as well as the weekly
"Best Friends" chat.
. NBC Interactive Neighborhood--We provide the capability to host locally-
oriented chats to several of NBC's 200 local affiliate television
stations.
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In addition, we receive advertising on various NBC television programs. Our
agreement with NBC, which covers CNBC.com, TNBC and NBC.com, is for an initial
three-year term with an automatic extension for a two-year period unless either
party notifies the other in writing of its election to have the agreement
expire at least 60 days in advance of the end of the then-current term. Our
agreement covering NBC Interactive Neighborhood is for a two-year term. The
parties have agreed to negotiate a possible extension of an additional one or
two-year term. Either party may terminate the agreement at any time and for any
reason in its sole discretion by providing the other party with 60 days prior
written notice. Pursuant to our agreements with NBC, we share the expenses and
resulting revenues arising under the agreements according to mutually agreed
upon percentages.
Internet Service Providers
Our Internet service provider participants direct their users to Talk City as
their primary community offering. Pursuant to our written agreements with these
participants, we share the costs and revenues associated with promoting and
providing the services and attracting the users. Our Internet service provider
participants include Excite@Home, AT&T WorldNet, BellSouth.Net, Concentric
Network, WebTV Network, Cable & Wireless USA Internet and MindSpring. These
participants enable us to reach a substantial number of additional users.
Internet Content Companies
We also provide community services for online Internet content sites. Our
Internet content participants operate a Web service that typically focuses on a
particular topic or subject. They work with us to provide their users with our
community offerings. Our Internet content participants bring audiences of
shared interests or demographic groups into our community. Pursuant to the
agreements with each of our Internet content participants, we share the
expenses and revenues arising under the agreement with the respective
participant. Specifically, we share the associated costs of creating content,
integrating information on our respective sites and promoting the services. We
include the following within our group of Internet content participants:
<TABLE>
<CAPTION>
Internet Content
Participant Co-Branded Service
---------------- ------------------
<C> <S>
@Music................. A music site for which we provide always open chat
rooms to discuss numerous music topics
Auto OnRamp............ An auto site for which we provide chat on topics such
as classic and muscle cars
CheckOut.com........... A music, video and game site for which we provide our
community services
Donna Wick Radio Show.. A radio and Internet inspirational radio show, hosted
by Donna Wick, for which we provide chat rooms for
listeners to chat during live broadcasts
Girl Geeks?............ We provide the community services for this site which
is devoted to exploring women and technology issues
GreenTree.............. A vitamin and nutritional products ecommerce site for
which we provide our chat and message board services
Hispanic Online........ An Internet site for the Hispanic market for which we
provide chat and special events production for
featured guests
</TABLE>
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<TABLE>
<CAPTION>
Internet Content Participant Co-Branded Service
---------------------------- ------------------
<C> <S>
Learfield Communications.... We provide chat rooms for their Gamecruiser site,
the official Internet broadcast site for 13 of
the nations' top college athletic programs, for
listeners to chat during live broadcasts
Lifetime Television......... An Internet site complementing Lifetime
Television Networks for which we provide our
community services for various shows and special
events
The Lottery Channel......... An Internet site for lottery players nationwide
for which we provide chat for lottery players to
discuss strategies and share winning stories
LucasFilm................... We are the official and exclusive LucasFilm
Internet chat provider for Star Wars motion
pictures through August 1999
NetNoir..................... An Internet site for the African American market
for which we provide chat and special events
production for featured guests
POV Magazine................ A magazine geared towards Gen-Xers entering the
working world for which we provide chat and
special events production for featured guests
Religions and Spirituality.. We provide our community services for users to
explore world religions, spiritual traditions and
exchange ideas
Riffage.com................. A music site for which we provide our community
services
Sony Music.................. A music site for which we provide our community
services
Transformations............. An Internet site geared towards self help,
support and recovery issues for which we provide
our community services
UKMax.com................... An Internet site focused on the United Kingdom
for which we provide our community services
Virtual Communities......... A geographically-oriented Web site, currently
focused on Ireland and Jerusalem, for which we
provide our community services
Women Online Worldwide...... An Internet site geared towards celebrating the
spirit of womankind for which we provide chat on
a variety of women-related topics
Zapa Digital Arts........... An Internet site which provides our users with
tools and accessories for home page creation
ZineZone.................... A personalization site that allows users to
control their view of the Web for which we
provide chat and special events production for
featured guests
</TABLE>
Chat@TalkCity Program
Our Chat@TalkCity program enables other Internet sites and individuals to
create a permanent chat room within our community. These chat rooms can also be
embedded directly into the participants' Internet site or home page, whether
the home page is on our service or on another service. The Chat@TalkCity
program provides its participants with the tools to build a chat room, embed it
in their Internet site or home page and make it either a public chat room,
accessible through our service, or a private room. We provide our Chat@TalkCity
participants with instructions on how to operate a chat room and work within
our guidelines, including access to our city standards
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advisors. As of March 31, 1999, over 77,000 Internet sites and individuals have
registered online to participate in the Chat@TalkCity program.
Consumer Community Service
We believe that quality community services must be planned and proactively
managed. In order to accomplish this, we provide active role models through our
network of trained community leaders and moderators. In addition, we produce a
variety of programming through our live events, topical categories and themed
communities, all within the established culture, tone and standards of our
community.
Our Moderator Network
A key element of our programming is our network of over 2,000 trained
community leaders and moderators who work together to enhance our culture. The
moderators range in age from 14 to 77 and are located all over the United
States and in multiple countries around the world. Our moderators supervise
over 75,000 chats per month, as well as our message boards, home pages and
audience content. These leaders and moderators facilitate interaction in our
communities by using proprietary tools to draw users into conversation and
encourage them to express their ideas. Our moderator network is essentially a
community in itself, with a centralized set of goals, guiding principles and
management. Community leaders and moderators become well acquainted with one
another and this camaraderie helps to form a strong foundation of goodwill and
high-spirited commitment.
City Standards Advisors. Our city standards advisors form a separate group
within the moderator network. These individuals are our response-based
standards maintenance team, handling behavior problems, such as profanity or
obscenity, and answering calls from users who believe that standards violations
are occurring in their chat rooms or in one-on-one conversations with other
users. City standards advisors have the power to remove participants from our
actual servers, as opposed to leaders or moderators who can only remove
offenders from the respective chat rooms which they are supervising or
moderating at the time. At least one city standard advisor is on duty on our
service at all times. At peak times, there are typically six city standards
advisors to ensure our clean well lighted community is maintained.
Recruitment. Our current network of moderators serves as our primary
recruiter for new community leaders and moderators. Our community leaders and
moderators are continually seeking good conversationalists and articulate users
on our service. They frequently post notices and, in many cases, approach
promising candidates to direct them to a Web site to learn about and
potentially apply for a community leader or moderator position. This recruiting
provides us with a steady stream of potential new community leaders and
moderators to our training program. There are currently thousands of people on
the waiting list to join our moderator network.
Training and Quality Assurance. Our training consists of online training
sessions and an on-the-job apprenticeship within our community. Candidates
participate in a five session series of two hour classes held in chat rooms.
These training sessions focus on the principles and mechanics of moderating and
the maintaining of our behavior standards. Four teams of three trainers each
run the ongoing training program. Candidates who complete the program are
provided with an ongoing mentor to provide further guidance as necessary. A
quality assurance team systematically reviews the
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performance of our leaders and moderators. In addition, most of our themed
communities hold regular meetings to discuss such issues as new chat topics
requested by users, behavioral or cultural challenges or moderator policy
revisions.
Volunteers. Most people volunteer as trained community leaders or moderators
because they enjoy being moderators. They like chatting with people and often
have a personality that enjoys helping others, welcoming them and providing a
pleasant context for conversation. They may also enjoy the recognition they
receive in a community leadership position. Often they are passionately
committed to some interest or issue, such as crafts or health, and enjoy being
in a position to share their expertise or interest with others. Volunteers do
not receive any compensation or incentives, financial or otherwise.
Compensation. Over 270 of our approximately 2,000 trained community leaders
and moderators are compensated for their services. The remainder are
volunteers. Compensated leaders and moderators sign an independent contractor
agreement with us which includes a full nondisclosure agreement. These
agreements are terminable by either party upon 30 days' prior written notice.
Our compensated trained community leaders and moderators are either paid per
hour or receive a flat fee per month depending upon whether such leaders or
moderators oversee an entire themed community.
Programming
We provide our community with an extensive series of live events, 20 topical
categories and over 50 themed communities as described below.
Live Events. We operate one of the most extensive series of live events on
the Internet, attended by audiences ranging in size from several dozen people
to many thousands. The following are examples of events which we produced or
co-produced with our network participants and clients in the first quarter of
1999:
Enrico Colantoni--"Just Shoot Me" Mackenzie Phillips (ZoogDisney)
(NBC.com) Shawn Phillips (@Music)
Golden Globe Awards (NBC.com) Premier of "The 60s" (NBC.com)
Grammy Awards Michael Stipe--REM singer
(Borders.com/Grammy.com) (ZoogDisney)
Jewel (ZoogDisney) Joe Satriani
Greg Louganis--Olympic Diver (Borders.com/Grammy.com)
(Borders.com) Jan Schlichtmann--lawyer in "Civil
Mark McGwire & Starbucks CEO, Howard Action" (ZineZone)
Schultz (Starbucks) Soap Opera Digest Awards (NBC.com)
MickeyMouse (ToonDisney) 3rd Storee (ZoogDisney)
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Topical Categories. Our 20 topical categories and over 50 themed communities
all offer moderated chats, message boards, home pages, special events
production and discussion groups. The topical categories may include
professional editorial content or graphical presentation, or they may be co-
produced with our network participants. Our topical categories are organized as
follows:
<TABLE>
<S> <C> <C>
Ages: 20s to Seniors Computing and Technology Movies, TV and Radio
Numerous chat rooms ComputerTalk Movie City
based on particular FolksOnline NBC.com
ages MacTalk NBC Interactive
Senior-Citizens New2Internet Neighborhoods
New2TalkCity
Art and Books New2WebTV Music
Art City @Music
Borders.com Ethnic and Lifestyle
Mystery Place Alternative LifeStyles News and Sports
Hispanic Online News Talk
Auto Latino Chat Sailing Forum
AutoOnRamp NetNoir TCSports
Trefpunt
Business Finance Romance and Social
Business City Center Games City Pub
Fantasy Forum Courtship Corner
Cities and Travel Games Galore Talk City Personals
Canada Space Corps Town Talk
City Down Under
Cox Interactive Media Health and Wellness Spirituality
sites, such as Transformations Jesus Cafe
accessatlanta.com Wellness Forum Religions and
India Spiritualities
Local Home and Family
Travel Forum Animal Forum Teen
EduCenter The InSite
Collectibles and Hobbies FoodTalk Teen Talk
Collectibles Hearst New Media & TNBC MaxChat
Technology sites Youth Online
College Science Visions
College Connection Women
Kids Women Together
KidszKorner Women Online Worldwide
</TABLE>
In addition, our community provides programming in multiple languages,
including English, Filipino, French, German, several dialects of Hindi,
Italian, Spanish and Vietnamese. We believe the global nature of our
programming creates an around-the-clock friendly environment and a diversity of
subject matter which further increases its value and interest to the entire
audience.
Applications and Features
We offer a wide range of applications and features through which our users
interact and our programming is created. These include:
. chat--primarily text chat;
. audio chat--the user's words are heard aloud by other users;
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. avatar--graphical figures or characters on the computer screen are used
to represent the participating users;
. 3D chat--chats take place in a graphical environment in which the
graphics display a three-dimensional view of an environment such as a
room, forest or castle;
. instant messaging--private chats between users;
. buddy lists--user-created list of special friends which notifies the user
and helps the user find these friends when they come on to the service;
. auditoriums--large scale chat events that can handle thousands of users
simultaneously and provide for a more structured question and answer
format than a standard chat room;
. message boards--topical areas of the service in which a user can display
a text message on the screen for others to read;
. home pages--personalized Web sites created by users within our themed
communities;
. polls;
. email;
. search; and
. calendars--features over 3,000 events and activities on our service each
month and serves as an important programming tool for our users.
OnNow
We also operate a second destination site, www.onnow.com, which is a guide to
live events on the Internet. The OnNow service provides users with a guide to
thousands of chats, web casts and other live events on the Internet provided by
hundreds of Internet sites, including www.talkcity.com.
Our OnNow service provides users with quick, easy access to schedules of
events in 54 different categories, organized and searchable by topic, time,
audience type, media and publisher. Each event listing provides a description
of the event, an Internet link directly to the event and a link to any
specialized software that might be required to participate in the event. In
addition, users can receive email reminders for events in which they have
expressed interest.
Established Culture
Our programming and services are offered within our clean well lighted
environment which is focused on positive and respectful behavior between people
and intended to create a friendly and welcoming environment for family-oriented
audiences. As new users come to our service, they participate in the moderated
or supervised areas and see and learn the positive culture and behavior
standards from our trained community leaders and moderators. We believe that
when users have become familiar with the culture of our service, they tend to
maintain that culture even when participating in unmoderated, but supervised,
areas of our community.
Sales And Marketing
Sales
We concentrate our sales efforts on, and derive our revenues from, our
business services and advertising and sponsorships. Our internal sales force
consisted of 15 sales personnel as of March 31, 1999.
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Business Services. Sales of our business services are generated by our
internal sales force, which we began to significantly expand in the second half
of 1998. In addition, through our agreement with NFO Research, we develop,
produce and sell our interactive market research services, such as our focus
groups. Our business services are generally part of the client's corporate
strategy and are often incorporated into the client's primary business plan. As
a result, we generally work with the senior management of our business clients
and their agencies who possess broad budget authority rather than media buyers
within the organization. This results in a close strategic working relationship
between us and the client and enhances the prospects for long-term account
relationships and repeat revenues.
Sponsorships and Advertising. We believe our clean well lighted community and
loyal, mainstream audience presents attractive opportunities to our sponsors
and advertisers. Our sales force works with our sponsors and advertisers to
provide them with information on our users' demographics and interests so that
the efforts of our advertising clients are aligned with the topical area or
community of their choice. Sponsorships are designed to support broad marketing
objectives, including brand promotion, awareness, product introductions and the
integration of advertising with content. Our sponsorship and advertising
clients enter into short-term agreements pursuant to which they generally
receive a guaranteed number of impressions. We also utilize a third-party
service to sell advertising on our Web sites.
Marketing
We employ a variety of methods to increase our audience and build brand
recognition and loyalty.
Traditional Marketing. Our traditional marketing programs include a mixture
of television, magazine and newspaper media, direct mail and participation in
and sponsorship of Internet trade shows and advertising associations. Our
advertisements are published in selected magazines owned by Hearst, such as
Cosmopolitan and Good Housekeeping. In addition, we receive advertising on the
NBC television network. Both Hearst and NBC provide us the flexibility to
specifically target advertisements to television shows or magazines attractive
to our users.
The Hearst and NBC advertising is currently paid for through noncash in-kind
investments. In total, this in-kind program includes $7.2 million of television
commercials and print advertisements valued at rates discounted from the rate
card to be incurred from 1998 through 2001. Please see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Three months
ended March 31, 1999" and "--Operating Expenses--Noncash Advertising and
Promotional Charges."
Network Participant Co-Branding and Ingredient Branding. "Branding" describes
the process by which our community services are offered on our network
participants' Web sites in exchange for featured co-branding or ingredient
branding of the Talk City brand name on the Internet and in traditional media
forums. For example, when an NBC.com user clicks on "NBC Talk City," the user
is instantly presented with an NBC co-branded view of www.talkcity.com. While
this co-branded site focuses on NBC-specific programming, such as a chat about
"Friends," the NBC.com user has access to our community and programming as
well.
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Viral Community Growth. To date, the majority of our user base growth has
resulted from word-of-mouth recommendations within our community. We intend to
actively encourage and continue this word-of-mouth endorsement by user
communication through our expanding community leader and moderator network and
by ongoing service enhancements, contests and promotions that encourage our
users to invite others to our community.
Operating Infrastructure
Our operating infrastructure has been designed and implemented to support the
delivery of millions of page views per day. Web pages are generated and
delivered, in response to end-users requests, by any one of over 70 Web and
applications servers. Key attributes of this infrastructure include the ability
to support growth, performance and service availability.
