<PAGE>
________________________________________________________________________________
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
or
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 333-77455
TALK CITY, INC.
(Exact name of Registrant as specified in its charter)
Delaware 77-0426524
-------------------------------- -------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1919 South Bascom Avenue
Campbell, California 95008
--------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 871-5200
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
The number of shares of the Registrant's Common Stock, $0.001 par value,
outstanding at November 14, 2000 was 25,253,238.
________________________________________________________________________________
<PAGE>
TALK CITY, INC.
FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE NUMBER
-----------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements:
Unaudited Condensed Balance Sheets at September 30, 2000 and
December 31, 1999 3
Unaudited Condensed Statements of Operations for the three and
nine months ended September 30, 2000 and 1999 4
Unaudited Condensed Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999 5
Notes to Unaudited Condensed Financial Statements 6
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 28
</TABLE>
2
<PAGE>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
TALK CITY, INC.
UNAUDITED CONDENSED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 10,089 $ 14,112
Short term investments 12,990 41,541
Accounts receivable, net 4,198 3,533
Prepaid expenses and other current assets 1,729 1,772
--------- ---------
Total current assets 29,006 60,958
Property and equipment, net 9,391 5,689
Other assets 8,012 7,880
Goodwill, net 2,904 --
--------- ---------
Total assets $ 49,313 $ 74,527
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Notes payable, current portion $ 107 $ 154
Accounts payable 1,255 3,977
Accrued liabilities 3,774 3,302
Deferred revenue 841 664
--------- ---------
Total current liabilities 5,977 8,097
Notes payable, less current portion 41 107
--------- ---------
Total liabilities 6,018 8,204
Stockholders' equity:
Common stock 25 24
Additional paid-in-capital 135,517 131,306
Deferred stock based compensation (306) (550)
Notes receivable from stockholders (946) (992)
Accumulated deficit (90,995) (63,465)
--------- ---------
Total stockholders' equity 43,295 66,323
--------- ---------
Total liabilities and stockholders' equity $ 49,313 $ 74,527
========= =========
</TABLE>
See accompanying notes to the condensed financial statements.
3
<PAGE>
TALK CITY, INC.
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------------- -----------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Network and syndication services $ 1,445 $ 1,571 $ 5,969 $ 3,283
Community solutions services 925 216 2,244 514
Event services 931 184 2,297 441
Market research services 448 55 1,281 168
-------- -------- -------- --------
Total revenue 3,749 2,026 11,791 4,406
Cost of revenue 3,973 2,461 11,710 5,759
-------- -------- -------- --------
Gross margin (224) (435) 81 (1,353)
Operating expenses:
Product development 2,205 1,366 5,905 3,164
Sales and marketing 2,760 5,234 12,323 13,429
General and administrative 2,981 1,605 8,798 3,716
Restructuring charges - - 469 -
Noncash advertising and promotional charges 213 934 1,374 10,265
Amortization of goodwill 171 - 513 -
Total operating expenses 8,330 9,139 29,382 30,574
-------- -------- -------- --------
Loss from operations (8,554) (9,574) (29,301) (31,927)
Interest income, net 455 809 1,771 1,263
-------- -------- -------- --------
Net loss (8,099) (8,765) (27,530) (30,664)
Accretion of discount related to redeemable
convertible preferred stock and warrants - 16 - 159
-------- -------- -------- --------
Net loss applicable to common stockholders $ (8,099) $ (8,781) $(27,530) $(30,823)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.33) $ (0.45) $ (1.11) $ (3.39)
======== ======== ======== ========
Weighted average basic and diluted common shares
outstanding 24,892 19,667 24,743 9,089
======== ======== ======== ========
</TABLE>
See accompanying notes to the condensed financial statements.
4
<PAGE>
TALK CITY, INC.
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------
September 30, September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(27,530) $(30,664)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 3,227 726
Stock compensation expense 244 549
Noncash advertising and promotional charges 1,373 10,265
Provision for accounts receivable allowance 470 50
Changes in operating assets and liabilities:
Accounts receivable (1,135) (1,269)
Prepaid expenses and other current assets 43 (1,003)
Accounts payable (2,722) 1,110
Accrued liabilities 472 1,736
Deferred revenue 177 239
-------- --------
Net cash used in operating activities (25,381) (18,261)
-------- --------
Cash flows from investing activities:
Purchases of property and equipment (6,416) (3,186)
Cash paid for acquisition of Research Connections, Inc.,
net of cash acquired (417) -
Purchases of short-term investments (4,879) (33,948)
Proceeds from sale of short-term investments 33,430 10,300
Other assets (1,505) (127)
-------- --------
Net cash provided by (used in) used in investing activities 20,213 (26,961)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs - 55,357
Proceeds from sale of redeemable preferred stock, net of issuance costs - 19,956
Proceeds from stock option and warrant exercises 1,212 89
Proceeds from repayment of stockholders' notes receivable 46 5
Repayment of notes payable (113) (105)
-------- --------
Net cash provided by financing activities 1,145 75,302
-------- --------
Net increase (decrease) in cash and cash equivalents (4,023) 30,080
Cash and cash equivalents at beginning of period 14,112 8,697
-------- --------
Cash and cash equivalents at end of period $ 10,089 $ 38,777
======== ========
Cash paid during the period for interest $ 32 $ 60
======== ========
Supplemental disclosure of noncash financing activities:
Common stock issuance for acquisition of Research Connections, Inc. $ 3,000 $ -
======== ========
Accretion of redeemable convertible preferred stock and warrants $ - $ 159
======== ========
Common stock issued for notes receivable, net of repurchases $ - $ 617
======== ========
Issuance of stock and warrants for advertising and promotional
services $ - $ 12,553
======== ========
Deferred compensation related to option grants $ - $ 715
======== ========
</TABLE>
See accompanying notes to the condensed financial statements.
5
<PAGE>
TALK CITY, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The condensed financial statements have been prepared by Talk City,
Inc., pursuant to the rules and regulations of the Securities and Exchange
Commission and include the accounts of Talk City, Inc. ("Talk City" or the
"Company"). Certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such
rules and regulations. In the opinion of the Company, the unaudited
financial statements reflect all adjustments, consisting only of normal
recurring adjustments except as described in Note 3, necessary for a fair
presentation of the financial position at September 30, 2000 and the
operating results and cash flows for the three and nine months ended
September 30, 2000 and 1999. The condensed balance sheet at December 31,
1999 has been derived from audited financial statements as of that date.
Certain reclassifications have been made to the prior years' financial
statements to conform to the September 30, 2000 presentation. These
financial statements and notes should be read in conjunction with the
Company's audited consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 28, 2000.
The results of operations for the three and nine months ended
September 30, 2000 are not necessarily indicative of the results that may
be expected for future quarters or the year ending December 31, 2000.
2. NATURE OF OPERATIONS
Talk City was incorporated in the state of California in March 1996
and reincorporated in the state of Delaware in July 1999. Talk City is a
provider of online marketing services for businesses. The Company offers
businesses a wide range of services to help them develop and expand online
relationships with customers, suppliers and employees. These services
include designing fully integrated customized communities, producing online
interactive events, conducting online market research and providing
outsourced chat and event feeds through advertising and network services.
As part of its network services, the Company operates a network of online
communities located at www.talkcity.com. These communities offer services
----------------
such as moderated chat, home pages, special event production, message
boards and online event guides. The Company generates revenues by selling
its online marketing services to corporations of various sizes within
several industries. Talk City has incurred operating losses since inception
through September 30, 2000. The Company had an accumulated deficit of $91.0
million at September 30, 2000.
3. ACQUISITION OF RESEARCH CONNECTIONS, INC.
On January 3, 2000, the Company acquired Research Connections, Inc.
("RCI"), a privately-held online market research company. The Company paid
$500,000 in cash and issued 242,424 shares of its Common Stock, with an
approximate fair market value of $3 million, in exchange for all
outstanding shares of RCI. The fair market value was based on the Company's
closing price of its Common Stock on December 15, 1999 which is the date
the Company and RCI mutually agreed to the significant terms and conditions
of the merger. The cash consideration of $500,000 was due as follows:
$250,000 was paid on January 3, 2000; $125,000 was paid on April 3, 2000;
and $125,000 was paid on July 3, 2000. In addition, contingent cash
consideration of $1.5 million, subject to an employment agreement with the
former sole shareholder of RCI, was placed into an escrow fund and recorded
as restricted cash in Other Assets. Funds will be released over four years
with 25% released on January 3, 2001 and the remainder released evenly over
the following 36 months. In the event the shareholder is terminated for
cause or voluntarily leaves employment of the Company, then all remaining
cash in the escrow fund shall be forfeited to the Company and the
shareholder will have no further right to such cash. The Company will
record the cash consideration of $1.5 million as compensation expense as
the funds are released from escrow.
6
<PAGE>
The Company accounted for the acquisition of RCI pursuant to the
purchase method of accounting. Thus, the results of operations of RCI and
the fair value of the assets acquired and liabilities assumed was included
in the Company's financial statements beginning on the acquisition date.
The allocation of the purchase price of $3.5 million resulted in cash and
other assets of approximately $100,000 and goodwill of approximately $3.4
million, which was capitalized and is being amortized on a straight line
basis over five years.
4. ADVERTISING AND OPERATING AGREEMENTS
On April 15, 1999, certain advertising and operating agreements with
the National Broadcasting Company, Inc. ("NBC") and Hearst Communications,
Inc. ("Hearst") were amended to effect the immediate issuance of warrants
and shares of Preferred Stock as follows:
. 600,000 shares of Series D Preferred Stock ("Series D Stock") and
warrants to purchase 266,667 shares of Series D Stock pursuant to
the NBC advertising agreement dated August 21, 1998;
. 750,000 shares of Series D Stock pursuant to the Hearst
advertising agreement dated October 30, 1998;
. A warrant to purchase 375,000 shares of Common Stock in exchange
for and upon cancellation of the previous warrant issued to NBC
pursuant to the operating agreement dated February 27, 1998; and,
. A warrant to purchase 130,556 shares of Series D Stock in
exchange for and upon cancellation of the previous warrant issued
to NBC pursuant to the advertising agreement dated August 21,
1998.
All the warrants and Preferred Stock issued pursuant to the above are
noncancelable and nonforfeitable. Accordingly, the fair market value of
these instruments was measured and fixed on the date of their respective
issuance. The fair market value was recorded in Other Assets and is being
charged to operations as the advertisements are run. The fair market values
attributable to the amended NBC and Hearst agreements were based on the
fair value of the Series E Redeemable Convertible Preferred Stock issued at
$8.00 per share on April 15, 1999. As of September 30, 2000, of the $8.0
million in Other Assets, $3.2 million relates to the advertising and
operating agreements and will continue to be charged to operations as the
related advertising is run or amortized over the remaining term of the
respective operating agreements. Of the $3.2 million, $2.4 million relates
to the Hearst advertising agreement and approximately $800,000 relates to
the NBC operating agreements. The Company incurred noncash advertising and
promotional charges of approximately $213,000 and $1.4 million for the
three and nine months ended September 30, 2000, respectively.
In connection with the Company's Initial Public Offering, effective
July 19, 1999 (the "IPO"), the Preferred Stock issued in the above
arrangements was converted to Common Stock at their respective ratios. In
addition, the warrants are exercisable into shares of Common Stock,
determined based on the respective conversion ratios.
7
<PAGE>
5. ACCRUED LIABILITIES
Accrued liabilities consist of: September 30, December 31,
2000 1999
------------- ------------
(In thousands)
Accrued compensation and benefits $ 1,387 $ 953
Accrued sales and marketing expenses 401 987
Accrued moderator expenses 300 390
Other accrued liabilities 1,686 972
--------- ---------
$ 3,774 $ 3,302
========= =========
6. SEGMENT REPORTING
The Company has one operating segment because it is not organized by
multiple segments for purposes of making operating decisions or assessing
performance. This operating segment is comprised of four main areas of
online business, including (i) live event services, (ii) market research
services, (iii) community solutions and (iv) network and syndication
services. The chief operating decision maker evaluates performance, makes
operating decisions and allocates resources based on financial data
consistent with the presentation in the accompanying financial statements.
The Company's operations and assets are based in the United States,
and its revenues have substantially all been earned from customers in North
America. For the three months ended September 30, 2000 one of the Company's
clients was responsible for $453,000 or 12% of its revenue. Total
receivables from this client were $377,000 on September 30, 2000. For the
nine months ended September 30, 2000 no clients were responsible for more
than 8% of total revenue.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive loss for the three and nine months ended September 30,
2000 and 1999 equaled the net loss.
8. NET LOSS PER COMMON SHARE
Diluted net loss per common share does not include the effects of the
following potentially dilutive securities as of September 30, 2000 and
1999:
September 30, September 30,
2000 1999
------------- -------------
(In thousands)
Common Stock Options 4,852 604
Common Stock Warrants 991 1,299
Unvested Common Stock Subject to Repurchase 86 455
------- -------
5,929 2,358
======= =======
The average exercise price of the Common Stock Options is $9.97 and
$3.59 as of September 30, 2000 and September 30, 1999, respectively. The
average exercise price of the Common Stock Warrants is $5.83 and $4.66 as
of September 30, 2000 and September 30, 1999, respectively.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the Emerging Issues Task Force ("EITF") issued
Statement No. 00-2, "Accounting for Web Site Development Costs." EITF 00-2
establishes accounting and reporting standards for capitalization of Web
site development costs in accordance with Statement of Accounting Principle
No. 98-1. EITF No. 00-2 is effective for Web site development costs
incurred for fiscal quarters beginning after June 30, 2000.
8
<PAGE>
The company believes that the adoption of EITF 00-2 will not materially
impact the Company's financial position or results of operations.
In March 2000, the Financial Accounting Standards Board ("FASB")
issued Financial Interpretation No. 44 ("FIN 44"). FIN 44 clarifies certain
issues in the application of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." FIN 44 was effective July 1,
2000 and is to be applied on a prospective basis for certain specific
events that occur after either December 31, 1998 or January 12, 2000. This
interpretation is not expected to have a material impact on Talk City.
In December 1999, the Securities and Exchange Commission ("SEC") staff
issued Staff Accounting Bulletin ("SAB") 101, Revenue Recognition in
Financial Statements, as amended by SAB 101A and SAB101B. The SAB
summarizes the SEC's views in applying generally accepted accounting
principles to revenue recognition in financial statements. In June 2000,
the SEC issued SAB 101B, which requires companies to comply with the SAB no
later than the fourth quarter of the fiscal year beginning after December
15, 1999. The company believes that the adoption of SAB 101 will not
materially impact the Company's financial position or results of
operations.
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"),
"Accounting for Derivative Instruments and Hedging Activities." SFAS 133
establishes accounting and reporting standards for derivative financial
instruments and hedging activities and requires the Company to recognize
all derivatives as either assets or liabilities on the balance sheet and
measure them at fair value. Gains and losses resulting from changes in fair
value would be accounted for depending on the use of the derivative and
whether it is designated and qualifies for hedge accounting. In June 1999,
the FASB issued SFAS 137, which defers the implementation of SFAS 133. In
June 2000, the FASB issued SFAS 138, which amends SFAS 133 with regards to
specific hedging risks, foreign-currency-dominated assets and liabilities,
and inter-company derivatives. The Company believes the adoption of SFAS
No. 133 will not have a material effect on its results of operations,
financial position or cash flows. The Company will be required to implement
SFAS 133 in the first quarter of fiscal 2001. This statement will be
effective for the Company beginning January 1, 2001.