Our servers run on the Sun Solaris and Microsoft NT operating systems and use
Netscape Enterprise, Apache and Microsoft's IIS Web server software. We also
use NetApp file servers for personal home pages and a variety of Web-based
applications software to provide our services. In addition, we contract with
CommTouch, Inc. to provide HTML-based email, One&Only Network to provide
personnels, TelePost to provide online conferencing services, and MyPoints to
provide affinity rewards programs. We have developed a variety of proprietary
software, including tools for event production and community moderating, chat
proxy servers, template systems to support dynamic pages and monitoring and
reporting systems.
We maintain all of our production servers at the Sunnyvale, California
facility of Frontier GlobalCenter. Our operations are dependent upon Frontier
GlobalCenter's ability to protect its systems against damage from fire,
earthquakes, power loss, telecommunications failure, break-ins and other
similar events.
Our data is copied to backup tapes on a nightly basis. We keep all of our
production servers behind firewalls for security purposes and do not allow
outside access, at the operating systems level, except via special secure
channels. Strict password management and physical security measures are
followed. Computer security response team alerts are read, and, where
appropriate, recommended action is taken to address security risks and
vulnerabilities.
Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. Components of our Web sites have in the past
suffered outages or experienced slower response times because of equipment or
software downtime.
Competition
The market for business services, users and Internet advertising is new and
rapidly evolving, and competition across all these areas is intense and is
expected to increase significantly in the future. With no substantial barriers
to entry, we expect that competition will intensify.
We believe that the primary competitive factors in creating communities on
the Internet and business services are:
. the degree of quality and structure in the environment;
. functionality;
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. brand recognition;
. user affinity and loyalty;
. demographic focus;
. variety of value-added services;
. ease-of-use;
. quality of service and of the production process; and
. reliability and critical mass.
We compete with numerous companies or sites that are primarily focused on
business services, including companies that provide:
. similar services on the Internet, such as broadcast.com for live events
production, Well Engaged for customized communities and many smaller
companies that provide online market research and event services;
. software for businesses to implement business services in-house, such as
Microsoft, IBM/Lotus, Netscape and iChat/Accuity; and
. similar solutions by non-online methods, such as market research firms,
trade show firms and event production firms.
None of these companies is currently dominant in the business services area.
In the consumer community area, we also compete with numerous companies, none
which are currently dominant. These competitors include Delphi, theglobe.com,
GeoCities, Xoom, Homestead.com, WBS.net, Angelfire, Fortune City, iVillage,
Tripod and Third Age. Based on our review and internal analysis of Media
Metrix's April 1999 report, we ranked sixteenth out of the top 500 sites on the
Internet based on average minutes spent per usage day for home users in April
1999. In addition, based on our review and internal analysis of the Media
Metrix report, we ranked second out of the top 15 Internet sites whose primary
focus is providing online community services. However, we expect the number of
our competitors in the consumer community area to continue to increase as the
barriers to entry in this area are low.
Other consumer community competitors include:
. community components of portals and search engine sites, Internet access
sites and general purpose online services, such as America Online, the
Microsoft Network, Yahoo!, Excite@Home, Infoseek, Lycos and Earthlink;
and
. online event guide sites and the online event guide components of search
engines such as Yahoo! and America Online.
We will likely also face competition in the future from developers of Web
directories, search engine providers, shareware archives, content sites,
commercial online services, sites maintained by Internet service providers and
other entities that establish or attempt to establish communities on the
Internet by developing their own communities or purchasing one of our
competitors.
In addition, we could face competition in the future from traditional media
companies, a number of which, including Disney, CBS, Fox and NBC, have recently
made significant acquisitions of, or investments in, Internet companies.
Further, our competitors and potential competitors may develop interactive
business services or communities that are equal or superior to ours, or that
achieve greater market acceptance than our business services and community.
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We also compete with traditional forms of media such as newspapers,
magazines, radio and television for advertisers and advertising revenues. We
believe that the principal competitive factors in attracting advertisers to our
Web sites include:
. our brand visibility;
. the high usage per user on our sites;
. the amount of traffic on our Web sites;
. the quality of the culture and environment of our Web sites;
. the demographics of our users;
. our ability to offer targeted audiences; and
. the overall cost-effectiveness of the advertising medium we offer.
We believe that the number of Internet companies relying on business
services, Web-based advertising and ecommerce revenues will increase greatly in
the future. Accordingly, we will likely face increased competition, resulting
in increased pricing pressures on our advertising rates which could in turn
harm our business.
Many of our current and potential competitors, including developers of Web
directories and search engines, have longer operating histories, significantly
greater financial, technical and marketing resources, greater name recognition
and larger existing customer bases than we do. These competitors are able to
undertake more extensive marketing campaigns for their brands and services,
adopt more aggressive advertising pricing policies and make more attractive
offers to potential employees, distribution partners, companies, advertisers
and third-party content providers. Internet content providers and Internet
service providers, including developers of Web directories, search engines,
sites that offer professional editorial content and commercial online services,
may be perceived by advertisers as having more desirable Web sites for
placement of advertisements.
In addition, many of our current advertising customers and network
participants also have established collaborative relationships with certain of
our competitors or potential competitors and other high-traffic Web sites or
offer services that are or might become competitive to our services. As a
result, any of the following could occur:
. we may be unable to increase the number of our users, business clients or
advertisers at historical levels;
. we may be unable to retain our current users, business clients or
advertiser customers;
. competitors may experience greater growth in traffic or business clients
than we do as a result of these relationships which could have the effect
of making their Web sites or services more attractive to advertisers; or
. our network participants may sever or elect not to renew their agreements
with us.
We may be unable to compete successfully against current or future
competitors and competitive pressures may cause our business to suffer.
Intellectual Property, Proprietary Rights And Domain Names
We regard our copyrights, service marks, trademarks, trade secrets,
proprietary technology and similar intellectual property as critical to our
success, and we rely on trademark and copyright law,
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trade secret protection and confidentiality and license agreements with our
employees, clients, independent contractors, network participants and others to
protect our proprietary rights. We strategically pursue the registration of
trademarks and service marks in the United States, and have applied for and
obtained registration in the United States for "Talk City" and "LiveWorld." We
have also applied for U.S. trademark registration of "OnNow." Effective
trademark, service mark, copyright and trade secret protection may not be
available in every country in which our services are made available online.
We have licensed in the past, and expect to license in the future, certain of
our proprietary rights, such as trademarks or copyrighted material, to third
parties. While we attempt to ensure that the quality of our brand is maintained
by these licensees, licensees may take actions that might harm the value of our
proprietary rights or reputation. The steps taken by us to protect our
proprietary rights may not be adequate and third parties may infringe or
misappropriate our copyrights, trademarks and similar proprietary rights. In
addition, other parties may assert claims of infringement of intellectual
property or other proprietary rights against us.
We have been subject to claims and expect to be subject to legal proceedings
and claims from time to time in the ordinary course of our business, including
claims of alleged infringement of the trademarks and other intellectual
property rights of third parties by us and our licensees. These claims, even if
without merit, could cause us to expend significant financial and managerial
resources. Further, if these claims are successful, we may be required to
change our trademarks, alter our content and pay financial damages, any of
which could harm our business.
We may be required to obtain licenses from others to refine, develop, market
and deliver new services. We 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.
Employees
As of March 31, 1999, we had a total of 82 employees, all of whom were
located in the United States. Of the total, 52 were engaged in product
development and programming, 21 in sales and marketing and 9 in general and
administrative. None of our employees is represented by a labor union. We have
not experienced any work stoppages and consider our relations with our
employees to be good. See "Risk Factors--Our chief executive officer and vice
president of community are critical to our business and they may not remain
with us in the future."
Facilities
Our principal offices currently occupy approximately 23,000 square feet in
Campbell, California under leases that expire in July 2000 and May 2002. In
addition, we lease approximately 3,000 square feet at an office in New York,
New York under a lease that expires in March 2004. We are currently considering
relocating our principal office facilities to accommodate anticipated future
growth.
Legal Proceedings
We are not currently subject to any material legal proceedings. We may from
time to time become a party to various legal proceedings in the ordinary course
of business.
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Management
Executive Officers and Directors
The following table sets forth information regarding our executive officers
and directors as of April 30, 1999:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Peter H. Friedman....... 44 President, Chief Executive Officer and Chairman of the Board
Jeffrey Snetiker........ 51 Senior Vice President, Chief Financial and Administrative Officer
Jenna Woodul............ 50 Vice President of Community
Bernard G. Bernstein.... 33 Lead Engineer
Chris N. Christensen.... 38 Vice President of Engineering and Operations
Patricia Griffith....... 47 Vice President of Sales
Christopher J. Escher... 40 Vice President of Marketing
Arwyn Bryant............ 41 Vice President of Product Marketing and Business Operations
Daniel Paul............. 34 Vice President of Business Development
Kenneth A. Bronfin...... 39 Director
Joseph A.
Graziano(a)(b)......... 55 Director
Thomas P.
Hirschfeld(a)(b)....... 36 Director
John Sculley............ 60 Director
Barry M. Weinman(a)(b).. 60 Director
Martin J. Yudkovitz..... 44 Director
</TABLE>
- --------
(a) Member of the Audit Committee.
(b) Member of the Compensation Committee.
Peter H. Friedman has served as our Chairman of the Board, President and
Chief Executive Officer since he co-founded our company in March 1996. From
1984 to February 1996, Mr. Friedman worked at Apple Computer, Inc., where he
served as Vice President and General Manager of Apple's Internet/Online
business unit. In this role, Mr. Friedman oversaw the launch and growth of
eWorld, Apple's consumer online Internet-based service, managed and grew
Apple's AppleLink business services and a series of Internet-based services
such as Salon and Youth Central. Mr. Friedman also held various senior roles in
marketing at Apple. Mr. Friedman received an M.B.A. degree from the Harvard
Business School and a B.A. degree from Brown University.
Jeffrey Snetiker has served as our Senior Vice President, Chief Financial and
Administrative Officer since March 1999. From October 1996 to February 1999,
Mr. Snetiker was Principal Consultant of Executive Business Advisory, a
consulting company. From January 1995 to September 1996, Mr. Snetiker served as
Senior Vice President, Finance and Administration of United Paramount Network,
a television broadcast network. From October 1985 to November 1993, Mr.
Snetiker held various executive positions for Reeves Entertainment, a
television production and distribution company, including Executive Vice
President, Chief Financial and Administrative Officer from January 1990 to
November 1993, Senior Vice President, Finance and Administration from January
1989 to December 1989 and Vice President, Finance and Administration from
October 1985 to December 1988. From January 1983 to September 1985, Mr.
Snetiker was Vice President and Controller of Group W Productions, a subsidiary
of Westinghouse Broadcasting & Cable. Mr. Snetiker received a B.S. degree in
Accounting from C.W. Post College of Long Island University.
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Jenna Woodul has served as our Vice President of Community since she co-
founded our company in March 1996. From January 1993 to March 1996, Ms. Woodul
cultivated the online community for Apple's eWorld, where she directed the
Community Center. Ms. Woodul worked at Apple from 1984 to 1988 in the area of
Apple's business communications service, AppleLink, as a core member of the
team which developed the community-oriented AppleLink Personal Edition, which
later became America Online. Ms. Woodul received an M.A. degree from the
University of New Mexico and a B.A. degree from Vassar College.
Bernard G. Bernstein has served as our Lead Engineer since he co-founded our
company in March 1996. From January 1994 to February 1996, Dr. Bernstein served
as a Senior Scientist/Engineer for Apple in its Electronic Media Lab, a
research lab in the Apple Online Services division. Dr. Bernstein received a
Ph.D. degree in Computer Science from the University of Colorado at Boulder, an
M.S. degree in Computer Science from the University of Colorado at Boulder and
a B.S. degree in Computer Science from the State University of New York at
Albany.
Chris N. Christensen has served as our Vice President of Engineering and
Operations since May 1996. From May 1993 to May 1996, Mr. Christensen served as
the Engineering Manager for Apple's Online Services division. Mr. Christensen
managed the Macintosh and Windows clients for Apple's eWorld online service. He
also wrote the email application for the Newton and worked on the QuickTime
plug-in for Macintosh. Prior to his experience at Apple, Mr. Christensen worked
at Hewlett Packard for five years. Mr. Christensen received an M.E. degree and
a B.S. degree from Rensselaer Polytechnic Institute.
Patricia Griffith has served as our Vice President of Sales since January
1998. From July 1997 to January 1998, Ms. Griffith served as our Director of
Western Sales. Ms. Griffith joined our company from Women.com where she served
as Vice President of Sales from January 1996 to July 1997. At Women.com, Ms.
Griffith was responsible for developing the advertising strategies and programs
that launched a successful advertising model for Women's Wire. From October
1986 to December 1995, Ms. Griffith worked for Harte Hanks Communications, a
marketing company, where she served as Senior Accountant Executive for
Major/National Accounts. Ms. Griffith received a B.A. degree in History and a
B.A. degree in Anthropology from the University of California, Santa Barbara.
Christopher J. Escher has served as our Vice President of Marketing since
August 1997. From February 1997 to August 1997, Mr. Escher served as the
managing director of the Palo Alto, California office of Cunningham
Communication, Inc., a marketing communication firm specializing in high
technology concerns. At Cunningham, Mr. Escher led the Cisco Systems account,
among others. From October 1984 to February 1997, Mr. Escher worked at Apple in
a variety of marketing and communications roles, from Online Services Marketing
Director to Public Relations Director and Creative Director. He culminated his
career at Apple in 1997 as Vice President, Corporate Communications. Mr. Escher
received a B.A. degree in British Studies from Stanford University.
Arwyn Bryant has served as our Vice President of Product Marketing and
Business Operations since January 1998. From July 1996 to December 1997, Mr.
Bryant served as our Senior Director of Product Marketing. From January 1994 to
June 1996, Mr. Bryant held a variety of positions in the areas of Business
Development, Content Development, International Development and Solution
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Marketing in Apple's Online Services division. Mr. Bryant received a B.A.
degree in Business/Economics from Macquarie University in Sydney, Australia.
Daniel Paul has served as our Vice President of Business Development since
August 1996. From June 1994 to July 1996, Mr. Paul served as Vice President,
New Media, Turner Home Entertainment, a division of Turner Broadcasting
Company. From June 1986 to May 1994, Mr. Paul served in various capacities at
Apple, most recently as Entertainment Industry Evangelist reporting to the
Chairman and CEO a role in which he was responsible for the development of
Apple's market presence in Hollywood. Mr. Paul attended both Boston University
and the University of Colorado.
Kenneth A. Bronfin has served as a director of our company since September
1998. Mr. Bronfin currently serves as Senior Vice President and Deputy Group
Head of Hearst New Media and Technology, the unit of The Hearst Corporation
responsible for the development and investment in Internet-related businesses.
Prior to joining Hearst in June 1996, Mr. Bronfin served as Vice President,
Business Development and General Manager of the NBC Data Network at NBC.
Mr. Bronfin received an M.B.A. degree from the Wharton School at the University
of Pennsylvania and a B.S. degree in Electrical Engineering from the University
of Virginia.
Joseph A. Graziano has served as a director of our company since its
inception in March 1996 and was the Acting Chief Financial Officer from May
1996 until March 1999. From June 1989 to December 1995, Mr. Graziano served as
the Executive Vice President and Chief Financial Officer of Apple and was a
member of its board of directors from June 1993 until October 1995. From May
1987 to June 1989, Mr. Graziano served as Chief Financial Officer of Sun
Microsystems, Inc. and from October 1981 to May 1985, as Chief Financial
Officer of Apple. Mr. Graziano also serves as a director of Pixar and Carrier
Access Corporation. Mr. Graziano received a B.S. degree in accounting from
Merrimack College and is a Certified Public Accountant.
Thomas P. Hirschfeld has served as a director of our company since October
1997. Mr. Hirschfeld has served as a Managing Director of Patricof & Co.
Ventures, Inc., a venture capital company, since April 1999 and was a Principal
from January 1995 to March 1999. From January 1994 to December 1994, he served
as Assistant to the Mayor of New York City. From August 1986 to December 1993,
Mr. Hirschfeld was with Salomon Brothers, an investment banking firm.
Mr. Hirschfeld serves as a director of a number of privately-held companies in
which the limited partnerships managed by Patricof & Co. are investors. He
received an M.A degree from Balliol College, Oxford and an A.B. degree from
Harvard College.