10. RESTRUCTURING CHARGES
In June 2000, the Company underwent a restructuring of operations to
more clearly focus Talk City as an online marketing services provider (the
"Restructuring"). Pursuant to the Restructuring, Talk City intends to focus
on four main areas of online business, including (i) live event services,
(ii) market research services, (iii) community solutions and (iv) network
and syndication services, for businesses. As a result of the Restructuring,
the Company reduced its total headcount by 35 employees, or approximately
15% of its total workforce. The Unaudited Condensed Statement of Operations
for the nine months ended September 30, 2000 includes a charge of
approximately $469,000, related to the Restructuring. Such amount consists
of approximately $290,000 for employee severance and other related costs
and $179,000 for the markdown of inventory. Substantially all liabilities
related to the Restructuring were paid as of June 30, 2000.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the Private Securities Litigation Reform Act of 1995. Actual results
may differ materially from those projected in the forward-looking statements as
a result of various factors, including the Company's ability to increase the
number of its online marketing services clients, expand its online marketing
services offerings and effectively implement these services, increase revenues,
maintain or improve the number or quality of network participants and customers,
attract and retain key personnel and compete successfully in the marketplace, as
well as other factors set forth under "Factors That May Affect Results" and
elsewhere in this report. Talk City does not undertake any obligation to
publicly update any forward-looking statement to reflect
9
<PAGE>
events or circumstances after the date on which any such statement is made or to
reflect the occurrence of unanticipated events.
The following discussion of financial condition and results of operations
of the Company should also be read in conjunction with the financial statements
and notes thereto and "Factors That May Affect Results", both of which are
included elsewhere in this report.
Overview
The Company provides online marketing services for businesses. From
inception through September 2000, the Company's operating activities have
primarily been focused on:
. developing and expanding its online marketing services offerings and
client base;
. establishing operating relationships with its network participants;
. expanding the audience and usage of its services;
. building sales momentum and developing programs and content to enhance
its network services;
. developing the quality environment of its services;
. recruiting personnel;
. developing a comprehensive computer software and hardware
infrastructure; and
. raising capital.
To date, substantially all of Talk City's revenues have been derived from
the sale of its community solutions, network and syndication, event and market
research services. Talk City's community solutions services include designing
fully integrated, customized communities, discussion boards, and outsourced chat
and event network services. These services help businesses develop and expand
online relationships with customers, suppliers and employees. Revenues,
including setup or upfront fees, derived from community solutions services are
recognized ratably over the term of the contract period or upon completion of
the project, provided that the collection of the receivable is probable.
Revenues from network and syndication services are generally derived from
short-term banner advertisement and sponsorship contracts under which the
Company offers a combination of custom programming, prominent logo placement,
other onsite promotions and additional banner ads. Talk City's network and
syndication services clients enter into short-term agreements pursuant to which
they generally receive a guaranteed number of advertising impressions on the
Company's network sites. Revenues from network and syndication services are
recognized in the period in which the advertisement is displayed or the 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 Talk City contracts
with sales representative firms to sell advertising, Talk City recognizes
revenues derived from sales by such firms net of the commissions paid.
Talk City's event services primarily include the setup and production of
live, online, interactive events for our clients. Revenues from the event
services are recognized as the events are run or ratably over the term of the
contract.
Market research services consist of the production and delivery of online
market research surveys and focus groups. Revenue is recognized at the lesser of
the estimated percentage of project completion or on a straight-line basis over
the term of the contract.
Cost of revenues include content costs, payroll and related expenses for
the editorial staff, Web site design and production staff, moderator costs,
Internet connection charges and depreciation and maintenance costs necessary to
support the Company's Web sites. In addition, cost of revenues include expenses
associated with conducting online market research, producing online business
events and implementing customized business communities.
10
<PAGE>
Operating expenses consist primarily of product development, sales and
marketing, general and administrative and interest expenses. Product development
expenses consist primarily of salaries, payroll taxes, benefits and related
expenditures for technology, software development, project management and
support personnel. Sales and marketing expenses consist primarily of advertising
and promotion costs, salaries, commissions and other related costs of internal
sales and marketing personnel and program expenses, public relations costs and
other marketing expenses. General and administrative expenses consist of
salaries, payroll taxes and benefits and related costs for general corporate
functions, including executive management, finance, human resources, facilities,
legal and fees for other professional services.
Sales and marketing expenses exclude noncash advertising and promotional
charges related to Talk City's 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 September 30, 2000, noncash
charges of $3.2 million will continue to be charged to operations as the related
advertising is run or amortized over the remaining term of the respective
operating or advertising agreements. Of the $3.2 million, $2.4 million relates
to the Hearst advertising agreement and approximately $800,000 relates to the
NBC operating agreements. These amounts were determined based on the fair market
value of the Company's Common Stock and warrants exchanged for the services
received.
The Company incurred losses of $1.3 million in 1996, $6.4 million in 1997,
$15.7 million in 1998, $40.1 million in 1999 and $27.5 million for the nine
months ended September 30, 2000. At September 30, 2000, Talk City had an
accumulated deficit of $91.0 million. These losses include noncash advertising
and promotional charges of $15.4 million through September 30, 2000. The Company
anticipates that it will incur additional operating losses for the foreseeable
future. The Company's anticipation that it will incur additional operating
losses for the forseeable future is a forward-looking statement.
In June 2000, the Company underwent a Restructuring of operations to more
clearly focus Talk City as an online marketing services provider. Pursuant to
the Restructuring, Talk City intends to focus on four main areas of online
business, including (i) live event services, (ii) market research services,
(iii) community solutions and (iv) network and syndication services, for
business customers. As a result of the Restructuring, the Company reduced its
total headcount by 35 employees, or approximately 15% of its total workforce.
The Unaudited Condensed Statement of Operations for the nine months ended
September 30, 2000 includes a charge of approximately $469,000, related to the
Restructuring. Such amount consists of approximately $290,000 for employee
severance and other related costs and $179,000 for the markdown of inventory.
Substantially all liabilities related to the Restructuring were paid as of June
30, 2000.
11
<PAGE>
Results of Operations
The following table sets forth, for the periods indicated, the percentage
of net revenue represented by certain items reflected in Talk City's Condensed
Financial Statements:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue 100% 100% 100% 100%
Cost of revenue 106 122 99 131
------ ------ ------ ------
Gross margin (6) (22) 1 (31)
Operating expenses:
Product development 59 68 50 72
Sales and marketing 74 258 105 305
General and administrative 79 79 75 84
Restructuring charges -- -- 4 --
Noncash advertising and promotional charges 6 46 12 233
Amortization of goodwill
4 -- 4 --
------ ------ ------ ------
Total operating expenses 222 451 250 694
------ ------ ------ ------
Operating loss (228) (473) (249) (725)
Interest income, net 12 40 15 29
------ ------ ------ ------
Net loss (216)% 433)% (234)% +(696)%
====== ====== ====== ======
</TABLE>
Net Revenue. Net revenue increased 85% to approximately $3.7 million for
the three months ended September 30, 2000 from $2.0 million for the three months
ended September 30, 1999, an increase of approximately $1.7 million. Net revenue
increased 168% to approximately $11.8 million for the nine months ended
September 30, 2000 from $4.4 million for the nine months ended September 30,
1999. This increase was primarily due to the expansion of the Company's sales
force and an increased number of marketing services projects as a result of a
broader and more extensive marketing services product portfolio, an increased
number of advertisers. Substantially all of Talk City's revenue is derived
within North America.
Cost of Revenue. Cost of revenue was $4.0 million, or 106% of total
revenue, for the three months ended September 30, 2000 compared to $2.5 million,
or 122% of total revenue, for the three months ended September 30, 1999. Cost of
revenue for the nine months ended September 30, 2000 was approximately $11.7
million, or 99% of total revenue compared to $5.8 million or 131% of total
revenue for the nine months ended September 30, 1999. Cost of revenue increased
in absolute dollars by $1.5 and $6.0 million compared to the same periods in the
prior years due to increased personnel-related costs, Internet connection fees
and server related expenses associated with conducting additional online events
and market research studies, as well as supporting the increased traffic to the
Company's Web sites.
Product Development. Product development expenses for the three months
ended September 30, 2000 and 1999 were approximately $2.2 million, or 59% of
total revenue, and $1.4 million, or 68% of total revenue, respectively. Product
development expenses for the nine months ended September 30, 2000 and 1999 were
$5.9 million, or 50% of revenue, and $3.2 million, or 72% of revenue. The
increase in absolute dollars was primarily attributable to additional personnel-
related costs and consulting fees associated with developing products and
software to expand the Company's marketing services product portfolio and
enhance the functionality of the Company's Web sites. Talk City expects that
product development expenses will increase for the foreseeable future as it
continues to hire additional personnel, develop and increase the functionality
of its marketing services products, and enhance the quality and functionality of
its Web sites. The Company's expectation regarding increases in product
development expenses in the future is a forward-looking statement.
Sales and Marketing. Sales and marketing expenses for the three months
ended September 30, 2000 and 1999 were approximately $2.8 million, or 74% of
total revenue, and approximately $5.2 million, or 258% of
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total revenue, respectively. Sales and marketing expenses for the nine months
ended September 30, 2000 and 1999 were approximately $12.3 million, or 105% of
revenue, and $13.4 million, or 305% of revenue, respectively. The decrease in
absolute dollars in sales and marketing expenses for the quarter was primarily
attributable to a decrease in online advertising expenses partially offset by an
increase in sales personnel, commissions and expenses associated with expanding
the Company's New York City office and opening sales offices in Chicago, San
Francisco and Los Angeles. Talk City expects that sales and marketing expenses
will moderately increase in absolute dollars in the foreseeable future. The
Company's expectation regarding increases in sales and marketing expenses in the
future is a forward-looking statement.
General and Administrative. General and administrative expenses for the
three months ended September 30, 2000 and 1999 were approximately $3.0 million,
or 79% of total revenue, and $1.6 million, or 79% of total revenue,
respectively. General and administrative expenses for the nine months ended
September 30, 2000 and 1999 were approximately $8.8 million, or 75% of total
revenue, and $3.7 million, or 84% of total revenue, respectively. The increase
in absolute dollars in general and administrative expenses was primarily
attributable to an increase in personnel-related and recruiting costs associated
with increased staffing in order to build the Company's infrastructure and
increased rent and operating costs relating to its new corporate headquarters.
The increase was also due to costs associated with operating as a public
company, such as directors' and officers' liability insurance, investor
relations and professional service fees. The Company expects general and
administrative expenses to remain relatively constant in absolute dollars as the
Company's operating infrastructure is substantially complete. The Company's
statement regarding general and administrative expenses remaining relatively
constant is a forward-looking statement.
Noncash Advertising and Promotional Charges. Noncash advertising and
promotional charges for the three months ended September 30, 2000 and 1999 were
$213,000, or 6% of total revenue, and $934,000, or 46% of total revenue,
respectively. Noncash advertising and promotional charges for the nine months
ended September 30, 2000 and 1999 were approximately $1.4 million, or 12% of
total revenue, and $10.3 million, or 233% of total revenue, respectively. The
decrease in noncash and promotional charges for the nine months ended September
30, 2000 was primarily due to the full utilization, as of September 30, 1999, of
advertising provided under the NBC advertising agreements.
Amortization of Goodwill. The Company recorded amortization of $513,000
through September 30, 2000. This amortization was recorded in connection with
the acquisition of RCI in January 2000. The goodwill of approximately $3.4
million related to this acquisition is being amortized over the expected period
of benefit of five years. There was no similar charge in 1999.
Interest Income, Net. Interest income, net, includes income from Talk
City's cash and investments and expenses related to its equipment financing
obligations. Interest income, net, for the three months ended September 30, 2000
and 1999 was approximately $455,000 and $809,000, respectively. The reduction in
interest income, net, resulted from declining interest income on lower cash,
cash equivalent and short-term investment balances for the three months ended
September 30, 2000. Interest income, net for the nine months ended September 30,
2000 and 1999 was approximately $1.8 million and $1.3 million, respectively. The
decrease in interest income, net, for the nine months ended September 30, 2000
was primarily due to lower average investment balances resulting from the
Company's IPO in July 1999 with net proceeds of approximately $55.4 million.
Income Taxes. FASB Statement No. 109 provides for the recognition of
deferred tax assets if realization of such assets is more likely than not. Based
upon historical operating performance and the reported cumulative net losses in
all prior years, Talk City has provided a full valuation allowance against its
net deferred tax assets. The Company evaluates the realizability of the deferred
tax assets on a quarterly basis.
Restructuring. Pursuant to the Restructuring, and the associated reduction
in workforce of 35 employees, or approximately 15% of the total workforce, the
Unaudited Condensed Statement of Operations for the nine months ended September
30, 2000 includes a charge of approximately $469,000. This charge consists of
approximately $290,000 for employee severance and other related costs and
$179,000 for the markdown of
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inventory. Substantially all liabilities related to the Restructuring were paid
as of June 30, 2000. Such Restructuring charges represent 4% of revenue for the
nine months ended September 30, 2000. There was no similar charge in 1999. While
Talk City does not project any further expenses related to the Restructuring, it
cannot be certain that additional expenditures or charges will not be required
in the future. In addition, Talk City cannot be certain that its Restructuring
will be successfully accepted or adopted by the market, including its current
investors or security analysts, the Company's current or potential business or
consumer clients, the Company's current or potential network participants, or
its current or potential advertisers. If the Restructuring is not accepted or
adopted by parties above, among others, our business could be adversely
affected. The above discussion regarding the potential for additional
Restructuring charges or expenditures and nonacceptance by the market and other
entities or individuals of the Restructuring is a forward-looking statement.
Liquidity and Capital Resources
Since Talk City's inception in March 1996, the Company has financed its
operations primarily through the private placement of its Preferred Stock, its
IPO in July 1999 and, to a lesser extent, through equipment financing. As of
September 30, 2000, the Company had approximately $10.1 million in cash and cash
equivalents and approximately $13.0 million in short-term investments.
Net cash used in operating activities was approximately $25.4 million and
$18.3 million for the nine months ended September 30, 2000 and 1999,
respectively. Cash used in operating activities in each of these periods was
primarily the result of net operating losses excluding the effects of noncash
advertising expenses as well as depreciation and amortization.
Net cash provided by investing activities was approximately $20.2 million
and net cash used in investing activities was $27.0 million for the nine months
ended September 30, 2000 and 1999, respectively. Cash provided by investing
activities for the nine months ended September 30, 2000 consisted of
approximately $33.4 million in sales of short-term investments partially offset
by approximately $6.4 million in purchases of equipment, approximately $4.9
million in purchases of short-term investments and $1.5 million placed into an
escrow fund for an employment agreement with the former sole shareholder of RCI.