John Sculley has served as a director of our company since July 1996. Since
February 1994, Mr. Sculley has been a partner with his brothers in Sculley
Brothers, a family investment capital firm, that focuses on media enabling
technologies, Internet services and consumer businesses. The Sculleys are
active investors in approximately 20 companies in the Silicon Valley, New York,
Bermuda and Israel. Their Internet service investments include Intralinks, Talk
City, Zapa.com, GreenTree, Buy.com and Softvideo. Their consumer companies
include Country Gourmet, Select Comfort, Ranch 1, Frame King and Sirius
Thinking Ltd. Mr. Sculley serves on the board of directors of NFO Worldwide,
Inc., an affiliate of NFO Research, and a number of other private companies.
Barry M. Weinman has served as a director of our company since August 1998.
Since May 1993, he has been a Managing Director of Media Technology Equity
Partners and a General Partner
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of Media Technology Ventures and AVI Management Partners, which has been making
high tech venture capital investments in the Silicon Valley since 1980. AVI and
its new media fund, Media Technology Ventures, had approximately $300 million
under management as of March 31, 1999. Mr. Weinman is also on the board of
directors of Women.com, Be.Inc, InfoGear and Quokka Sports. Mr. Weinman
received an M.A. degree from London School of Economics/University of Southern
California and a B.S. degree from Clarkson College of Technology.
Martin J. Yudkovitz has served as a director of our company since August
1998. Since December 1995, Mr. Yudkovitz has been the President and Chief
Executive Officer of NBC Multimedia, Inc., a subsidiary of NBC. Prior to this
he served as Senior Vice President, Strategic Development for NBC. From 1992 to
1994, he served as Senior Vice President of Strategic Development at NBC. His
other positions at NBC have included Vice President of Business Affairs for
NBC's 1992 Olympics Unit, First General Counsel and Vice President for Business
Affairs at CNBC and Senior Counsel to NBC's 1988 Seoul Olympics Unit in NBC
Sports. Mr. Yudkovitz joined NBC in January 1984 in the legal department. Mr.
Yudkovitz received a J.D. degree from Columbia University and a B.A. degree
from Rutgers University.
No director has a contractual right to serve as a member of our board of
directors.
Classified Board
Immediately following the offering, our board of directors will consist of
seven directors divided into three classes with each class serving for a term
of three years as follows:
<TABLE>
<CAPTION>
Class Expiration Member
----- ---------- ------
<S> <C> <C>
Class I 2000 Bronfin and Hirschfeld
Class II 2001 Sculley, Yudkovitz and Weinman
Class III 2002 Friedman and Graziano
</TABLE>
At each annual meeting of stockholders, directors will be elected by the
holders of common stock to succeed those directors whose terms are expiring. In
addition, our bylaws provide that the authorized number of directors may be
changed only by resolution of the board of directors. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the total number of directors. This classification
of the board of directors may have the effect of delaying or preventing changes
in control of our company.
Board Committees
The board of directors has a compensation committee and an audit committee.
The compensation committee, currently comprised of Mr. Hirschfeld, Mr. Graziano
and Mr. Weinman, administers the 1996 stock option plan, the 1999 employee
stock purchase plan and all matters concerning executive compensation and
employment agreements. The audit committee, currently comprised of Mr.
Hirschfeld, Mr. Graziano and Mr. Weinman, approves our independent auditors,
reviews the results and scope of annual audits and other accounting related
services, and evaluates our internal audit and control functions. The
compensation committee was established in November 1996 and the audit committee
was established in December 1996.
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Director Compensation
We currently do not pay compensation to directors for serving in that
capacity, nor do we currently reimburse directors for expenses incurred in
attending board meetings. In May 1996, Mr. Graziano received options to
purchase an aggregate of 350,000 shares of common stock at an exercise price
per share of $0.06. Mr. Sculley received options to purchase 75,000 shares of
common stock in July 1996 and 25,000 shares of common stock in October 1996,
each at an exercise price per share of $0.20. Please see also "Employee Benefit
Plans--Director Option Plan" for a description of options to be granted to
directors.
Compensation Committee Interlocks and Insider Participation
The compensation committee is currently comprised of Mr. Hirschfeld, Mr.
Graziano and Mr. Weinman. Neither Mr. Hirschfeld nor Mr. Weinman has at any
time been an officer or employee of our company. Mr. Graziano served as our
Acting Chief Financial Officer from May 1996 to March 1999. No interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company, nor
has any interlocking relationship existed in the past.
Limitation on Liability and Indemnification Matters
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except for:
. any breach of the director's duty of loyalty to a company or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases, redemptions
or other distributions; or
. any transaction from which the director derived an improper personal
benefit.
Our bylaws provide that we may indemnify our directors and executive officers
to the fullest extent permitted by law. We may, in our discretion, indemnify
other officers, employees and agents as set forth in Delaware law. We believe
that indemnification under our bylaws covers at least negligence and gross
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in that capacity,
regardless of whether the bylaws would permit indemnification.
We also have entered into agreements to indemnify our directors and officers.
These agreements indemnify our directors and officers for some expenses,
including attorneys' fees, judgments, fines and settlement amounts incurred by
them in any action or proceeding, including any action by or in the right of
our company, arising out of their services as one of our directors or officers,
any of our subsidiaries or any other company or enterprise to which the person
provides services at our request. In addition, we have obtained directors' and
officers' insurance providing indemnification for some of our directors,
officers and employees for certain liabilities. We believe that these
provisions, agreements and insurance are necessary to attract and retain
qualified directors and officers.
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At present, there is no pending litigation or proceeding involving any of our
directors, officers, employees or agents where indemnification will be required
or permitted. We are not aware of any threatened litigation or proceeding that
might result in a claim for indemnification.
Executive Compensation
The following table sets forth information concerning the compensation that
we paid during the fiscal year ended December 31, 1998 to our Chief Executive
Officer and our four other most highly compensated officers who earned more
than $100,000 during that fiscal year. All option grants were made under our
1996 stock option plan.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
-------------------- ----------------------
Securities Underlying
Name and Principal Position Salary ($) Bonus ($) Options (#)
--------------------------- ---------- --------- ----------------------
<S> <C> <C> <C>
Peter H. Friedman.................. $225,000 $ -- --
President and Chief Executive
Officer
Patricia Griffith.................. 140,000 21,569 55,000
Vice President of Sales
Christopher J. Escher.............. 150,000 -- --
Vice President of Marketing
Jenna Woodul....................... 125,000 -- --
Vice President of Community
Chris N. Christensen............... 115,000 -- --
Vice President of Engineering and
Operations
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information with respect to stock options
granted to our Chief Executive Officer and our four other most highly
compensated executive officers during the fiscal year ended December 31, 1998.
We have never granted any stock appreciation rights. All option grants were
made under our 1996 stock option plan. The exercise price per share was equal
to the fair market value of the common stock on the date of grant as determined
by the board of directors. Percentage of total options is based on an aggregate
of 315,648 shares of common stock granted under the 1996 stock option plan in
the year ended December 31, 1998. The potential realizable value is calculated
based on the term of the ten-year option, the initial public offering price of
$12.00 per share and assumed rates of stock appreciation of 5% and 10%,
compounded annually. These assumed rates comply with the rules of the
Securities and Exchange Commission and do not represent our estimate of future
stock price. Actual gains, if any, on stock option exercises will be dependent
on the future performance of our common stock.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------------
Potential Realizable
Value at Assumed
Number Annual Rates of Stock
Of Securities % of Price Appreciation for
Underlying Total Options Exercise Option Term
Options Granted in Price Per Expiration -----------------------
Name Granted (#) 1998 (%) Share ($) Date 5% 10%
- ---- ------------- ------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Peter H. Friedman....... -- -- -- -- -- --
Patricia Griffith....... 55,000 17.4% $0.28 1/15/08 $ 1,049,985 $ 1,671,926
Christopher J. Escher... -- -- -- -- -- --
Jenna Woodul............ -- -- -- -- -- --
Chris N. Christensen.... -- -- -- -- -- --
</TABLE>
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<PAGE>
Aggregated Option Exercises in Last Fiscal Year
The following table sets forth for our Chief Executive Officer and our four
other most highly compensated executive officers information concerning shares
acquired upon exercise of stock options in fiscal year ended December 31, 1998
and exercisable and unexercisable options held as of December 31, 1998. None of
the individuals listed below held any unexercised options at the end of fiscal
year 1998. All options were granted under our 1996 stock option plan. The value
realized is based on the initial public offering price of $12.00, minus the per
share exercise price, multiplied by the number of shares issued upon exercise
of the option.
<TABLE>
<CAPTION>
Shares
Acquired on Value Realized
Name Exercise (#)(a) ($)
---- --------------- --------------
<S> <C> <C>
Peter H. Friedman........................... -- --
Patricia Griffith........................... 75,000 879,000
Christopher J. Escher....................... 150,000 1,758,000
Jenna Woodul................................ -- --
Chris N. Christensen........................ -- --
</TABLE>
- --------
(a) The shares acquired by each of Ms. Griffith and Mr. Escher were acquired
pursuant to restricted stock purchase agreements. We have the right to
repurchase any unvested shares at their cost in the event of either
employee's termination of employment. As of April 30, 1999, approximately
48,647 shares held by Ms. Griffith and 84,375 shares held by Mr. Escher
were unvested and subject to our repurchase.
Employment Agreements
We require each of our employees to enter into confidentiality agreements
prohibiting the employee from disclosing any of our confidential or proprietary
information. In addition, the agreements generally provide that upon
termination the employee will not solicit our employees. At the time of
commencement of employment, our employees also generally sign offer letters
specifying basic terms and conditions of employment. In general, our employees
are not subject to written employment agreements.
Employee Benefit Plans
1996 Stock Option Plan. Our 1996 stock option plan, as amended and restated,
provides for the granting to employees of incentive stock options within the
meaning of Section 422 of the Internal Revenue Code and for the granting to
employees and consultants of nonstatutory stock options. As of April 30, 1999,
3,075,000 shares were authorized under the plan, 1,301,049 shares had been
issued upon the exercise of stock options granted under the plan, 448,465
shares were subject to outstanding options and 1,325,486 shares remained
available for future grant. The 1996 stock option plan provides for annual
increases on the first day of each fiscal year beginning 2000 equal to the
lesser of:
. 750,000 shares;
. 4% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 1996 stock option plan may be administered by the board of directors or a
committee of the board. The board has the power to determine the terms of the
options granted, including the exercise
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<PAGE>
price, the number of shares subject to each option, the exercisability of the
option grant and the form of consideration payable upon exercise. The board
also has the authority to amend, suspend or terminate the 1996 stock option
plan, provided that no action may affect any share of common stock previously
issued and sold or any option previously granted under the plan. The 1996 stock
option plan terminates in October 2006.
The 1996 stock option plan provides that in the event we merge with or into
another company, or we sell substantially all of our assets, each option may be
assumed or substituted by the successor company. If the outstanding options are
not assumed or substituted by the successor company, each outstanding option
will fully vest and become exercisable and the optionee will have 15 days to
exercise the option, after which time the option will terminate.
1996A Stock Option Plan. Our 1996A stock option plan provides for the
granting to employees of incentive stock options within the meaning of Section
422 of the Internal Revenue Code and for the granting to employees and
consultants of nonstatutory stock options. The terms of the 1996A stock option
plan are substantially similar to those of the 1996 stock option plan. All of
the 725,000 shares of common stock authorized for issuance pursuant to the
1996A stock option plan have been issued upon the exercise of stock options
granted under the plan. The 1996A stock option plan terminates in April 2006.
1999 Employee Stock Purchase Plan. A total of 500,000 shares of common stock
has been reserved for issuance under our 1999 employee stock purchase plan,
plus annual increases on the first day of each fiscal year beginning 2000 equal
to the lesser of:
. 500,000 shares;
. 2% of our outstanding shares as of such date; or
. a lesser amount determined by the board of directors.
The 1999 employee stock purchase plan, which is intended to qualify under
Section 423 of the Internal Revenue Code, contains successive 24-month offering
periods. The offering periods generally start on the first trading day on or
after May 1 and November 1 of each year, except for the first offering period,
which will commence on the first trading day on or after the effective date of
this offering and will end on the last trading day on or before October 31,
1999. Subsequent offering periods will each have a six-month duration
commencing on the first trading day on or after May 1 and November 1 of each
year.
Employees are eligible to participate if they are employed by us or any
participating subsidiary for at least 20 hours per week and more than five
months in any calendar year. However, the following employees may not be
granted options to purchase stock under the purchase plan:
. any employee who immediately after grant owns stock possessing 5% or more
of the total combined voting power or value of all classes of our capital
stock; or
. any employee whose rights to purchase stock under all of our employee
stock purchase plans accrues at a rate which exceeds $25,000 worth of
stock for each calendar year.
Participants may purchase common stock through payroll deductions of up to
15% of the participant's compensation. The maximum number of shares a
participant may purchase during a single offering period is 10,000 shares.
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<PAGE>
Amounts deducted and accumulated by the participant are used to purchase
shares of common stock at the end of each offering period. The price of stock
purchased under the purchase plan is 85% of the lower of the fair market value
of the common stock at the beginning of the offering period and the fair market
value of the common stock at end of the offering period.
The purchase plan provides that in the event we merge with or into another
company, or we sell substantially all of our assets, each outstanding option
may be assumed or substituted by the successor company. If the successor
company refuses to assume or substitute the options, the offering period then
in progress will be shortened and a new exercise date will be set, which will
occur before the proposed merger or sale.
The purchase plan will become effective on the effective date of this
offering and will terminate in June 2009. The board has the authority to amend
or terminate the purchase plan, except that no action may adversely affect any
outstanding rights to purchase stock.
1999 Director Option Plan
Non-employee directors are entitled to participate in the 1999 director
option plan. The director option plan will become effective upon the effective
date of this offering. The 1999 director option plan has a term of ten years,
unless terminated sooner by the board. A total of 250,000 shares of common
stock have been reserved for issuance under the 1999 director option plan.
Each non-employee director automatically will receive, on the commencement of
this offering and on the date of each annual meeting of stockholders, a fully
vested and exercisable option to purchase 5,000 shares of common stock. Each
new non-employee director who joins our board after the effective date of the
offering will receive, upon joining the board, an initial, fully vested and
exercisable option to purchase 20,000 shares of common stock. The exercise
price of all options is required to be 100% of the fair market value per share
of the common stock, determined with reference to the closing price of the
common stock as reported on the Nasdaq National Market on the date of grant.
In the event we merge with, or sell substantially all of our assets to,
another company, each option may be assumed or substituted by the successor
company. In the absence of an assumption or substitution, the board must notify
each option holder that the option is exercisable for 30 days, after which
period it expires. If the successor company refuses to assume or substitute the
options, each outstanding option will terminate after 30 days. Options granted
under the 1999 director option plan must be exercised within three months of
the end of the optionee's termination of service as a director or consultant,
or within twelve months after such director's termination by death or
disability, but not later than the expiration of the option's ten-year term.
401(k) Savings Plan
We have a 401(k) savings plan covering our employees who are at least 21
years of age. The 401(k) savings plan is intended to qualify under Section
401(k) of the Internal Revenue Code. Consequently, contributions to the 401(k)
savings plan by our employees, and income earned on such contributions, are not
taxable to employees until withdrawn from the 401(k) savings plan. Subject to
restrictions imposed by the Internal Revenue Code on highly compensated
employees, employees
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<PAGE>
may generally defer up to 20% of their pre-tax earnings up to the statutorily
prescribed annual limit, which is $10,000 in 1999, and to have the amount of
such reduction contributed to the 401(k) savings plan. The 401(k) savings plan
permits, but does not require, additional matching contributions by us on
behalf of all participants in the 401(k) savings plan. We have not made any
matching contributions to the 401(k) savings plan in 1997, 1998 or the three
months ended March 31, 1999.
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<PAGE>
Certain Transactions
Equity Investment Transactions for Cash
In June 1996, we sold 150,000 shares of Series A preferred stock for $2.00
per share. In July 1996 we sold 350,000 shares of Series A1 preferred stock for
$2.00 per share. In November 1996, we sold 3,294,785 shares of Series B
preferred stock for $2.80 per share. In August and September of 1998, we sold
5,592,033 shares of Series D preferred stock at $4.00 per share. In April 1999,
we sold 2,499,882 shares of Series E preferred stock for $8.00 per share.
Listed below are the directors, executive officers and stockholders who
beneficially own 5% or more of our securities who participated in these
financings.
<TABLE>
<CAPTION>
Series A Series A1 Series B Series D Series E
Directors, Executive Officers Preferred Preferred Preferred Preferred Preferred Aggregate Cash
and 5% Stockholders Stock Stock Stock Stock Stock Consideration
- ----------------------------- --------- --------- --------- --------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Funds managed by
Patricof & Co.