The increase in purchases of property and equipment was due to leasehold
improvements as well as furniture and office equipment associated with the
Company's new corporate headquarters. In addition, the Company purchased
additional servers for its co-location server sites.
Net cash provided by financing activities was approximately $1.1 million
and $75.3 million for the nine months ended September 30, 2000 and 1999,
respectively. Net cash provided by financing activities for the nine months
ended September 30, 2000 consisted primarily of net proceeds of approximately
$1.2 million from stock option and warrant exercises partially offset by
principal payments on notes payable. Net cash provided by financing activities
for the nine months ended September 30, 1999 consisted of proceeds from the
Company's private placement in April 1999 of Preferred Stock and the Company's
initial public offering in July 1999.
As of September 30, 2000, the Company's principal commitments consisted of
obligations outstanding under operating leases. In October 1999, the Company
signed a nine-year, three and one-half month lease for a new 56,000 square foot
corporate headquarters in Campbell, California, which commenced on December 15,
1999. Pursuant to the lease agreement, the Company has provided a $2,100,000
letter of credit as security for the lease. The letter of credit may be reduced
by specified amounts in the lease agreement after every 12 months through
December 14, 2005 provided no default has occurred. Future minimum lease
payments under all non-cancelable operating leases total approximately $17.4
million as of September 30, 2000.
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In May 1998, Talk City obtained an equipment line of credit with a
financial institution in the amount of approximately $2.0 million. This line of
credit is secured by the Company's fixed assets and has a four-year term that
expires in April 2002. As of September 30, 2000, the amount outstanding under
this line of credit was approximately $148,000.
Talk City's capital requirements depend on numerous factors, including
market acceptance of its online marketing services, marketing and selling its
online marketing services and brand promotions and other factors. The Company
has experienced substantial increases in its expenditures since its inception
consistent with growth in its operations and personnel. Talk City currently
believes that its available cash and cash equivalents will be sufficient to meet
its anticipated needs for working capital and capital expenditures for at least
the next 15 months. The Company may need to raise additional funds, however, in
order to fund more rapid expansion, to develop new or enhance existing marketing
services or products, or to acquire or invest in complementary businesses,
technologies, services or products. In addition, in order to meet its long term
liquidity needs, the Company may need to raise additional funds, establish a
credit facility or seek other financing arrangements. Additional funding may not
be available on favorable terms or at all. The Company's statement regarding the
expectation that its available cash is sufficient to meet its needs for the next
15 months is a forward-looking statement.
Factors That May Affect Results
Talk City's stock price has traded far below the initial offering price and
could remain at such low price or be extremely volatile as the market for
Internet companies' stock has recently decreased and experienced extreme price
and volume fluctuations
The market price of Talk City's Common Stock has traded far below the IPO
price and may remain at such low price or be volatile as the market for
Internet-related companies has experienced extreme price and volume fluctuations
previously and, more recently, has substantially decreased. The market demand,
valuation and trading prices of Internet-related companies has historically 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 have often bought the stock at 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. Since Talk
City's IPO, the market price of its Common Stock has substantially traded at or
below the initial offering price of $12.00 per share. If the price per share
does not increase, the Company's investors may incur a substantial loss on their
investment. The Company cannot assure investors that its stock price will
increase to trade at the same levels as other technology stocks. The sustained
depression of the market price of the Company's 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.
Talk City's stock price may continue to be depressed due to broad market and
industry factors beyond its control
Talk City's stock price may continue to be depressed due to a variety of
factors, including factors beyond its control. These broad market and industry
factors could continue to harm the market price of its Common Stock, regardless
of the Company's performance. These factors include:
. announcements of or new programming by the Company or its competitors,
including the Company's announcement of its Restructuring;
. conditions or trends in the Internet services industry;
. changes in the market valuations of Internet companies;
. additions or departures of key personnel; and
. sales of substantial amounts of its Common Stock or other securities
in the open market.
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General political and economic conditions, such as recession or interest
rate or currency rate fluctuations, also could harm the market price of the
Company's Common Stock.
The low price of our common stock could result in our shares being
suspended or delisted from the NASDAQ
The shares of our Common Stock are currently listed on the NASDAQ national
market. Due to the recent decline in the price of our Common Stock, our Common
Stock could be suspended or delisted from the NASDAQ due to their minimum
trading requirements, particularly if our stock price remains below $1.00 per
share or certain financial tests are not met. If the shares of our Common Stock
were to be suspended or delisted from the NASDAQ system, it would be much more
difficult to dispose of our Common Stock or obtain accurate quotations as to the
price of our securities.
Fluctuations in quarterly operating results may cause the stock price to decline
The Company's operating results in one or more future quarters may be below
the expectations of its investors, and as a result the price of its Common Stock
could decline. Talk City expects that its quarterly operating results will
continue to fluctuate significantly and be affected by many factors, the more
important of which include:
. its dependence on increased online marketing services revenues;
. the length of its sales cycle;
. its ability to increase its audience of loyal, engaged clients and
consumers;
. management of growth; and
. potential technical difficulties or system down time affecting the
Internet generally or the Company specifically.
These factors are described in more detail in the risk factors described
below. Many of these factors are beyond the Company's control.
Talk City has incurred losses inclusive of noncash charges since inception and
it may be unable to achieve profitability or generate positive cash flow
Talk City incurred net losses of approximately $1.3 million in 1996, $6.4
million in 1997, $15.7 million in 1998, $40.1 million in 1999 and $27.5 million
for the nine months ended September 30, 2000, and it may be unable to achieve
profitability in the future. If the Company continues to incur net losses in
future periods, it may be unable to achieve one or more key elements of its
strategy, including the following:
. increase the number of online marketing services clients;
. increase its sales activities;
. adequately inform the market about its product positioning; or
. maintain the number of its network participants.
Talk City expects to continue to incur significant operating expenditures,
as well as noncash advertising and promotional charges, and as a result the
Company will need to generate significant revenues to achieve and maintain
profitability. As of September 30, 2000, Talk City had an accumulated deficit of
approximately $91.0 million, including noncash advertising and promotional
charges of $15.4 million. The Company may not achieve profitability if its
revenue increases more slowly than it expects, or if operating expenses exceed
its expectations or cannot be adjusted to compensate for lower than expected
revenues. If the Company does achieve profitability, it may be unable to sustain
or increase profitability on a quarterly or annual basis. Any of the factors
discussed above could cause its stock price to decline.
If the recent Restructuring of Talk City designed to increase awareness of and
refocus the Company's business on online marketing services, is not accepted,
the Company's results of operations may decrease and the business may be
adversely affected
In June 2000, Talk City began its Restructuring, pursuant to which it
reorganized its business into four main areas of operations, which include
online live events services, market research services, community solutions, and
network and syndication services. If the Restructuring does not increase
awareness or generate sales of the Company's online marketing services at the
level it anticipates, or at all, the Company's management and other resources
will have been expended with no increase in revenue, which could decrease its
results of operations, and otherwise adversely affect the business.
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Talk City invested in SocialNet, Inc. and its investment could be at risk if
SocialNet, Inc. does not grow as expected, or at all
In December 1999, the Company invested $3.0 million in SocialNet, Inc.
("SocialNet"), an online relationships company, in return for 1,554,404 shares
of Series C Preferred Stock of SocialNet, which represents approximately 7.6% of
SocialNet's outstanding shares. The price per share for the Series C Preferred
Stock was $1.93. Talk City's investment in this start-up company is at risk if
SocialNet does not grow at the level the Company anticipates or at all. In
addition, the benefits to the Company, including enhancing its demographic
targeting, may not be realized if SocialNet fails to perform as the Company
expects or achieve its business strategy. Many of these factors are out of Talk
City's control.
If Talk City raises additional capital through the issuance of new securities,
existing stockholders will incur additional dilution
If the Company raises additional capital through the issuance of new
securities, its stockholders will be subject to additional dilution. In
addition, any new securities issued may have rights, preferences or privileges
senior to those securities held by the Company's current stockholders.
Talk City's growth will depend on its ability to increase its online marketing
services revenues
Talk City has derived, and will continue to derive, a substantial portion
of its revenues from the sale of online marketing services. If the Company does
not continue to develop online marketing services revenues, its revenues may not
meet its expectations or may decline and Talk City will need to revise its
revenue model to reflect this. The Company's growth and future success will
depend on its ability to increase the number of its online marketing services
clients, expand its online marketing services offerings, effectively implement
these services and increase the average revenue per project and per client. Talk
City's ability to generate significant online marketing services revenues will
also depend, in part, on its ability to create new online marketing services
offerings without diluting the value of its existing programs.
Current and potential competitors could decrease Talk City's market share and
harm its business
Increases in the number of Web sites competing for the attention and
spending of businesses, consumers and advertisers could result in price
reductions, reduced margins or loss of market share, any of which could decrease
Talk City's revenues and contribute to the Company not achieving profitability
and failing. The barriers to entry in the Internet services market are low and
the Company expects the number of its competitors to increase. Any company or
individual can establish and maintain a Web site for minimal cost. Talk City
competes for business clients, consumers, network participants and advertisers
with numerous companies, including the following:
. online services or Web sites that produce online marketing services,
such as live events, market research or customized community
solutions, including Prospero Technologies Corporation ("Prospero"),
Broadcast.com, Inc., and Greenfield Online;
. online services or Web sites with a focus on community services, such
as AOL, GeoCities, Inc., a subsidiary of Yahoo! Inc. ("Yahoo"),
Tripod, Inc., a subsidiary of Lycos, Inc. ("Lycos"), Prospero,
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.
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Revenue growth in prior periods may not be indicative of future growth
The Company achieved significant revenue growth in 1999 as well as the nine
months ended September 30, 2000. Its limited operating history makes prediction
of future growth difficult. In addition, due to the Restructuring, the Company
has shifted its focus to its online marketing services which is a new focus of
the Company and it cannot predict its revenue growth as a result. Accurate
predictions of future growth are also difficult because of the rapid changes in
its markets as a result of increased competition, evolving technology and
clients' business requirements. Accordingly, current and potential investors
should not rely on past revenue growth as a prediction of future growth.
Talk City's variable sales cycle may cause the Company to incur substantial
expenses and expend management time without generating the corresponding
revenues, which would slow its cash flow
Talk City's sales cycle, particularly with its business clients, varies in
length of time. During the sales cycle, the Company may expend substantial funds
and management resources without generating corresponding revenues. The time
between the date of its initial contact with a potential client and the
execution of a contract with that potential client typically ranges from a few
weeks for smaller agreements to several months for larger agreements. Its sales
cycle is also subject to delays as a result of factors over which the Company
has little or no control, including the following:
. budgetary constraints;
. internal acceptance reviews;
. the success and continued internal support of advertisers', online
marketing services clients' and network participants' own development
efforts; and
. the possibility of cancellation or delay of projects by advertisers,
online marketing services clients or network participants.
The length and uncertainty of its sales cycle also may harm its billing and
collection efforts. The length of the sales cycle might prevent the Company from
rendering its services on a more accelerated basis, which slows its cash flow
and reduces its ability to fund the expenditures the Company incurs during the
sales cycle.
Talk City depends on the clients of its online marketing services, including
business clients, advertisers, network participants and end users of its
network, for content, promotion and sustaining an engaged audience, and if its
clients or users become dissatisfied or do not become engaged with its services,
the Company would need to increase its expenditures for these activities
Talk City depends largely on clients of its online marketing services,
including business clients, advertisers, network participants and end users of
its network, for content, word-of-mouth promotion and for sustaining an involved
audience for its advertisers and business clients. If such clients or users
become dissatisfied or do not become engaged with its services, they will not
generate significant content or promote its Web sites or services and the
Company will have to increase the expenditure of its own resources for these
activities. In addition, dissatisfied or disengaged clients or users would not
continue to attract other clients or users to the Company's sites. Loss of its
clients or users and failure to increase its number of engaged clients or users
would hurt the Company's efforts to generate increased revenues. The Company's
clients or users may become dissatisfied with its services as a result of the
increased focus on commercialization of its services due to their continued
exposure to advertising activities on its Web sites or the use of their
information for commercial purposes. Talk City's clients or users may also
become dissatisfied with its services if the Company experiences system failures
or does not maintain its structured environment, attract quality business
clients, or continually upgrade its software functionality.
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Talk City derives a substantial portion of its revenues from network and
syndication services, and if its network and syndication services revenues
decline due to lack of acceptance of the Internet as an advertising medium, its
business will not grow or will decrease
Talk City derives a substantial portion of its revenues from network and
syndication services. Network and syndication services revenues represented 75%
of its total revenue in 1999 and 51% of its revenue for the nine months ended
September 30, 2000. As a result, the Company's success is highly dependent on
the increased use of the Internet as an advertising medium. Talk City's business
will not grow or will decrease if the market for Internet advertising fails to
develop or develops slower than expected. Most of the Company's current or
potential advertising clients 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 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 or may be unwilling
to pay the current advertising rates, and sponsors or advertisers who are not
currently advertising on the Internet may be reluctant to do so.
If Talk City does not provide its advertisers with the guaranteed number of
impressions required by its contracts with them, its reputation would be harmed
and its advertising inventory would be decreased
The terms of the Company's advertising contracts generally range from one
week to twelve months. Talk City's advertising contracts guarantee the
advertiser a minimum number of impressions, or times that an advertisement is
seen by users of its sites. If minimum impression levels are not achieved for
any reason, the Company may be required to provide additional impressions after
the contract term which could reduce the availability of advertising inventory
for its other current and potential advertisers. Continued inability to deliver
the guaranteed number of impressions to its advertisers could hurt the Company's
reputation and could cause its current as well as potential advertisers to not
advertise on its sites. If minimum guaranteed impressions are not met, Talk City
defers recognition of the corresponding revenues until guaranteed impression
levels are achieved.
Talk City relies on its network participants for user volume and increased
revenues
Talk City's network participants drove approximately 45% of the volume of
the Company's Web sites for the nine months ended September 30, 2000. Volume is
defined as the number of Internet page views or Internet advertisement views
seen by its users. The volume is considered to be "driven" by the network
participant if the user comes to the Company's sites via the participant's Web
site. If Talk City were to terminate or otherwise lose the benefit of all of its
network participant contracts, the Company could lose as much as 45% of its
volume. Talk City's network participant contracts typically have terms of nine
months to three years each.
In addition, the Company sells advertisements based on the volume of its
sites, including volume provided by its network participants. Of the Company's
total advertising and sponsorship revenue for the nine months ended September
30, 2000, approximately 23% were generated through advertisements that ran based
on volume provided by its network participants. If Talk City was to terminate or
otherwise lose the benefit of all of its network participant contracts, the
Company could lose as much as 23% of its advertising and sponsorship revenue.
Talk City would need to replace these revenues with increased revenues from its
online marketing services. For the nine months ended September 30, 2000, none of
the Company's network participants individually drove volume responsible for
more than 4% of its advertising and sponsorship revenue, except WebTV Network, a
wholly owned subsidiary of Microsoft Corporation ("WebTV Network"), which was
responsible for approximately 15% of its advertising and sponsorship revenue for
the nine months ended September 30, 2000.