Ventures, Inc.(a)....... -- -- 714,287 1,253,405 -- $6,100,000
Cox Interactive Media,
Inc...................... -- -- -- 1,250,000 -- 5,000,000
Media Technology Equity
Partners, L.P.(b)........ -- -- -- 1,000,000 125,000 5,000,000
New York Life Insurance
Company.................. -- -- 714,286 400,000 175,000 5,000,000
Hearst Communications,
Inc.(c).................. -- -- -- 292,033 210,521 2,852,296
Starbucks Corporation..... -- -- -- -- 1,000,000 8,000,000
Joseph A. Graziano........ 150,000 50,000 18,000 -- -- 450,400
John Sculley.............. -- 150,000 -- -- -- 300,000
</TABLE>
- --------
(a) The Patricof & Co. Ventures, Inc. shares include shares purchased by APA
Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and Patricof Private
Investment Club, L.P. Mr. Hirshfeld, a Managing Director of Patricof & Co.
Ventures, Inc. and a director of our company, disclaims beneficial
ownership of the securities held by these entities except for his
proportional interest in the entities.
(b) Mr. Weinman, a director of our company, is a Managing Director of Media
Technology Equity Partners and a General Partner of Media Technology
Ventures and AVI Management Partners. Mr. Weinman disclaims beneficial
ownership of the securities held by this entity except for his proportional
interest in the entity.
(c) Mr. Bronfin, a director of our company, is Senior Vice President and Deputy
Group Head of the Hearst New Media and Technology division of Hearst
Communications, Inc. Mr. Bronfin disclaims beneficial ownership of the
securities held by this entity except for his proportional interest in the
entity.
NBC and Affiliates Agreements
NBC
We entered into a series of letter agreements with NBC in February, July and
August 1998 pursuant to which we aired advertisements on various NBC television
programs. In consideration for NBC's agreement to air the advertisements, we
issued:
. an aggregate of 384,615 shares, at a price per share of $4.68, of our
Series C preferred stock, which converts to 450,000 shares of common
stock;
. a warrant to purchase 125,000 shares, with an exercise price per share of
$6.00, of Series D preferred stock;
. an aggregate of 600,000 shares, at a price per share of $4.00, of our
Series D preferred stock; and
. a warrant to purchase a total of 266,667 shares of Series D preferred
stock.
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<PAGE>
The exercise prices of the warrant to purchase an aggregate of 266,667 shares
of Series D preferred stock are as follows:
. with respect to 41,667 shares, $6.00 per share;
. with respect to 125,000 shares, $8.00 per share; and
. with respect to 100,000 shares, $10.00 per share.
Mr. Yudkovitz, a director of our company, is President and Chief Executive
Officer of NBC Multimedia, a subsidiary of NBC.
NBC Multimedia
In February 1998, we executed a letter agreement with NBC Multimedia, Inc.
pursuant to which we include localized versions of our chat service within NBC
Interactive Neighborhood's menu of localized Web services. In consideration, we
issued a warrant to NBC Multimedia to purchase 320,513 shares of common stock
at an exercise price per share of $4.68. On August 31, 1998, we issued a new
warrant to NBC Multimedia, upon cancellation and in replacement of the original
NBC Multimedia warrant, exercisable for 375,000 shares of common stock, at an
exercise price per share of $4.00, pursuant to an anti-dilution protection
contained in the original warrant.
In August 1998, we entered into an operating agreement with NBC Multimedia
pursuant to which we provide our community services to various NBC Web sites.
In consideration for the execution of the operating agreement by NBC
Multimedia, we issued:
. 500,000 shares of our Series D preferred stock, at a purchase price per
share of $4.00; and
. a warrant to purchase a total of 130,556 shares of Series D preferred
stock.
The warrant has the following exercise prices:
. with respect to 55,555 shares, $6.00 per share;
. with respect to 41,666 shares, $8.00 per share; and
. with respect to 33,335 shares, $10.00 per share.
Mr. Yudkovitz, a director of our company, is President and Chief Executive
Officer of NBC Multimedia.
Hearst Agreement
Pursuant to an agreement, dated October 30, 1998, as amended on April 15,
1999, with the Hearst New Media and Technology division of Hearst
Communications, Inc., we issued an aggregate of 750,000 shares of our Series D
preferred stock, at a price per share of $4.00, in consideration for the
publication by Hearst, over an agreed upon time period beginning September 3,
1998, of our advertisements in various magazines owned by Hearst. Mr. Bronfin,
a director of our company, is Senior Vice President and Deputy Group Head of
the Hearst New Media and Technology division of Hearst Communications, Inc.
Loan Financing
In April and July of 1998, we engaged in a loan financing pursuant to which
we issued to the investors in the financing convertible promissory notes and
warrants to purchase shares of common stock. An aggregate principal amount of
$2,903,000 was issued pursuant to the loan financing.
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<PAGE>
The principal plus interest on the notes were convertible, at the option of
each individual investor, into Series D preferred stock upon the initial
closing of the Series D financing, which occurred on August 25, 1998, at a
conversion price per share of $4.00. Each individual warrant issued pursuant to
the financing was exercisable for a number of shares of common stock equal to
30% of the principal amount of the note held by the investor divided by $3.00
per share. The exercise price of the warrants is $3.00 per share.
Funds managed by Patricof & Co. Ventures, Inc. invested an aggregate
principal amount of $900,000 in the loan financing, which converted to an
aggregate of 228,405 shares of Series D preferred stock. These funds also
received warrants to purchase an aggregate of 90,000 shares of common stock.
The Patricof & Co. Ventures, Inc. shares and warrants include shares and
warrants held by APA Excelsior IV, L.P., APA Excelsior IV/Offshore, L.P. and
Patricof Private Investment Club, L.P. Funds managed by Patricof & Co.
Ventures, Inc. own more than 5% of our securities. Mr. Hirschfeld, a Managing
Director of Patricof & Co. Ventures, Inc. and a director of our company,
disclaims beneficial ownership of the securities held by these entities except
for his proportional interest in the entities.
New York Life Insurance Company invested an aggregate principal amount of
$400,000 in the loan financing which converted to an aggregate of 102,183
shares of Series D preferred stock. New York Life also received warrants to
purchase an aggregate of 40,000 shares of common stock. New York Life Insurance
Company owns more than 5% of our securities.
Restricted Stock Purchase Agreement
In March 1999, Mr. Snetiker exercised an option grant to purchase an
aggregate of 125,000 shares of common stock and entered into a restricted stock
purchase agreement regarding the shares. Pursuant to the restricted stock
purchase agreement, we have a right to repurchase any of the unvested 125,000
shares upon his termination of employment. As of April 30, 1999, all 125,000
shares held by Mr. Snetiker remain unvested. Mr. Snetiker paid the $5.00
exercise price per share for such shares by delivery of a ten-year full-
recourse promissory note bearing interest at 5.23% per annum, compounded semi-
annually. The note is secured by the shares of common stock purchased by Mr.
Snetiker. As of April 30, 1999, approximately $625,000 in unpaid principal and
interest was outstanding in the aggregate under the note. In addition, Mr.
Snetiker's stock option agreement provides that, if at any time prior to March
1, 2000:
. we enter into any transaction which involves a change of control and Mr.
Snetiker's employment is terminated as a result of the change of control;
or
. Mr. Snetiker's employment is terminated other than for cause or as a
result of voluntary resignation
then, in each case, 25% of the unvested shares held by Mr. Snetiker will
automatically vest in full. Generally, a "change of control" is defined to
include mergers, asset sales or other transactions involving a transfer of at
least 50% of our securities.
Repurchase Agreements
On November 20, 1996, as a condition to closing the Series B preferred stock
financing, we entered into repurchase agreements with Mr. Friedman and Ms.
Woodul. Pursuant to the repurchase
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<PAGE>
agreements, we have the right to repurchase any or all of the unvested shares
of common stock held by Mr. Friedman and Ms. Woodul, respectively, upon their
termination for any reason. As of April 30, 1999, 200,926 and 48,611 of the
shares held by Mr. Friedman and Ms. Woodul, respectively, remain unvested.
These repurchase rights will terminate upon the closing of this offering.
The repurchase agreements also provide that in the event of termination of
such individuals' employment for any reason, with limited exceptions, each of
Mr. Friedman and Ms. Woodul will be entitled to receive 90 days, or such longer
period as the board determines, of their then current salary and benefits,
payable in one lump sum as of the date of termination.
Other Transactions
We have entered into indemnification agreements with each of our executive
officers and directors.
We have granted options to certain of our executive officers and directors.
See "Management--Option Grants in Last Fiscal Year" and "--Restricted Stock
Purchase Agreement."
Holders of preferred stock are entitled to registration rights with respect
to the common stock issued or issuable upon conversion of the preferred stock.
See "Description of Capital Stock--Registration Rights."
We believe that all related-party transactions described above were on terms
no less favorable than could have been otherwise obtained from unrelated third
parties.
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<PAGE>
Principal Stockholders
The following table sets forth information with respect to beneficial
ownership of our common stock as of April 30, 1999, and as adjusted to reflect
the sale of common stock offered by us in this offering, for:
. each person who we know beneficially owns more than 5% of the common
stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table; and
. all of our directors and officers as a group.
Unless otherwise indicated, the principal address of each of the stockholders
below is c/o Talk City, Inc., 307 Orchard City Drive, Suite 350, Campbell,
California 95008. Beneficial ownership is determined in accordance with the
rules of the Securities and Exchange Commission and includes voting or
investment power with respect to the securities. Except as indicated by
footnote, and subject to applicable community property laws, each person
identified in the table possesses sole voting and investment power with respect
to all shares of common stock held by them. The number of shares of common
stock outstanding used in calculating the percentage for each listed person
includes shares of common stock underlying options or warrants held by such
person that are exercisable within 60 days of April 30, 1999 but excludes
shares of common stock underlying options or warrants held by any other person.
Percentage of beneficial ownership is based on 19,175,763 shares of common
stock outstanding as of April 30, 1999, after giving effect to the conversion
of all outstanding shares of preferred stock upon the closing of this offering.
The numbers shown in the table assume no exercise by the underwriters of their
over-allotment option.
<TABLE>
<CAPTION>
Percentage
Shares Owned Beneficially Owned
Prior to ------------------------------
the Offering Before Offering After Offering
------------ --------------- --------------
<S> <C> <C> <C>
5% Stockholders:
Entities affiliated with National
Broadcasting Company, Inc.(a).... 2,447,223 12.2% 9.8%
Funds Managed by Patricof & Co.
Ventures, Inc.(b)................ 2,057,692 10.7 8.5
New York Life Insurance
Company(c)....................... 1,431,469 7.5 5.9
Hearst Communications, Inc.(d).... 1,252,554 6.5 5.2
Cox Interactive Media, Inc.(e).... 1,250,000 6.5 5.2
Media Technology Equity Partners,
L.P.(f).......................... 1,125,000 5.9 4.7
Starbucks Corporation (g)......... 1,000,000 5.2 4.1
Directors and Executive Officers:
Peter H. Friedman(h).............. 1,567,936 8.2 6.5
Kenneth A. Bronfin(e)............. 1,252,554 6.5 5.2
Joseph A. Graziano(i)............. 578,761 3.0 2.4
Thomas P. Hirschfeld(b)........... 2,057,692 10.7 8.5
John Sculley(j)................... 260,762 1.4 1.1
Barry M. Weinman(f)............... 1,125,000 5.9 4.7
Martin J. Yudkovitz(a)............ 2,447,223 12.2 9.8
Patricia Griffith(k).............. 75,000 * *
Christopher J. Escher(l).......... 155,000 * *
Jenna Woodul(m)................... 757,087 3.9 3.1
Chris N. Christensen(n)........... 200,000 1.0 *
All directors and officers as a
group (15 persons)(o)............ 11,436,953 56.7 45.4
</TABLE>
- --------
* Represents less than one percent of the total.
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<PAGE>
(a) Principal address is 30 Rockefeller Plaza, New York, NY 10112. Number of
shares includes 1,050,000 shares held by NBC, 500,000 shares held by NBC
Multimedia, warrants issued to NBC Multimedia to purchase 505,556 shares
exercisable within 60 days of April 30, 1999 and warrants issued to NBC to
purchase 391,667 shares exercisable with 60 days of April 30, 1999. Mr.
Yudkovitz, a director of our company, is President and Chief Executive
Officer of NBC Multimedia. Mr. Yudkovitz disclaims beneficial ownership of
the shares held by these entities except to the extent of his proportional
interest in the entities.
(b) Principal address is 445 Park Avenue, New York, NY 10022. Number of shares
includes 1,645,776 shares held by APA Excelsior IV, L.P., 290,432 shares
held by APA Excelsior IV/Offshore, L.P., 31,484 shares held by Patricof
Private Investment Club, warrants issued to APA Excelsior IV, L.P. to
purchase 75,276 shares exercisable within 60 days of April 30, 1999,
warrants issued to APA Excelsior IV/Offshore, L.P. to purchase 13,284
shares exercisable within 60 days of April 30, 1999 and warrants issued to
Patricof Private Investment Club to purchase 1,440 shares exercisable
within 60 days of April 30, 1999. Mr. Hirschfeld, a director of our
company, is a Managing Director of Patricof & Co. Ventures, Inc. Mr.
Hirschfeld disclaims beneficial ownership of the shares held by these
entities except to the extent of his proportional interest in the entities.
(c) Principal address is 1400 Lake Hearn Drive, Atlanta, GA 30319.
(d) Principal address is 51 Madison Avenue, New York, NY 10010. Number of
shares includes 1,391,469 shares and warrants to purchase 40,000 shares
exercisable within 60 days of April 30, 1999.
(e) Principal address is 959 8th Avenue, New York, NY 10019. Mr. Bronfin, a
director of our company, is Senior Vice President and Deputy Group Head of
the Hearst New Media and Technology division of Hearst Communications, Inc.
Mr. Bronfin disclaims beneficial ownership of the shares held by such
entity except to the extent of his proportional interest in the entity.
(f) Principal address is One First Street, Los Altos, CA 94022. Mr. Weinman, a
director of our company, is a Managing Director of Media Technology Equity
Partners and a General Partner of Media Technology Ventures and AVI
Management Partners. Mr. Weinman disclaims beneficial ownership of the
shares held by such entity except to the extent of his proportional
interest in the entity.
(g) Principal address is 2401 Utah Avenue South, Seattle, WA 98134.
(h) Includes 1,470,936 shares held directly by Mr. Friedman, 200,926 shares of
which are subject to a repurchase option we hold as of April 30, 1999,
50,000 shares held by Arthur and Cynthia Friedman, 28,000 shares held by
Robert Friedman, 7,000 shares held by Joan Friedman, 7,000 shares held by
Judy and Kevin Wichter and a warrant to purchase 5,000 shares exercisable
within 60 days of April 30, 1999.
(i) Includes a warrant to purchase 3,000 shares exercisable within 60 days of
April 30, 1999.
(j) Principal address is 90 Park Avenue, New York, NY 10016. Includes 257,762
shares, 100,000 shares of which were issued upon exercise of stock options.
Of those 100,000 shares, 32,813 are subject to a repurchase option we hold
as of April 30, 1999, a warrant to purchase 3,000 shares exercisable within
60 days of April 30, 1999, 31,667 shares held by Sculley Brothers LLC,
10,000 shares held by Sculley Investment Ltd. Partnership, 2,500 shares
held by John Sculley Irrevocable Trust fbo Madeline Allnatt u/d/t 12/30/97
and 2,500 shares held by John Sculley Irrevocable Trust fbo Oliver Allnatt
u/d/t 12/30/97.
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<PAGE>
(k) Includes 75,000 shares issued upon exercise of stock options, 48,647 shares
of which are subject to a repurchase option we hold as of April 30, 1999.
(l) Includes 150,000 shares issued upon exercise of stock options, 84,375
shares of which are subject to a repurchase option we hold as of April 30,
1999 and a warrant to purchase 5,000 shares exercisable within 60 days of
April 30, 1999.
(m) Includes 380,087 shares held directly by Ms. Woodul, 48,611 shares of which
are subject to a repurchase option we hold as of April 30, 1999, 375,000
shares held by Morgan S. Wright and a warrant to purchase 2,000 shares
exercisable within 60 days of April 30, 1999.
(n) Includes 200,000 shares issued upon exercise of stock options, 54,167 of
which are subject to a repurchase option we hold as of April 30, 1999.
(o) Includes an aggregate of:
. 722,665 shares of which are subject to a repurchase option we hold as of
April 30, 1999;
. 1,700,000 shares issued upon exercise of stock options; and
. warrants to purchase 1,008,023 shares exercisable within 60 days of
April 30,1999.