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Talk City relies on WebTV Network for a substantial amount of traffic on its
advertising network and, to a lesser extent its revenue, and if its contract
with WebTV Network were terminated, the Company would need to replace this
volume and revenue through other sources
Talk City recently renewed its contract with WebTV Network for a term of
one year, expiring in July 2001. If this contract were to be terminated, the
Company could lose as much as 30% of the traffic on its advertising network. The
Company would need to replace this volume with volume from its other network
participants, through the growth of its own Web sites, or with volume generated
through other means, such as increased marketing, any of which would result in
an unexpected diversion of management efforts or increased operating expenses.
In addition, if Talk City were unable to replace this volume, the Company might
be unable to replace the 15% of its advertising and sponsorship revenues
generated by WebTV Network for the nine months ended September 30, 2000.
Talk City's growth will depend upon the acceptance of the Internet as an
attractive medium for its online marketing services clients
Talk City's current and potential business clients must accept the Internet
as an attractive and sustainable substitute medium for the traditional methods
to which they are accustomed. The market for online marketing services may not
continue to develop and may not be sustainable. The Internet, as an online
marketing services solution, has not been available for a sufficient period of
time for the Company to gauge its effectiveness as compared with traditional
methods, such as trade shows, phone and mail surveys and video conferencing.
Talk City acquired RCI and if the Company is not successful in integrating RCI's
operations with its own, the Company's revenue and operating results could
decline
Talk City's acquisition of RCI, an online market research company, in
January 2000 will only be successful if the Company is able to integrate its
operations with its own, which could divert attention from the day-to-day
operations of the combined company. The diversion of the attention of management
and key sales personnel, and any difficulties encountered in the transition
process could cause the revenues and operating results of the combined company
to decline. The Company must successfully integrate RCI's services offerings,
specifically online market research, with its own.
Further, this integration is occurring as the Company is undergoing its
Restructuring. The online marketing capabilities of RCI must effectively work
and combine with Talk City's new, restructured online market research component
for the integration to be successful. It is possible that neither Talk City nor
RCI will retain key management and sales personnel.
The acquisition of RCI, combined with the Company's Restructuring could
also cause the Company's business clients or clients of RCI to be uncertain
about its ability to support the combined company's services and the direction
of the combined company's development efforts. This may result in the delay or
cancellation of orders, a significant decrease in Talk City's online marketing
services revenues and limit its ability to implement its business strategy.
Talk City depends on its trained community leaders and moderators to engage its
users and maintain its structured and moderated environment
Talk City depends on its network of trained community leaders and
moderators, which consisted of approximately 1,550 active individuals as of
September 30, 2000, to draw its users into its services and maintain its
structured and moderated environment. Most of its trained community leaders and
moderators are volunteers. These people volunteer because they like to meet and
help people from all over the world, enjoy the recognition they receive in a
"leadership" position and generally have fun participating in such a novel form
of communication. As the Internet evolves and online communication becomes more
common, its trained community leaders and moderators may view moderating as less
exciting or less of a novelty than it is now. Loss of its trained community
leaders and moderators, or loss of its ability to attract these individuals to
its
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services, could cause the Company to implement new programs to engage its users
and maintain its structured environment. The implementation of these new
programs would cause the Company to expend unexpected management time and
resources which would increase its operating expenses.
Talk City's paid moderators could be viewed as employees rather than independent
contractors which could subject the Company to adverse tax and employee benefit
consequences
Talk City treats its paid moderators, consisting of approximately 450
individuals as of September 30, 2000, as independent contractors. The Company's
paid moderators sign independent contractor agreements and are paid a flat
monthly fee or per hour. One or more jurisdictions may deem the Company's paid
moderators to be employees rather than independent contractors and seek to
impose taxes, and any applicable interest and penalties, on the Company. The law
regarding the distinction between independent contractors and employees is not
entirely clear. The Company could be subject to substantial tax and employee
benefit liabilities if it were ultimately determined by a court of competent
jurisdiction that the Company's paid moderators are actually employees.
Talk City's volunteer community leaders could be viewed as employees, which
would substantially increase its operating expenses
If the Company's active volunteer community leaders, consisting of
approximately 1,100 individuals as of September 30, 2000, were viewed as
employees, Talk City could be subject to payment of back wages and other
penalties and its operating expenses could substantially increase. Previously,
former volunteers of America Online, Inc. ("AOL") filed a complaint with the
Labor Department and a class action lawsuit claiming they were treated like
employees and should have been paid.
Talk City is growing rapidly and must effectively manage and support its growth
in order for its business strategy to succeed
Talk City has grown rapidly and will need to continue to grow in all areas
of operation in order to execute its business strategy. Managing and sustaining
its growth will place significant demands on management as well as on its
administrative, operational and financial systems and controls. If the Company
is unable to do this effectively, the Company would have to divert resources
such as management time away from the continued growth of its business and
implementation of its business strategy. Talk City had 172 employees as of
September 30, 1999 compared to 198 employees as of September 30, 2000. The
Company anticipates further increases in the number of its employees in order to
increase its online marketing services revenues and enhance the content and
functionality of its Web sites.
Talk City's chief executive officer and senior vice president of community are
critical to its business and they may not remain with the Company in the future
Talk City's future success will depend, to a significant extent, on the
continued services of Peter Friedman, its Chairman of the Board and Chief
Executive Officer, and Jenna Woodul, its Senior Vice President of Community. The
loss of the services of Mr. Friedman or Ms. Woodul could cause the Company to
incur increased operating expenses and divert other senior management time in
searching for their replacements. The loss of their services could also harm its
reputation as its business clients and advertisers and network participants
could become concerned about its future operations. The Company does not have
long-term employment agreements with Mr. Friedman or Ms. Woodul and the Company
does not maintain any key person life insurance policies.
Talk City must continually attract and retain its sales, engineering and other
key personnel or the Company will be unable to execute its business strategy
Talk City's future success also will depend on its ability to attract,
retain and motivate highly skilled sales, engineering and other key personnel.
Competition for such personnel is intense in the Internet industry,
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especially in the Silicon Valley employment market, and the Company may be
unable to successfully attract, integrate or retain sufficiently qualified
personnel. The Company has, in the past, experienced, and expects to continue to
experience difficulty in hiring and retaining highly skilled and qualified
employees, especially engineers, as a result of its rapid growth and expansion.
The reduction in workforce related to the Restructuring could result in market
uncertainty and decreased employee morale
The reduction in workforce of Talk City by approximately 15% pursuant to
the Restructuring could result in market concerns about the operations of the
Company. Reductions in workforce sometimes result in operational concerns about
a company in the market and, while the Company's reduction was in connection
with the Restructuring, the Company may not be able to respond adequately to
reports of securities analysts or the market. In addition, the Company must take
the appropriate steps to sustain and prevent any decrease in employee morale due
to the reduction in workforce.
Talk City may be unable to consummate potential acquisitions or investments or
successfully integrate them with its business which could slow its growth
strategy
As part of its continued strategy to expand its online marketing services,
the Company may acquire or make investments in complementary businesses,
technologies, services or products if appropriate opportunities arise. Talk City
may be unable to identify suitable acquisition or investment candidates at
reasonable prices or on reasonable terms. Additionally, regardless of whether
suitable candidates are available, the Company may be unable to consummate
future acquisitions or investments, which could harm its growth strategy. If
Talk City does acquire a company or make other types of acquisitions, the
Company could have difficulty integrating the acquired services, personnel or
technologies. These difficulties could disrupt its ongoing business, distract
its management and employees, and increase its expenses.