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<PAGE>
Description of Capital Stock
Upon the completion of this offering, our authorized capital stock will
consist of 100,000,000 shares of common stock, $0.001 par value, and 5,000,000
shares of preferred stock, $0.001 par value.
The following summary of the rights of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of our amended and restated certificate of
incorporation and bylaws which are included as exhibits to the registration
statement of which this prospectus is a part and by the provisions of Delaware
law.
Common Stock
After giving effect to the one for two reverse stock split of the all
outstanding common stock and the conversion of all previously outstanding
preferred stock into shares of common stock, as of April 30, 1999, there were
19,175,763 shares of common stock outstanding held of record by approximately
88 stockholders. There will be 24,175,763 shares of common stock outstanding,
assuming no exercise of the underwriters' over-allotment option and no exercise
of outstanding options or warrants, after giving effect to the sale of common
stock in the offering.
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Except as required
under Delaware law or the rules of the Nasdaq National Market, the rights of
stockholders may not be modified otherwise than by a vote of a majority or more
of the shares outstanding. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, the holders of common stock are entitled
to receive ratably any dividends as may be declared by the board of directors
out of funds legally available for the payment of dividends. Please see
"Dividend Policy." In the event of our liquidation, dissolution or winding up,
the holders of common stock are entitled to share ratably in all assets,
subject to prior distribution rights of the preferred stock, if any, then
outstanding. Holders of common stock have no preemptive rights or rights to
convert their common stock into any other securities. There are no redemption
or sinking fund provisions applicable to the common stock. All outstanding
shares of common stock are fully paid and non-assessable, and the shares of
common stock to be issued in the offering will be fully paid and non-
assessable.
Preferred Stock
Upon the consummation of this offering, each outstanding share of Series A,
Series A1, Series B, Series D and Series E preferred stock will automatically
convert into one share of common stock. Each outstanding share of Series C
preferred stock will automatically convert into approximately 1.17 shares of
common stock. Pursuant to our amended and restated certificate of
incorporation, the board of directors has the authority, without further action
by the stockholders, to issue up to 5,000,000 shares of preferred stock in one
or more series and to fix the designations, powers, preferences and privileges,
which may be greater than the rights of the common stock. The board, without
stockholder approval, can issue preferred stock with voting, conversion or
other rights that could adversely affect the voting power and other rights of
the holders of common stock. Preferred stock could thus be issued quickly with
terms calculated to delay or prevent a change in control of our company or make
removal of management more difficult. Additionally, the issuance of preferred
stock may have the effect of decreasing the market price of the common stock.
At present, there are no shares of preferred stock outstanding, and we have no
plans to issue any of the preferred stock.
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<PAGE>
Common Stock Warrants
Upon completion of the offering, we will have 47 warrants outstanding to
purchase an aggregate of 1,318,246 shares of common stock, exercisable as
follows:
. 285,300 shares at an exercise price of $3.00 per share;
. 498,830 shares at an exercise price of $4.00 per share;
. 222,222 shares at an exercise price of $6.00 per share;
. 178,559 shares at an exercise price of $8.00 per share; and
. 133,335 shares at an exercise price of $10.00 per share.
These warrants expire five years from the date of execution.
Registration Rights
Upon completion of the offering, the holders of an aggregate of approximately
17,569,709 shares of common stock will be entitled to rights with respect to
the registration of such shares under the Securities Act of 1933. Under the
terms of the third amended and restated shareholders rights agreement, as
amended, if we propose to register any of our securities under the Securities
Act of 1933, either for our own account or for the account of other security
holders, these holders are entitled to notice of such registration and are
entitled to include shares of common stock in the registration. The rights are
subject to conditions and limitations, among them the right of the underwriters
of an offering subject to the registration to limit the number of shares
included in such registration. A limited number of the holders of these rights
may also require us to file a registration statement under the Securities Act
of 1933 with respect to their shares of common stock and we are required to use
our best efforts to effect such registration, subject to conditions and
limitations. Furthermore, stockholders with registration rights may require us
to file additional registration statements on Form S-3, subject to conditions
and limitations.
Delaware Anti-Takeover Law and Our Charter and Bylaws Provisions
Delaware Anti-Takeover Statute. We are subject to Section 203 of the Delaware
General Corporation Law. In general, these provisions prohibit a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that the stockholder
became an interested stockholder, unless the transaction in which the person
became an interested stockholder is approved in a manner presented in Section
203 of the Delaware General Corporation Law.
Generally, a "business combination" is defined to include mergers, asset
sales and other transactions resulting in financial benefit to a stockholder.
In general, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years, did own, 15% or more of
a corporation's outstanding voting stock.
Amended and Restated Certificate of Incorporation. Our amended and restated
certificate of incorporation provides:
. that the board of directors may issue, without further action by the
stockholders, up to 5,000,000 shares of undesignated preferred stock;
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<PAGE>
. that any action to be taken by our stockholders must be effected at a
duly called annual or special meeting and not by written consent; and
. for the division of the board of directors into three classes, with each
class serving for a term of three years.
Bylaws. Our bylaws provide that special meetings of our stockholders may be
called only by the chairman of the board, the president, the board or
stockholders holding a majority of our outstanding stock.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the board and in the policies formulated by the
board and to discourage certain types of transactions that may involve an
actual or threatened change of control of our company. These provisions are
designed to reduce our vulnerability to an unsolicited proposal for a takeover
that does not contemplate the acquisition of all of our outstanding shares or
an unsolicited proposal for the restructuring or sale of all or part of our
company. These provisions, however, could discourage potential acquisition
proposals and could delay or prevent a change in control of our company. They
may also have the effect of preventing changes in our management.
Transfer Agent and Registrar
The transfer agent and registrar for common stock is Firstar Bank of
Minnesota, N.A.
Listing
Our common stock has been approved for listing on the Nasdaq National Market
under the trading symbol "TCTY." We have not applied to list our common stock
on any other exchange or quotation system.
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<PAGE>
Shares Eligible For Future Sale
Prior to the offering, there has been no market for the common stock. Future
sales of substantial amounts of common stock in the public market following the
offering could cause the prevailing market price of our common stock to fall
and impede our ability to raise equity capital at a time and on terms favorable
to us.
Upon completion of the offering, we will have outstanding an aggregate of
24,175,763 shares of common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or outstanding
warrants after April 30, 1999. Of these outstanding shares, the 5,000,000
shares sold in the offering will be freely tradeable without restriction or
further registration under the Securities Act of 1933, unless purchased by our
"affiliates" as that term is defined in Rule 144 under the Securities Act of
1933. The remaining 19,175,763 shares of common stock outstanding upon
completion of the offering and held by existing stockholders will be
"restricted securities" as that term is defined in Rule 144 under the
Securities Act of 1933. Restricted shares may be sold in the public market only
if registered or if they qualify for an exemption from registration under
Rules 144, 144(k) or 701 promulgated under the Securities Act of 1933, which
rules are summarized below, or another exemption. Sales of the restricted
shares in the public market, or the availability of such shares for sale, could
adversely affect the market price of the common stock. All officers, directors
and certain other holders of common stock have entered into contractual "lock-
up" agreements providing that they will not offer, sell, contract to sell or
grant any option to purchase or otherwise dispose of shares of common stock
owned by them or that could be purchased by them through the exercise of
options or warrants for a period of 180 days after the date of this prospectus
without the prior written consent of Lehman Brothers Inc. As a result of these
contractual restrictions, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144, 144(k) and 701, additional shares will be
eligible for sale beginning 181 days after the effective date of the offering,
subject in some cases to certain volume limitations.
Of the remaining restricted shares:
. 722,665 shares are subject to our repurchase option in the event of
termination of employment; and
. 10,989,525 shares will not be eligible for sale pursuant to Rule 144
until the expiration of a one-year holding period.
In general, under Rule 144 as currently in effect, beginning 91 days after
the date of this prospectus, a person, or persons whose shares are aggregated,
who has beneficially owned restricted shares for at least one year, including
persons who may be deemed to be our "affiliates", would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1% of the number of shares of common stock then outstanding, which will
equal approximately 241,758 shares immediately after the offering; or
. the average weekly trading volume of the common stock as reported through
the Nasdaq National Market during the four calendar weeks preceding the
filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to manner of sale provisions and notice
requirements and to the availability of current public information about us.
Under Rule 144(k), a person who is not
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<PAGE>
deemed to have been our affiliate at any time during the 90 days preceding a
sale, and who has beneficially owned for at least two years the restricted
shares proposed to be sold, including the holding period of any prior owner
except an affiliate, is entitled to sell such shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 permits resales of shares issued
prior to the date the issuer becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, pursuant to certain compensatory benefit
plans and contracts commencing 90 days after the issuer becomes subject to the
reporting requirements of the Securities Exchange Act of 1934, in reliance upon
Rule 144 but without compliance with certain restrictions, including the
holding period requirements. In addition, the Securities and Exchange
Commission has indicated that Rule 701 will apply to typical stock options
granted by an issuer before it becomes subject to the reporting requirements of
the Securities Exchange Act of 1934, along with the shares acquired upon
exercise of such options, including exercises after the date the issuer becomes
so subject. Securities issued in reliance on Rule 701 are restricted securities
and, subject to the contractual restrictions described above, beginning 91 days
after the date of this prospectus, may be sold by persons other than affiliates
subject only to the manner of sale provisions of Rule 144 and by affiliates
under Rule 144 without compliance with its one-year minimum holding period
requirements.
We have agreed not to sell or otherwise dispose of any shares of common stock
or any securities convertible into or exercisable or exchangeable for common
stock, or enter into any swap or similar agreement that transfers, in whole or
in part, the economic risk of ownership of the common stock, for a period of
180 days after the date of this prospectus, without the prior written consent
of Lehman Brothers Inc., subject to limited exceptions.
We intend to file a registration statement under the Securities Act of 1933
covering the shares of common stock subject to outstanding options or reserved
for issuance under the 1996A stock option plan, 1996 stock option plan, 1999
employee stock purchase plan and the 1999 director option plan. This
registration statement is expected to be filed simultaneously with the
effectiveness of the registration statement covering the shares of common stock
offered in this offering and will automatically become effective upon filing.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to affiliates and the expiration of a
180-day lockup period, be available for sale in the open market, except to the
extent that such shares are subject to our vesting restrictions or the
contractual restrictions described above.
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<PAGE>
Underwriting
Under the underwriting agreement, which is filed as an exhibit to the
registration statement relating to this prospectus, the underwriters named
below, for whom Lehman Brothers Inc., Volpe Brown Whelan & Company, LLC, U.S.
Bancorp Piper Jaffray Inc. and E*TRADE Securities, Inc. are acting as
representatives, have each agreed to purchase from us the respective number of
shares of common stock set forth opposite its name below:
<TABLE>
<CAPTION>
Number of
Underwriters Shares
- ------------ ---------
<S> <C>
Lehman Brothers Inc................................................... 2,055,000
Volpe Brown Whelan & Company, LLC..................................... 1,235,000
U.S. Bancorp Piper Jaffray Inc........................................ 830,000
E*TRADE Securities, Inc............................................... 110,000
Banc of America Securities LLC........................................ 110,000
BancBoston Robertson Stephens, Inc.................................... 110,000
Credit Suisse First Boston Corporation................................ 110,000
Goldman, Sachs & Co................................................... 110,000
Hambrecht & Quist LLC................................................. 110,000
Dain Rauscher Wessels
A division of Dain Rauscher Incorporated............................. 55,000
Legg Mason Wood Walker, Incorporated.................................. 55,000
Sands Brothers & Co., Ltd............................................. 55,000
SoundView Technology Group, Inc....................................... 55,000
---------
Total............................................................... 5,000,000
=========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any of the shares of
common stock are purchased by the underwriters under the underwriting
agreement, then all of the shares of common stock which the underwriters have
agreed to purchase under the underwriting agreement, must be purchased. The
conditions contained in the underwriting agreement include the requirement that
the representations and warranties made by us to the underwriters are true,
that there is no material change in the financial markets and that we deliver
to the underwriters customary closing documents.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by us. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 750,000 additional shares.
<TABLE>
<CAPTION>
No Full
Paid by Talk City Exercise Exercise
----------------- ---------- ----------
<S> <C> <C>
Per Share................................................. $ 0.84 $ 0.84
Total..................................................... $4,200,000 $4,830,000
</TABLE>
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the public offering price
set forth on the cover page of this prospectus, and to dealers, who may include
the underwriters, at the public offering price less a selling concession not in
excess of $0.49 share. The underwriters may allow, and the dealers may reallow,
a
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<PAGE>
concession not in excess of $0.10 share to brokers and dealers. After the
offering, the underwriters may change the offering price and other selling
terms.
We have granted to the underwriters an option to purchase up to an aggregate
of additional shares of common stock, exercisable solely to cover over-
allotments, if any, at the public offering price less the underwriting
discounts and commissions shown on the cover page of this prospectus. The
underwriters may exercise this option at any time until 30 days after the date
of the underwriting agreement. If this option is exercised, each underwriter
will be committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase a number of additional shares of common stock
proportionate to the underwriter's initial commitment as indicated in the
preceding table and we will be obligated, under the over-allotment option, to
sell the shares of common stock to the underwriters.
We have agreed that, without the prior consent of Lehman Brothers Inc. we
will not directly or indirectly, offer, sell or otherwise dispose of any shares
of common stock or any securities which may be converted into or exchanged for
any such shares of common stock for a period of 180 days from the date of this
prospectus. All of our executive officers and directors and certain other
stockholders, including all of the holders of the preferred stock and warrants,
have agreed under lock-up agreements that, without the prior written consent of
Lehman Brothers Inc., they will not, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities which may be
converted into or exchanged for any such shares for the period ending 180 days
after the date of this prospectus. Please see "Shares Eligible for Future
Sale."
Prior to the offering, there has been no public market for the shares of
common stock. The initial public offering price has been negotiated between the
representatives and us. In determining the initial public offering price of the
common stock, the representatives considered, among other things and in
addition to prevailing market conditions, our historical performance and
capital structure, estimates of our business potential and earning prospects,
an overall assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
Our common stock has been approved for quotation on the Nasdaq National
Market under the symbol "TCTY."
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act of 1933 and liabilities arising from
breaches of the representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may be required
to make for these liabilities.
We estimate that the total expenses of the offering, excluding underwriting
discounts and commissions, will be approximately $1.1 million.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters
and selling group members to bid for and purchase shares of common stock. As an
exception to these rules, the representatives are permitted to engage in
transactions that stabilize the price of the common stock. These transactions
may consist of bids or purchases for the purposes of pegging, fixing or
maintaining the price of the common stock.
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The underwriters may create a short position in the common stock in
connection with the offering, which means that they may sell more shares than
are set forth on the cover page of this prospectus. If the underwriters create
a short position, then the representatives may reduce that short position by
purchasing common stock in the open market. The representatives also may elect
to reduce any short position by exercising all or part of the over-allotment
option. The underwriters have informed us that they do not intend to confirm
sales to discretionary accounts that exceed 5% of the total number of shares of
common stock offered by them.
The representatives also may impose a penalty bid on underwriters and selling
group members. This means that if the representatives purchase shares of common
stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of those purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or prediction
as to the direction or magnitude of any effect that the transactions described
above may have on the price of the common stock. In addition, neither we nor
any of the underwriters makes any representation that the representatives will
engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
Any offers in Canada will be made only under an exemption from the
requirements to file a prospectus in the relevant province of Canada where the
sale is made.
Purchasers of the shares of common stock offered in this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the offering price listed on the cover
of this prospectus.
A prospectus in electronic format is being made available on an Internet Web
site maintained by E*TRADE Securities, Inc. Internet purchases of the common
stock offered by this prospectus will be available only to registered customers
of E*TRADE Securities, Inc. who possess sufficient net worth and investment
experience. All eligible accounts may submit an indication of interest to
E*TRADE Securities, Inc. to purchase shares. If demand exceeds availability,
E*TRADE Securities, Inc. will randomly allocate shares to applicants in 100
share lots in a round-robin fashion, meaning that no applicant will receive a
second lot until all applicants have received one lot and so forth, until all
shares available to E*TRADE Securities, Inc. have been distributed.
At our request, the underwriters have reserved up to 5% shares of the common
stock offered by this prospectus for sale to our officers, directors, employees
and their family members and to our business associates at the initial public
offering price set forth on the cover page of this prospectus. These persons
must commit to purchase no later than the close of business on the day
following the date of this prospectus. The number of shares available for sale
to the general public will be reduced to the extent these persons purchase the
reserved shares. In addition, E*TRADE Securities, Inc. has
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<PAGE>
reserved up to 20,000 shares for sale to our trained community leaders and
moderators on the same terms and conditions. The number of shares available for
sale to customers of E*TRADE Securities, Inc. will be reduced to the extent
these persons purchase their reserved shares.
In connection with our private placement of Series D preferred stock and our
private placement of Series E preferred stock, we paid to Volpe Brown Whelan &
Company, LLC an aggregate of $1,148,208 in cash, warrants to purchase 120,080
shares of our Series D preferred stock, at an aggregate exercise price of
$480,320, and warrants to purchase 11,893 shares of our Series E preferred
stock, at an aggregate exercise price of $95,144, as payment for acting as our
financial advisor.
In connection with our private placement of Series E preferred stock,
Softbank Ventures, Inc. purchased 87,003 shares of Series E preferred stock of
the Company for $8.00 per share, or an aggregate purchase price of $696,024.
The NASD has determined that Softbank Ventures is indirectly affiliated with
E*TRADE Securities, Inc. and thus has deemed as underwriting compensation the
87,003 shares of Series E preferred stock held by Softbank Ventures. Prior to
the closing of this offering, Softbank Ventures agreed that for a period of one
year from the effective date of this offering, it will not sell, transfer,
assign, pledge or hypothecate any of the 87,003 shares of Series E preferred
stock that it holds.
Legal Matters
The validity of the shares of common stock offered by this prospectus will be
passed upon for us by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California. Legal matters in connection with this
offering will be passed upon for the underwriters by Cooley Godward LLP, San
Francisco, California. WS Investment Company, an investment partnership
composed of certain current and former members of and persons associated with
Wilson Sonsini Goodrich & Rosati, Professional Corporation, as well as an
individual attorney of this firm, beneficially own an aggregate of 15,000
shares of our common stock.
Experts
The financial statements of Talk City, Inc. as of December 31, 1997 and 1998
and for the period from March 29, 1996 (inception) through December 31, 1996
and the years ended December 31, 1997 and 1998 included in this prospectus have
been included in reliance on the report of KPMG LLP, independent auditors,
appearing elsewhere in this prospectus, and upon the authority of such firm as
experts in accounting and auditing.
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Available Information
We have filed with the Securities and Exchange Commission, Washington, D.C.
20549, under the Securities Act of 1933, a registration statement on Form S-1
relating to the common stock offered hereby. This prospectus does not contain
all of the information set forth in the registration statement and the exhibits
and schedules thereto. For further information with respect to our company and
the shares we are offering by this prospectus you should refer to the
registration statement, including the exhibits and schedules thereto. You may
inspect a copy of the registration statement without charge at the Public
Reference Room of the Securities and Exchange Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549 or at the Securities and Exchange
Commission's regional offices at 5670 Wilshire Boulevard, 11th Floor, Los
Angeles, California 90036. The public may obtain information on the operation
of the Public Reference Room by calling the Securities and Exchange Commission
at 1-800-SEC-0330. The Securities and Exchange Commission also maintains an
Internet site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Securities
and Exchange Commission. The Securities and Exchange Commission's World Wide
Web address is http://www.sec.gov.
We intend to furnish holders of the common stock with annual reports
containing, among other information, audited financial statements certified by
an independent public accounting firm and quarterly reports containing
unaudited condensed financial information for the first three quarters of each
fiscal year. We intend to furnish such other reports as we may determine or as
may be required by law.
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Talk City, Inc.
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Form of Independent Auditors' Report..................................... F-2
Balance Sheets........................................................... F-3
Statements of Operations................................................. F-4
Statements of Redeemable Convertible Preferred Stock and Stockholders'
Deficit................................................................. F-5
Statements of Cash Flows................................................. F-6
Notes to Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
Independent Auditors' Report
The Board of Directors and Stockholders
Talk City, Inc.:
We have audited the accompanying balance sheets of Talk City, Inc. (the
Company), as of December 31, 1997 and 1998, and the related statements of
operations, redeemable convertible preferred stock and stockholders' deficit,
and cash flows for the period from March 29, 1996 (inception) to December 31,
1996 and for each of the years in the two-year period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Talk City, Inc. as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from March 29, 1996 (inception) to December 31, 1996 and for each of the
years in the two-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Mountain View, California
April 23, 1999, except as to
Note 11 which is as of July
12, 1999
F-2
<PAGE>
Talk City, Inc.
Balance Sheets
(in thousands, except share and par value amounts)
<TABLE>
<CAPTION>
December 31,
----------------- March 31,
1997 1998 1999
------- -------- -----------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents..................... $ 2,055 $ 8,697 $ 3,484
Short term investments........................ -- 5,740 5,740
Accounts receivable, net...................... 121 763 1,212
Prepaid expenses and other current assets..... 67 -- 47
------- -------- --------
Total current assets........................ 2,243 15,200 10,483
------- -------- --------
Property and equipment, net..................... 548 999 1,384
Other assets, net............................... 20 2,291 2,705
------- -------- --------
Total assets................................ $ 2,811 $ 18,490 $ 14,572
======= ======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable.............................. $ 391 $ 1,205 $ 2,221
Accrued liabilities........................... 8 375 364
Notes payable, current portion................ -- 127 130
------- -------- --------
Total current liabilities................... 399 1,707 2,715
------- -------- --------
Notes payable, less current portion............. -- 273 237
------- -------- --------
Total liabilities........................... 399 1,980 2,952
------- -------- --------
Commitments
Series A, A1, B, C, and D redeemable convertible
preferred stock:
Authorized--3,900,000 in 1997 and 19,000,000
in 1998 and 1999
Issued and outstanding--3,794,785, in 1997,
10,929,909 in 1998, and 11,101,212 in 1999...
Liquidation preference--$10,225 in 1997,
$39,027 in 1998, and $39,713 in 1999......... 10,081 38,973 39,979
Stockholders' deficit:
Common stock, $0.001 par value:
Authorized--30,000,000 in 1997 and 60,000,000
in 1998 and 1999.............................
Issued and outstanding--3,687,200 in 1997,
4,191,666 in 1998, and 4,314,904 in 1999..... 4 4 4
Additional paid-in capital.................... 260 1,792 3,959
Deferred compensation......................... (59) (598) (1,144)
Notes receivable from stockholders............ (175) (303) (921)
Accumulated deficit........................... (7,699) (23,358) (30,257)
------- -------- --------
Total stockholders' deficit................. (7,669) (22,463) (28,359)
------- -------- --------
Total liabilities and stockholders'
deficit.................................... $ 2,811 $ 18,490 $ 14,572
======= ======== ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
Talk City, Inc.
Statements of Operations
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months ended
(Inception) to December 31, March 31,
December 31, ----------------- --------------------
1996 1997 1998 1998 1999
-------------- ------- -------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Business services..... $ -- $ 25 $ 522 $ 60 $ 357
Advertising and
sponsorships......... 14 183 931 65 623
------- ------- -------- --------- ---------
Total revenues...... 14 208 1,453 125 980
------- ------- -------- --------- ---------
Operating expenses:
Product development
and programming...... 771 3,472 5,383 1,175 2,224
Sales and marketing... 252 2,492 6,668 476 3,425
General and
administrative....... 335 974 1,804 336 974
Noncash advertising
and promotional
charges.............. -- -- 2,890 1,039 1,410
------- ------- -------- --------- ---------
Total operating
expenses........... 1,358 6,938 16,745 3,026 8,033
------- ------- -------- --------- ---------
Loss from
operations......... (1,344) (6,730) (15,292) (2,901) (7,053)
Interest income
(expense), net......... 36 339 (367) 10 154
------- ------- -------- --------- ---------
Net loss............ (1,308) (6,391) (15,659) (2,891) (6,899)
Accretion of redeemable
convertible preferred
stock and warrants..... 8 38 558 20 72
------- ------- -------- --------- ---------
Net loss applicable
to common
stockholders....... $(1,316) $(6,429) $(16,217) $ (2,911) $ (6,971)
======= ======= ======== ========= =========
Net loss per share:
Basic and diluted..... $ (0.49) $ (2.10) $ (4.92) $ (0.87) $ (1.90)
======= ======= ======== ========= =========
Weighted average
shares............... 2,679 3,068 3,295 3,332 3,661
======= ======= ======== ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
Talk City, Inc.
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit
(in thousands, except share amounts)
<TABLE>
<CAPTION>
Redeemable
Convertible Notes
Preferred stock Common stock Additional receivable Total
------------------ ----------------- paid-in Deferred from Accumulated stockholders'
Shares Amount Shares Amount capital compensation stockholders deficit deficit
---------- ------- --------- ------ ---------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock to founders
April 1, 1996....... -- $ -- 2,300,000 $ 2 $ 44 $ -- $ -- $ -- $ 46
Issuance of
preferred stock, net
of issuance costs... 3,794,785 10,035 -- -- -- -- -- -- --
Issuance of common
stock upon exercise
of stock options.... -- -- 1,537,200 2 292 (89) (205) -- --
Accretion
attributable to
redeemable preferred
stock............... -- 8 -- -- (8) -- -- -- (8)
Net loss............ -- -- -- -- -- -- -- (1,308) (1,308)
---------- ------- --------- --- ------ ------- ----- -------- --------
Balances, December
31, 1996............ 3,794,785 10,043 3,837,200 4 328 (89) (205) (1,308) (1,270)
Repurchase of common
stock............... -- -- (150,000) -- (30) -- 30 -- --
Accretion
attributable to
redeemable preferred
stock............... -- 38 -- -- (38) -- -- -- (38)
Amortization of
stock-based
compensation........ -- -- -- -- -- 30 -- -- 30
Net loss............ -- -- -- -- -- -- -- (6,391) (6,391)
---------- ------- --------- --- ------ ------- ----- -------- --------
Balances, December
31, 1997............ 3,794,785 10,081 3,687,200 4 260 (59) (175) (7,699) (7,669)
Noncash issuance of
preferred stock and
preferred and common
stock warrants
pursuant to the NBC
agreements.......... 884,615 4,565 -- -- 575 -- -- -- 575
Issuance of
preferred stock, net
of $1,233 issuance
costs............... 6,250,509 23,769 -- -- -- -- -- -- --
Issuance of
preferred stock
warrants for
services rendered in
connection with the
preferred stock
offering............ -- 438 -- -- (438) -- -- -- (438)
Issuance of common
stock warrants
pursuant to the loan
agreement........... -- -- -- -- 490 -- -- -- 490
Issuance of common
stock upon exercise
of stock options,
net of repurchases.. -- -- 504,466 -- 133 -- (128) -- 5
Deferred
compensation related
to option grants.... -- -- -- -- 892 (892) -- -- --
Amortization of
stock-based
compensation........ -- -- -- -- -- 353 -- -- 353
Accretion
attributable to
redeemable preferred
stock............... -- 120 -- -- (120) -- -- -- (120)
Net loss............ -- -- -- -- -- -- -- (15,659) (15,659)
---------- ------- --------- --- ------ ------- ----- -------- --------
Balances, December
31, 1998............ 10,929,909 38,973 4,191,666 4 1,792 (598) (303) (23,358) (22,463)
Issuance of common
stock upon exercise
of stock options and
warrants, net of
repurchases......... -- -- 123,238 -- 638 -- (618) -- 20
Noncash issuance of
preferred stock
pursuant to the
Hearst agreement.... 171,303 904 -- -- -- -- -- -- --
Revaluation of
warrants related to
the NBC operating
agreements.......... -- 30 -- -- 886 -- -- -- 886
Deferred
compensation related
to option grants.... -- -- -- -- 715 (715) -- -- --
Amortization of
stock-based
compensation........ -- -- -- -- -- 169 -- -- 169
Accretion
attributable to
redeemable preferred
stock............... -- 72 -- -- (72) -- -- -- (72)
Net loss............ -- -- -- -- -- -- -- (6,899) (6,899)
---------- ------- --------- --- ------ ------- ----- -------- --------
Balances, March 31,
1999 (unaudited).... 11,101,212 $39,979 4,314,904 $ 4 $3,959 $(1,144) $(921) $(30,257) $(28,359)
========== ======= ========= === ====== ======= ===== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
Talk City, Inc.
Statements of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months ended
(Inception) to December 31, March 31,
December 31, ------------------- --------------------
1996 1997 1998 1998 1999
-------------- -------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss............... $ (1,308) $ (6,391) $ (15,659) $ (2,891) $ (6,899)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation........... 15 125 347 70 162
Stock compensation
expense............... -- 30 353 46 169
Common stock warrants
issued pursuant to the
loan financing........ -- -- 490 -- --
Noncash advertising and
promotional charges... -- -- 2,890 1,039 1,410
Provision for accounts
receivable allowance.. -- -- 100 -- --
Changes in operating
assets and
liabilities:
Accounts receivable... (10) (111) (742) (45) (449)
Prepaid expenses and
other current
assets............... (1) (66) 67 13 (47)
Accounts payable and
accrued liabilities.. 290 110 1,181 54 1,005
-------- -------- --------- --------- ---------
Net cash used in
operating activities.. (1,014) (6,303) (10,973) (1,714) (4,649)
-------- -------- --------- --------- ---------
Cash flows from
investing activities:
Purchases of property
and equipment........ (137) (550) (797) (218) (531)
Purchases of short-
term investments..... -- -- (5,740) -- --
Other assets.......... -- (22) (22) -- (4)
-------- -------- --------- --------- ---------
Net cash used in
investing activities... (137) (572) (6,559) (218) (535)
Cash flows from
financing activities:
Proceeds from sale of
redeemable preferred
stock, net of
issuance costs....... 10,035 -- 21,197 -- --
Proceeds from issuance
of common stock...... 46 -- 5 -- --
Proceeds from loan
financing, net of
issuance costs....... -- -- 2,903 -- --
Repayment of loan
financing............ -- -- (331) -- --
Proceeds from notes
payable.............. -- -- 491 -- --
Repayment of notes
payable.............. -- -- (91) -- (29)
-------- -------- --------- --------- ---------
Net cash provided by
financing activities... 10,081 -- 24,174 -- (29)
-------- -------- --------- --------- ---------
Net (decrease) increase
in cash and cash
equivalents............ 8,930 (6,875) 6,642 (1,932) (5,213)
Cash and cash
equivalents at
beginning of period.... -- 8,930 2,055 2,055 8,697
-------- -------- --------- --------- ---------
Cash and cash
equivalents at end of
period................. $ 8,930 $ 2,055 $ 8,697 $ 123 $ 3,484
======== ======== ========= ========= =========
Cash paid during the
period for interest.... $ -- $ -- $ 113 $ -- $ 16
======== ======== ========= ========= =========
Supplemental disclosure
of noncash financing
activities:
Accretion of redeemable
convertible preferred
stock and warrants.... $ 8 $ 38 $ 558 $ 20 $ 72
======== ======== ========= ========= =========
Common stock issued for
notes receivable...... $ 205 $ -- $ 128 $ 128 $ 618
======== ======== ========= ========= =========
Issuance of stock and
warrants for
advertising and
promotional services.. $ -- $ -- $ 5,140 $ 1,577 $ 904
======== ======== ========= ========= =========
Issuance of preferred
stock for conversion
of loan financing..... $ -- $ -- $ 2,572 $ -- $ --
======== ======== ========= ========= =========
Deferred compensation
related to option
grants................ $ 89 $ -- $ 892 $ 223 $ 715
======== ======== ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
Talk City, Inc.
Notes to Financial Statements
(information with respect to March 31, 1998 and 1999 is unaudited)
(1) Description of Business and Nature of Operations
Talk City, Inc. (the Company), incorporated in March 1996, is a provider of
online communities and interactive services for businesses and consumers. 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 events, conducting online market research and facilitating online
meetings. For consumers, the Company operates a network of online communities
located at www.talkcity.com. This network includes 20 topical categories, over
50 themed communities, 50 co-branded network participant communities and
thousands of user generated communities. 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 business
services and advertising and sponsorships on its Web sites to corporations of
various sizes within several industries.
(2) Summary of Significant Accounting Policies
(a) Interim Financial Statements
The interim financial statements of the Company for the three months
ended March 31, 1998 and 1999, included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note
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 relating to
interim financial statements.
In the opinion of management, the accompanying unaudited interim
financial statements reflect all adjustments, consisting only of normal
recurring adjustments, necessary to present fairly the financial position
of the Company at March 31, 1999, and the results of its operations and its
cash flows for the three months ended March 31, 1998 and 1999. Results for
the three months ended March 31, 1999 are not necessarily indicative of the
results to be expected for the entire year.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those
estimates.
(c) Cash Equivalents and Short-Term Investments
Cash equivalents consist of instruments with maturities of three months
or less at the time of purchase.
F-7
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The Company has classified its cash equivalents and short-term
investments as "available for sale." Such investments are carried at fair
value, based on the quoted market prices, and unrealized gains and losses,
if material, are reported as a separate component of accumulated other
comprehensive income (loss) in stockholders' deficit. The cost of
securities sold is based on the specific identification method. Realized
and unrealized gains and losses were not material during all periods
presented.
(d) Property and Equipment
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is calculated using the straight-line method over the
estimated useful lives of the equipment, generally three to five years.
(e) Long Lived Assets
The Company reviews its long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of the asset
may not be recoverable. Recoverability of assets held and used is measured
by a comparison of the carrying amount of the asset to future net cash
flows expected to be generated by the asset. If such amounts are considered
to be impaired, the impairment to be recognized is measured by the amount
by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(f) Fair Value of Financial Instruments
The fair values of the Company's cash, cash equivalents, short-term
investments, accounts receivable, accounts payable and notes payable
approximate their carrying values due to the short maturity or variable
rate structure of those instruments. The Company does not have any foreign
currency hedging or other derivative financial instruments as of March 31,
1999.
(g) Concentration of Credit Risk
Financial instruments which subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, short term
investments and trade accounts receivable. The Company maintains cash and
cash equivalents with one domestic financial institution. From time to
time, the Company's cash balances with its financial institution may exceed
Federal Deposit Insurance Corporation insurance limits.
The Company's customers are concentrated in the United States. The
Company performs ongoing credit evaluations, generally does not require
collateral and establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of customers, historical trends and
other information; to date, such losses have been within management's
expectations. As of December 31, 1998 and March 31, 1999, the allowance for
bad debts was $100,000.
F-8
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
(h) Revenue Recognition
To date, the Company's revenues have been derived primarily from the sale
of business services and sponsorship and advertising contracts.
Business services revenues are derived principally from contracts
relating to one or more events and contracts relating to a period of time
up to two years in which the Company designs customized communities,
produces online events, conducts market research, and facilitates online
meetings for customers. Business services revenues are recognized as the
events are run or ratably over the term of the contract period which
coincides with when the services are performed, provided that collection of
the receivable is probable.
Sponsorship contracts integrate traditional advertising with content
designed to support broad marketing objectives, including brand promotion,
awareness, and product introductions. Advertising revenues are derived
principally from short-term advertising contracts in which the Company
delivers banner advertisements on its online properties over a specified
period of time for a fixed fee. The Company's contracts typically are
short-term agreements that guarantee a minimum number of impressions or
pages to be delivered to users over a specified period of time. Revenues
from these contracts are recognized in the period in which the
advertisement is displayed or the event is run, provided that no
significant Company obligations remain. The amount of revenue recognized
each period is based on the lesser of the ratio of impressions delivered
over total guaranteed impressions or the ratable amortization over the term
of the contract.
In certain instances where the Company contracts with third party sales
agents for the sale of advertising, the Company recognizes the revenues
from such transactions net of the related commission paid to the agent.
(i) Product Development and Programming
Product development and programming expenses consist primarily of
salaries, payroll taxes and benefits and expenditures related to editorial
content, community management and support personnel, server hosting costs
and software development and operations expenses. Costs related to the
development of new products and enhancements to existing products are
charged to operations as incurred. Software development costs are required
to be capitalized when a product's technological feasibility has been
established by completion of a working model of the product. To date,
completion of a working model of the Company's products and general release
have substantially coincided. As a result, the Company has not capitalized
any software development costs because such costs have not been
significant.
(j) Advertising Expense
The cost of advertising is expensed as incurred. Such costs totaled
approximately $122,000, $1,245,000, $7,410,000, $1,154,000 and $4,162,000
for the period from inception to December 31, 1996, the years ended
December 31, 1997 and 1998, and the three months ended March 31, 1998 and
1999, respectively. For the year ended December 31, 1998 and the three
F-9
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
months ended March 31, 1998 and 1999, these costs included $2,890,000,
$1,039,000, and $1,410,000, respectively, of noncash advertising and
promotional charges pursuant to the NBC and Hearst advertising and
operating agreements. See Note 3--Advertising and Operating Agreements.
(k) Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amount of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
(l) Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements with
employees using the intrinsic-value method pursuant to Accounting
Principles Board (APB) Opinion No. 25. As such, compensation expense is
recorded on the date of grant when the fair value of the underlying common
stock exceeds the exercise price for stock options or the purchase price
for the issuance or sales of common stock. Pursuant to Statement of
Financial Accounting Standards (SFAS) No. 123, the Company discloses the
pro forma effects of using the fair value method of accounting for stock-
based compensation arrangements. See Note 6--Capitalization.
The Company accounts for stock-based compensation arrangements with
nonemployees in accordance with the Emerging Issues Task Force Abstract
(EITF) No. 96-18, Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods
or Services. Accordingly, unvested options held by nonemployees are subject
to revaluation at each balance sheet date based on the then current fair
market value.
Unearned deferred compensation resulting from employee and nonemployee
option grants is amortized on an accelerated basis over the vesting period
of the individual options, generally four years in accordance with
Financial Accounting Standards Board Interpretation No. 28.
(m) Comprehensive Loss
The Company has no significant components of other comprehensive loss,
and accordingly, the comprehensive loss is the same as the net loss for all
periods.
(n) Net Loss Per Share
Basic net loss per share is computed using the weighted-average number of
outstanding shares of common stock. Diluted net loss per shares is computed
using the weighted-average number of shares of common stock outstanding
and, when dilutive, potential common shares from options and warrants to
purchase common stock using the treasury stock method and from convertible
securities using the if-converted basis. All potential common shares have
been
F-10
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
excluded from the computation of diluted net loss per share for all periods
presented because the effect would have been antidilutive.
Diluted net loss per share does not include the effect of the following
antidilutive common equivalent shares (in thousands):
<TABLE>
<CAPTION>
March 29, 1996 Years ended Three months
(Inception) to December 31, ended March 31,
December 31, ------------- ----------------
1996 1997 1998 1998 1999
-------------- ------ ------ ------- --------
<S> <C> <C> <C> <C> <C>
Stock options................ 133 675 343 233 395
Unvested common stock subject
to repurchase............... 937 647 752 1,038 817
Preferred and common stock
warrants.................... -- -- 1,311 375 1,306
Redeemable convertible
preferred stock (as if
converted).................. 679 3,795 6,467 4,005 11,081
----- ------ ------ ------- --------
1,749 5,117 8,873 5,651 13,599
===== ====== ====== ======= ========
</TABLE>
(o) Segment Reporting
During 1998, the Company adopted the provisions of SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. SFAS
131 establishes annual and interim reporting standards for operating
segments of a company. The statement requires disclosures of selected
segment-related financial information about products, major customers, and
geographic areas. The Company has one operating segment because it is not
organized by multiple segments for purposes of making operating decisions
or assessing performance. 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 revenues have all been earned from customers in the United
States. In addition, all operations and assets are based in the United
States. Revenues from one major customer was $229,000 in 1998. Total
receivables from this customer were $171,000 at December 31, 1998.
(p) Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use. SOP 98-1
is effective for financial statements for years beginning after December
15, 1998. SOP 98-1 provides guidance over accounting for computer software
developed or obtained for internal use including the requirement to
capitalize specified costs and amortization of such costs. The Company does
not expect the adoption of this standard to have a material effect on the
Company's capitalization policy.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 establishes accounting and
reporting standards for derivative
F-11
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
instruments, including derivative instruments embedded in other contracts,
and for hedging activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. This statement does
not apply to the Company as the Company currently does not have any
derivative instruments or hedging activities.
(3) Advertising and Operating Agreements
Advertising Agreements
The Company entered into three separate agreements with the National
Broadcasting Company (NBC) whereby NBC provides the Company with advertising
time and promotes the Company's services on television, primarily during prime
time programs, in exchange for preferred stock and warrants described as
follows:
(i) On April 22, 1998, the Company issued 213,675 shares of Series C
Redeemable Convertible Preferred Stock (Series C Stock) at a price of
$4.68 per share, which converts into 250,000 shares of common stock,
in exchange for advertising spots provided by NBC.
(ii) On August 31, 1998, the Company issued 170,940 shares of Series C
Stock at a price of $4.68 per share, which converts into 200,000
shares of common stock, and warrants to purchase 125,000 shares of
Series D Redeemable Convertible Preferred Stock (Series D Stock) with
an exercise price of $6.00 per share in exchange for advertising
spots provided by NBC. The warrant is exercisable at any time prior
to August 31, 2003 and is valued at approximately $425,000 using the
Black Scholes option pricing model.
(iii) On August 21, 1998, the Company entered into a letter agreement
whereby NBC will provide the Company with the use of advertising
spots having an aggregate discounted rate card value of $2,400,000 in
exchange for 600,000 shares of Series D Stock valued at $4.00 per
share and warrants to purchase 266,667 shares of Series D Stock with
a weighted average exercise price of $8.44 per share (the Contingent
Shares). For each $800,000 of advertising spots provided, the Company
will issue 200,000 shares of Series D Stock and warrants to purchase
41,667, 125,000, and 100,000 shares of Series D Stock in the first,
second, and third tranches, respectively. As of March 31, 1999, NBC
had not provided any advertising spots pursuant to this agreement.
On October 30, 1998, the Company entered into an agreement with the New Media
and Technology division of Hearst Communications, Inc. (Hearst) whereby Hearst
will provide advertising space to the Company in selected national
publications. The advertising has an aggregate discounted rate card value of
$3,000,000 and will be provided in exchange for 750,000 shares of Series D
Stock (the Contingent Shares). For every $4.00 of print advertising provided by
Hearst, the Company will issue one share of Series D Stock. For the three
months ended March 31, 1999, 171,303 shares were issuable to Hearst based on
the value of the print advertising provided in the period. These shares are
considered to be issued and outstanding for purposes of presentation in the
accompanying balance sheet.
F-12
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The Company charged approximately $2,228,000, $1,000,000, and $695,000 for
the year ended December 31, 1998 and for the three months ended March 31, 1998
and 1999, respectively, to noncash advertising and promotional charges in the
statement of operations pursuant to the above arrangements. The value of the
advertising spots was determined based on the fair value of the equity
instruments on the date the advertising was provided. In accordance with EITF
No. 96-18, the Contingent Shares and related advertising expense will be
determined based on the fair value of the common stock and warrants exchanged
for the services received. The estimated value of the advertising incurred in
each period based on rates discounted from the respective rate card was
approximately $1,800,000, $1,000,000 and $580,000 for the year ended December
31, 1998 and the three months ended March 31, 1998 and 1999, respectively.
In April 1999, the Company amended the NBC and Hearst advertising agreements.
See Note 11--Subsequent Events.
Operating Agreements
During 1998, the Company entered into two operating agreements with NBC
Multimedia whereby the Company and NBC Multimedia jointly produce, market, and
promote the Company's online properties and involves the integration of the
Company's and NBC Multimedia's Web sites over a period of two to three years.
In connection with these agreements, the Company issued preferred stock and
warrants to NBC Multimedia as follows:
(i) The Company executed an operating agreement whereby the Company issued
a warrant to purchase 375,000 shares of common stock with an exercise
price of $4.00 per share. The warrant is exercisable at any time prior
to its expiration in April 2003. Of the shares issuable upon exercise
of the warrants, 50% and 25% are subject to cancellation, if not
previously exercised, in the event that NBC Multimedia cancels the
agreement for convenience prior to February 25, 1999 and February 25,
2000, respectively (the Variable Warrants). The warrant was initially
valued at approximately $630,000 using the Black-Scholes option
pricing model.
(ii) The Company executed an operating agreement whereby the Company issued
500,000 shares of Series D Stock valued at $4.00 per share and a
warrant to purchase 130,556 shares of Series D Stock with a weighted
average exercise price of $7.66 per share. The warrant is exercisable
at any time prior to its expiration in August 2003. Of the shares
issuable upon exercise of the warrant, 25% are subject to
cancellation, if not previously exercised, in the event that NBC
Multimedia cancels the agreement for convenience prior to August 21,
2001 (the Variable Warrants). The warrant was initially valued at
approximately $439,000 using the Black-Scholes option pricing model.
The total value attributed to the operating agreements is being amortized
ratably over the term of the respective agreements, which coincides with when
the services are received. For the year ended December 31, 1998 and for the
three months ended March 31, 1998 and 1999, amortization expense related to
these agreements of approximately $663,000,
F-13
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
$39,000 and $715,000, respectively, was recorded to noncash advertising and
promotional charges in the statement of operations. In accordance with EITF No.
96-18, the Variable Warrants are subject to revaluation at each balance sheet
date based on the then current fair value through the date the related
cancellation or repurchase rights lapse. As of December 31, 1998 and March 31,
1999, the unamortized value attributable to the noncancelable preferred stock
and warrants of $2,253,000 and $2,454,000, respectively, has been recorded in
other assets.
In April 1999, the Company amended the NBC Multimedia operating agreements.
See Note 11--Subsequent Events.
(4) Financial Statement Components
(a) Cash Equivalents and Short-Term Investments
The following is a summary of cash equivalents and short-term investments as
of December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------
1997 1998
------ -------
<S> <C> <C>
Cash equivalents:
Money markets funds........................................ $ -- $ 21
Commercial paper........................................... 1,807 4,445
Auction rate securities.................................... -- 1,300
Corporate notes............................................ -- 2,347
------ -------
1,807 8,113
------ -------
Short-term investments:
Commercial paper........................................... -- 980
Corporate notes............................................ -- 4,760
------ -------
-- 5,740
------ -------
$1,807 $13,853
====== =======
</TABLE>
As of December 31, 1997 and 1998, the contractual maturities of all debt
securities in the Company's portfolio, except auction-rate securities, were
less than one year. The contractual maturities for the auction-rate securities
exceed 10 years. However, the Company has the option of adjusting the interest
rates or liquidating these investments on their respective reset dates, which
occur every 90 days or less.
F-14
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
(b) Property and Equipment
Property and equipment consisted of the following as of December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
-------------
<S> <C> <C>
Computer equipment............................................ $ 664 $1,435
Furniture and fixtures........................................ 23 50
----- -------
687 1,485
Less accumulated depreciation................................. 139 486
----- -------
$ 548 $ 999
===== =======
</TABLE>
(c) Interest Income (Expense), Net
Interest income (expense), net consisted of the following (in thousands):
<TABLE>
<CAPTION>
March 29, 1996 Years ended
(Inception) to December 31,
December 31, ------------
1996 1997 1998
-------------- ------------
<S> <C> <C> <C>
Interest income................................ $36 $ 339 $ 241
Interest and other expense..................... -- -- (608)
--- ----- ------
$36 $ 339 $ (367)
=== ===== ======
</TABLE>
Included in interest expense in 1998 is the value associated with the common
stock warrants issued to the holders of the notes totaling $490,000. See Note
6--Capitalization.
(5) Notes Payable
The Company has an equipment line of credit with a financial institution that
provides up to $2,000,000 in borrowings, bears interest at a rate determined on
the draw date, and currently expires in April 2002. The line of credit is
secured by the Company's fixed assets. As of December 31, 1998, $400,000 was
outstanding under this agreement with the principal amount due in 48 monthly
installments beginning in May 1998. These amounts bear interest at a fixed rate
of approximately 20%.
The aggregate principal payments due under the line of credit subsequent to
December 31, 1998 are as follows: 1999, $127,000; 2000, $152,000; 2001,
$93,000; and 2002, $28,000.
F-15
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
(6) Capitalization
(a) Redeemable Convertible Preferred Stock
A summary of redeemable convertible preferred stock as of December 31, 1998
follows:
<TABLE>
<CAPTION>
Noncumulative Liquidation Redemption
Shares dividend preference price
outstanding per share per share per share
----------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
Series A.................... 150,000 $0.16 $2.00 $2.00
Series A1................... 350,000 0.16 2.00 2.00
Series B.................... 3,294,785 0.22 2.80 2.80
Series C.................... 384,615 0.38 4.68 4.68
Series D.................... 6,750,509 0.32 4.00 4.00
----------
10,929,909
==========
</TABLE>
At any time after November 30, 2001, following the written request of the
holders of a majority of the then outstanding shares of preferred stock, the
Company must redeem all or any part of the then outstanding shares of preferred
stock for cash at the greater of the redemption price or the then current fair
market value.
Each share of the Series A, A1, B, and D redeemable preferred stock is
convertible into common stock at a rate of 1.00 shares of common stock for one
share of preferred stock and is subject to certain adjustments for
antidilution. Pursuant to antidilution adjustments, the Series C Stock is
convertible at a rate of 1.17 shares of common stock for 1 share of Series C
Stock. The redeemable preferred stock automatically converts to common stock
upon completion of a public offering of the Company's common stock or at such
time as the Company receives the consent of the majority of the holders of each
series of the preferred stock. The holders of the redeemable preferred stock
are entitled to the number of votes equal to the number of shares of common
stock on an "as if converted" basis.
No dividends have been declared or paid on either the preferred stock or
common stock since inception of the Company.
The Company borrowed approximately $2,900,000 under a convertible loan
arrangement from April 1998 through August 1998. Advances were at an interest
rate of 9% per annum. In connection with the issuance of the Series D Stock in
September 1998, notes of $2,634,000, including accrued interest, were converted
into 658,476 shares of Series D Stock and the remaining notes were repaid in
full.
(b) Common Stock
As of December 31, 1998, the Company has reserved 10,994,812 shares of common
stock for the future conversion of the Series A through D Preferred Stock.
F-16
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The Company has issued to the Company's founders 2,300,000 shares of common
stock, which are subject to repurchase on termination of employment. As of
December 31, 1998, 468,520 shares were subject to repurchase. Such repurchase
rights terminate upon the completion of a public offering of the Company's
common stock.
Option holders have exercised options to purchase shares of restricted common
stock in exchange for stockholder promissory notes. The notes are secured by
the underlying shares of common stock and were issued with full recourse
rights. The notes bear interest at 6% and expire on various dates ranging from
November 2006 to March 2009. The Company has the right to repurchase all
unvested shares purchased by the notes at the original exercise price in the
event of employee termination. The number of shares subject to this repurchase
right decreases as the shares vest under the original option terms, generally
over four years. As of December 31, 1998 and March 31, 1999, there were 732,979
and 855,684 shares, respectively, subject to repurchase. These options were
exercised at prices ranging from $0.02 to $0.60 with a weighted average
exercise price of $0.26 per share. The options exercised to date have a
weighted average fair value of $0.28 per share.
(c) Stock Option Plan
The Company's 1996 Stock Option Plan (the 1996 Plan) provides for stock
options to be granted to employees, independent contractors, officers, and
directors. Options are generally granted at an exercise price which
approximates 100% of the estimated fair market value per share at the date of
grant, as determined by the Company's Board of Directors. All options are
granted at the discretion of the Company's Board of Directors and have a term
not greater than 10 years from the date of grant. Options issued generally vest
ratably over 4 years, 25% one year after the grant date and the remainder at a
rate of 1/36 per month thereafter.
A summary of stock option activity follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------------------- -------------------- --------------------
Weighted Weighted Weighted
average average average
Options exercise Options exercise Options exercise
outstanding price outstanding price outstanding price
----------- -------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period.............. -- $-- 207,750 $0.20 674,801 $0.26
Options granted......... 1,823,200 0.24 520,551 0.28 315,623 0.92
Options exercised....... (1,612,200) 0.32 -- -- (534,519) 0.26
Options canceled........ (3,250) 0.20 (53,500) 0.28 (112,907) 0.38
---------- ------- --------
Outstanding at end of
year................... 207,750 0.20 674,801 0.26 342,998 0.82
========== ======= ========
Shares available for
future grant........... 805,050 488,000 315,336
========== ======= ========
</TABLE>
In connection with its grants of options, the Company has recognized unearned
deferred compensation expense of $892,000 for the year ended December 31, 1998.
Of this amount, $618,000
F-17
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
related to 301,623 options granted to employees with exercise prices below the
deemed fair market value of the common stock. The weighted average exercise
price and weighted average fair value for these options were $0.78 and $2.82,
respectively. The remaining $274,000 relates to the value of option grants to
non-employees determined using the Black-Scholes option pricing model.
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options outstanding Options Vested
--------------------------------- ---------------------
Weighted-
average
Range remaining Weighted- Weighted-
of contractual average average
exercise Number life exercise Number exercise
prices outstanding (years) price outstanding price
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$0.20-0.40 265,374 8.99 $0.30 149,110 $0.28
2.00 40,500 9.81 2.00 -- --
3.00-4.00 37,124 9.91 3.32 -- --
------- -------
342,998 9.18 0.82 149,110 0.28
======= =======
</TABLE>
The Company uses the intrinsic-value method in accounting for its stock-based
compensation plans. Accordingly, no compensation cost has been recognized in
the financial statements, except for those options issued with exercise prices
at less than fair market value at date of grant. Had compensation costs been
determined in accordance with SFAS No. 123 for all of the Company's stock based
compensation plans, net loss and basic and diluted net loss per share would not
have been materially impacted.
The weighted-average fair value of employee stock options granted during
1996, 1997, and 1998 was $0.06, $0.08 and $2.02, respectively. The fair value
of employee options granted was estimated on the date of grant using the
minimum value method. The following weighted-average assumptions were used in
the employee and nonemployee calculations for 1996, 1997, and 1998:
(i) dividend yield of 0%; (ii) expected volatility of 0% for employees and 45%
in 1996 and 1997 and 135% in 1998 for nonemployees; (iii) weighted average
risk-free interest rate of approximately 6% in 1996 and 1997 and 5% in 1998;
and (iv) expected life of three years for employees and ten years for
nonemployees.
(d) Preferred Stock Subscribed and Warrants
In August and October 1998, the Company agreed to issue 600,000 and 750,000
shares of the Series D Stock in exchange for television and print advertising,
respectively. In addition, the Company agreed to issue warrants to purchase
266,667 shares of Series D stock associated with the August 1998 advertising
agreement. As the associated advertising services have not yet been provided,
these shares and warrants were not issued as of December 31, 1998. As of March
31, 1999, 171,303 shares were issuable pursuant to these agreements based on
advertising provided to date. Although these shares were not delivered until
April 15, 1999, they are considered issued and
F-18
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
outstanding at March 31, 1999 for purposes of presentation in the accompanying
balance sheet. See Note 3--Advertising and Operating Agreements.
In connection with the Series D Stock issuance, the Company issued warrants
to two investment banking firms to purchase 123,830 shares of Series D Stock
with an exercise price of $4.00 per share. The warrants are exercisable any
time prior to September 14, 2003 and are valued at approximately $438,000 using
the Black-Scholes option pricing model. The fair value of the warrants was
deemed to be a direct financing cost associated with the Series D Stock
issuance and was accreted to Redeemable Convertible Preferred Stock in 1998 and
has been presented as an increase in the net loss applicable to common
stockholders in the 1998 statement of operations.
In connection with the NBC operating and advertising agreements, the Company
issued warrants to purchase 375,000 shares of common stock and 255,556 shares
of the Series D Stock. See Note 3--Advertising and Operating Agreements.
In connection with the convertible loan financing, the Company issued
warrants to purchase 290,300 shares of common stock with an exercise price of
$3.00 per share. The warrants may be exercised at any time prior to the fifth
anniversary of the issuance of the warrants, ranging from April 2003 through
July 2003. The warrants are valued at approximately $490,000 using the Black-
Scholes option pricing model. The fair value of the warrants was deemed to be
additional interest expense and charged to Interest Income (Expense), Net in
1998.
The following weighted-average assumptions were used in estimating the fair
value of the warrants issued in 1998: (i) dividend yield of 0%; (ii) expected
volatility of 135%; (iii) weighted average risk-free interest rate of
approximately 5%; and (iv) expected life of five years.
(7) Income Taxes
Income tax expense of $800, $800, and $8,000 in 1996, 1997 and 1998,
respectively, consisted of minimum state income taxes.
The reconciliation between the amount computed by applying the U. S. federal
statutory tax rate of 34% to the net loss and the actual provision for income
taxes for the periods ending December 31, 1996, 1997 and 1998, follows (in
thousands):
<TABLE>
<CAPTION>
1996 1997 1998
----- ------- -------
<S> <C> <C> <C>
Income tax benefit at statutory rate............... $(445) $(2,173) $(5,270)
State income tax, net of federal benefit........... 1 1 8
Current year net operating loss and temporary
differences for which no benefit has been
recognized........................................ 439 2,153 4,969
Other.............................................. 6 20 301
----- ------- -------
Total.......................................... $ 1 $ 1 $ 8
===== ======= =======
</TABLE>
F-19
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities as of December 31, 1997 and
1998, are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 3,068 $ 8,812
Preferred and common stock warrants...................... -- 582
Property and equipment................................... 202 179
Research credit carryforwards............................ 97 233
Other.................................................... -- 117
------- -------
Total gross deferred tax assets........................ 3,367 9,923
Valuation allowance........................................ (3,367) (9,923)
------- -------
Total net deferred tax assets.......................... $ -- $ --
======= =======
</TABLE>
Management has established a full valuation allowance against its net
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the 15-year carryforward period. The net
increase in total valuation allowance for the years ended December 31, 1997 and
1998 was approximately $2,826,000 and $6,556,000, respectively.
The Company has net operating loss carryforwards for federal and California
income tax purposes of approximately $20,762,000 and $19,842,000, respectively,
available to reduce future taxable income subject to income taxes. The net
operating loss carryforwards for federal and California income tax purposes
expire beginning in 2011 and 2004, respectively.
The Internal Revenue Code of 1986 and the California Conformity Act of 1987
substantially restrict the ability of a corporation to utilize existing net
operating losses and credits in the event of an "ownership change." The
issuances of preferred stock have resulted in multiple ownership changes since
inception of the Company. Approximately $16,800,000 of the federal net
operating loss carryforward will be subject to an annual limitation in the
amount of $1,700,000. Any unused annual limitation can be carried over and
added to the succeeding year's annual limitation within the allowable
carryforward period. Future changes in ownership may result in additional
limitations.
The Company also has research credit carryforwards for federal and California
income tax return purposes of approximately $151,000 and $82,000, respectively,
available to reduce future income taxes. The federal research credit
carryforward expires in years 2011, 2012, and 2018. The California research
credit carryforward can be utilized indefinitely.
(9) Commitments
Operating Leases
The Company leases its facilities under noncancelable operating leases
expiring at various dates through 2004. Rent expense was approximately $63,000,
and $211,000 for the years ended December 31, 1997 and 1998.
F-20
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
Future minimum lease payments under noncancelable operating leases as of
December 31, 1998 are as follows (in thousands):
<TABLE>
<S> <C>
1999................................................................. $ 402
2000................................................................. 414
2001................................................................. 427
2002................................................................. 437
2003 and thereafter.................................................. 102
------
Total minimum lease payments..................................... $1,782
======
</TABLE>
(10) Retirement Plan
Effective January 1997, the Company established a qualified 401(k) Plan (the
Plan) available to all employees who meet the Plan's eligibility requirements.
Participants may elect to contribute a percentage of their compensation to this
Plan up to a statutory maximum amount. The Company may make matching
contributions to the Plan on a discretionary basis. The Company has not made
any contributions to the Plan in 1997, 1998 or the three months ended March 31,
1999.
(11) Subsequent Events
Amendment of NBC and Hearst Agreements
On April 15, 1999, the Board of Directors amended the advertising and
operating agreements with NBC and Hearst to effect the immediate issuances of
the warrants and shares of preferred stock as follows:
. 600,000 shares of 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;
. 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,
. Warrants to purchase 130,556 shares of Series D Stock in exchange for
and upon cancellation of the previous warrants issued to NBC pursuant to
the operating 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 will be measured and fixed on the date of issuance. The fair value
of the preferred stock and warrants of $11.5 million issued in connection with
the advertising agreements, excluding the 171,303 shares related to the Hearst
agreement accounted for as of March 31, 1999 (see Note 3), will be recorded to
Other Assets and charged to operations as the advertisements are run. The fair
value of the common stock warrants of
F-21
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
$349,000 (valued as of March 31, 1999) will be recorded in Other Assets in
April 1999 and amortized over the remaining term of the respective operating
agreements. Subsequent to March 31, 1999, noncash charges of approximately
$14,300,000 will be charged to operations as the related advertising is run or
promotional services are received, of which the Company expects to incur
$12,900,000 million in the year ending December 31, 1999. Of the $14,300,000 in
total noncash charges, $11,500,000 is attributable to the advertising
agreements and $2,800,000 is attributable to the operating agreements. At March
31, 1999 approximately $2,450,000 relating to the operating agreements was
recorded in Other Assets. These amounts were determined based on the fair value
of the Series E Redeemable Convertible Preferred Stock issued on the same date.
Series E Redeemable Convertible Preferred Stock
On April 15, 1999, the Company issued 2,499,882 shares of Series E Redeemable
Convertible Preferred Stock (Series E) at a purchase price of $8.00 per share
for total proceeds of approximately $20.0 million. Holders of Series E
preferred stock are entitled to receive annual noncumulative dividends at the
rate of $0.32 per share. Each outstanding share is convertible on a one for one
basis. Upon liquidation, the holders of Series E preferred stock are entitled
to receive $8.00 per share. Holders of Series E are subject to all other rights
and preferences of the previously issued preferred stock.
The following unaudited pro forma financial information presents the
financial position of the Company as if the amendments to the NBC and Hearst
Agreements and the issuance of the Series E Redeemable Convertible Preferred
Stock occurred on March 31, 1999:
<TABLE>
<CAPTION>
Pro
Actual Forma
--------- --------
<S> <C> <C>
Cash, cash equivalents and short-term investments....... $ 9,224 $ 29,223
Working capital......................................... 7,768 39,250
Total assets............................................ 14,572 46,403
Long-term obligations, net of current portion........... 237 237
Redeemable convertible preferred stock and warrants..... 39,979 71,461
Total stockholders' deficit............................. (28,359) (28,010)
</TABLE>
Initial Public Offering
On April 23, 1999, the Board of Directors authorized the filing of a
registration statement with the SEC that would permit the Company to sell
shares of the Company's common stock in connection with a proposed initial
public offering (IPO). If the IPO is consummated under the terms presently
anticipated, upon the closing of the proposed IPO all of the then outstanding
shares of the Company's Redeemable Convertible Preferred Stock will
automatically convert into shares of common stock based on the respective
conversion ratios.
Reverse Stock Split and Reincorporation
On July 12, 1999, the Company effected a one for two reverse stock split of
the Company's common stock and preferred stock and a reincorporation of the
Company into the state of Delaware.
F-22
<PAGE>
Talk City, Inc.
Notes to Financial Statements--(Continued)
(information with respect to March 31, 1998 and 1999 is unaudited)
As part of the reincorporation the common stock par value will be adjusted to
equal $0.001 per share and to the number of common shares authorized will be
increased to 100,000,000, effective prior to the closing of the Company's
anticipated IPO. The share information in the accompanying financial statements
has been retroactively restated to reflect the effect of this reverse stock
split for all periods presented.
Stock Plans
The Board of Directors approved, on April 23, 1999, the 1999 Employee Stock
Purchase Plan. The common stock available for sale under the plan shall be
500,000 plus an annual increase to be added on the first day of the Company's
fiscal year beginning in 2000 equal to the lesser of (i) 500,000 shares, (ii)
2% of the outstanding shares on such date, or (iii) a lesser amount determined
by the Board.
The Board of Directors also approved a 1999 Director Option Plan reserving
250,000 shares of common stock for issuance thereunder and an amendment and
restatement to the 1996 Plan increasing the shares of common stock reserved for
issuance thereunder by 750,000. The amendment and restatement of the 1996 Plan
also provides for the automatic annual increase in the number of shares
reserved for issuance under the 1996 Plan by the lesser of 750,000 shares, 4%
of the then outstanding shares of common stock or a lesser an amount determined
by the Board of Directors.
F-23
<PAGE>
[INSIDE BACK COVER]
Text: 2,000 trained community leaders and moderators make the difference.
Text: Talk City's trained community leaders and moderators keep the
service family-oriented, welcoming and friendly. Here are a few
faces behind the nicknames. The following are paid moderators of
Talk City.
[This page will contain photos and personal profiles of five community leaders
and moderators.]
Text: www.talkcity.com
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 Shares
Common Stock
---------------
PROSPECTUS
July 19, 1999
---------------
Lehman Brothers
Volpe Brown Whelan & Company
U.S. Bancorp Piper Jaffray
E*TRADE Securities, Inc.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