System failures or slow downs would harm the Company's reputation and thus
reduce its attractiveness to its current and future business clients, users,
network participants and advertisers
System failures would harm the Company's reputation and reduce its
attractiveness to businesses, network participants and advertisers. Talk City's
ability to attract potential business clients, network participants and
advertisers to promote its brand will depend significantly on the performance of
its network infrastructure. In addition, a key element of its strategy is to
effectively perform its online marketing services for its business clients in
order to increase the usage of its online marketing services by business
clients. Increased usage of the Company's online marketing services could strain
the capacity of its infrastructure, resulting in a slowing or outage of its
services and reduced traffic to its Web sites. Talk City may be unable to
improve its technical infrastructure in relation to increased usage of its
services. In addition, the Company's users depend on Internet service providers,
online service providers and other Web site operators for access to its Web
sites. Many of these providers and operators have also experienced significant
outages in the past, and they could experience outages, delays and other
difficulties due to system failures unrelated to the Company's systems.
Talk City's communications and other computer hardware operations are subject to
disruptions which are out of its control and for which the Company may not have
adequate insurance
Fire, floods, earthquakes, power loss, telecommunications failures, break-
ins and similar events could damage the Company's communications hardware and
other computer hardware operations. These operations, which are separate from
its principal offices, are located at GlobalCenter's facilities in Sunnyvale,
California. In addition, computer viruses, electronic break-ins or other similar
interruptions also could disrupt its Web sites. Talk City's insurance policies
may not adequately compensate the Company for losses that may occur due to
failures or interruptions in its systems.
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Talk City must keep pace with rapid technological change and the intense
competition of the Internet industry in order to succeed
Talk City's market is characterized by rapidly changing technologies,
frequent new product and service introductions, and evolving industry standards.
The growth of the Internet and intense competition in the industry exacerbate
these market characteristics. In addition, in recent months many Internet-
related companies, similar to Talk City, have consolidated or restructured in
order to remain competitive within the Internet industry. To succeed, Talk City
will need to effectively implement its Restructuring, integrate the various
software programs and tools required to enhance and improve its service
offerings and be accepted by and manage its business. Any enhancements or new
services or features must meet the requirements of its current and prospective
clients and must achieve significant market acceptance. The Company's success
also will depend on its ability to adapt to rapidly changing technologies by
continually improving the performance features and reliability of its services.
The Company may experience difficulties that could delay or prevent the
successful development, introduction or marketing of new services. Talk City
could also incur substantial costs if it needs to modify its services or
infrastructure to adapt to these changes.
Talk City depends on third-party software to measure user demographics and for
other related services and, if this software does not function properly, the
Company would need to purchase new software or write the software themselves,
each of which could cause a temporary disruption in its business
If software purchased from third parties to perform the Company's services
does not function properly or is not updated, the Company would need to purchase
new software from other third-party providers. Even though the third-party
software Talk City currently uses is easily replaced through multiple other
third-party providers, or by it writing the necessary software programs
themselves, each of these alternatives would require an unplanned increase in
operating expenses and could cause a one to two month disruption in its
business.
It is important to advertisers that Talk City accurately measures the
demographics of its users and the delivery of advertising impressions on its Web
sites. Companies may choose not to advertise on the Company's Web sites or may
be less willing to pay the fees the Company intends to charge for advertising if
they do not perceive the Company's measurements to be reliable. Talk City has
purchased third-party software from Oracle Corporation and NetGravity, Inc. for
these measurement services. Talk City may be unable to accurately evaluate the
demographic characteristics of its users if the third-party software does not
function properly or is not enhanced to support the Company's needs. Talk City's
ability to deliver its services to its users may also be harmed if other
software the Company has purchased from third parties, such as Microsoft
Exchange for real-time chat and Netscape Web Servers for ad serving and
management, is not reliable or does not function properly.
Changes in government regulation could limit Talk City's Internet activities or
result in additional costs of doing business on the Internet
Currently, few laws or regulations exist that specifically regulate
communications on the Internet, but Talk City expects more stringent laws and
regulations to be enacted due to the popularity and use of the Internet. Any new
legislation or regulations or the application of existing laws and regulations
to the Internet could limit user volume and increase operating expenses. In
addition, the application of existing laws to the Internet is uncertain and may
take years to resolve and could expose the Company to substantial liability for
which Talk City might not be indemnified by the content providers or other third
parties. Existing laws and regulations currently, and new laws and regulations
are likely to address a variety of issues, including the following:
. user privacy and expression;
. the rights and safety of children;
. information security;
. the convergence of traditional channels with Internet commerce; and
. taxation and pricing.
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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 the Company's revenues to decrease
If Internet growth slows due to proposals to regulate Internet service
providers similar to long distance telephone carriers, Talk City's volume and
the demand for its online marketing services would decline which would cause its
revenues to decrease. The use of the Internet has burdened the existing
telecommunications infrastructure and led to interruptions in phone service in
areas with high Internet use. Several telecommunications companies and local
telephone carriers have petitioned the Federal Communications Commission to
regulate Internet service providers and online service providers in a manner
similar to long distance telephone carriers and to impose access fees. If this
were to occur, the costs of communicating on the Internet could increase
substantially, potentially slowing the growth in use of the Internet.
Talk City may be subject to liability for publishing or distributing content
over the Internet
Talk City may be subject to claims relating to content that is published on
or downloaded from its Web sites. The Company also could be subject to liability
for content that is accessible from its Web sites through links to other Web
sites. Although Talk City carries general liability and multimedia liability
insurance, the Company's insurance may not cover potential claims of this type
or may not be adequate to cover all costs incurred in defense of potential
claims or to indemnify the Company for all liability that may be imposed. In
addition, any claims like this, with or without merit, would result in the
diversion of its financial resources and management personnel.
Talk City may be liable for misappropriation by others of its users' personal
information
If third parties were able to penetrate the Company's network security or
otherwise misappropriate its users' personal information, Talk City could be
subject to liability. These could include claims for impersonation or other
similar fraud claims.
Talk City may be liable for its use or sale of its users' personal information
Talk City could be subject to liability claims by its users for misuses of
personal information, such as for unauthorized marketing purposes. In addition,
the Federal Trade Commission has previously investigated various Internet
companies regarding their use of personal information. The Company could incur
additional expenses if new regulations regarding the use of personal information
are introduced or if its privacy practices are investigated. Talk City currently
uses its users' personal information internally to determine how to improve its
services, applications and features, and to target its advertisements and
communications. The Company also uses this information externally to provide its
advertisers with the demographics of its user base. Talk City may, in the
future, sell its user information on an aggregate, not individual, basis.
Talk City is dependent on the trademark "Talk City" and if the Company could not
use this mark, it would need to reimplement its Web sites and re-build its brand
identity
Talk City is dependent on the trademark "Talk City." If the Company were
prevented from using this trademark, it would need to reimplement its Web sites
and devise new hard copy materials, such as letterhead and merchandise. The
Company would also need to re-build its brand identity with its business
clients, network participants and advertisers. Talk City's operating expenses
would substantially increase if it had to re-build its brand identity or
reimplement its Web sites.
Possible infringement of Talk City's intellectual property rights by third
parties could substantially increase its operating expenses
Other parties may assert claims of infringement of intellectual property or
other proprietary rights against Talk City. These claims, even if without merit,
could require the Company to expend significant financial and managerial
resources. Furthermore, if claims like this were successful, Talk City might be
required to change
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its trademarks, alter its content or pay financial damages, any of which could
substantially increase its operating expenses. The Company also may be required
to obtain licenses from others to refine, develop, market and deliver new
services. Talk City 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. Talk City has been subject to claims and expects to be
subject to legal proceedings and claims from time to time in the ordinary course
of its business, including claims of alleged infringement of trademarks and
other intellectual property rights of third parties by the Company and its
licensees.
Talk City's undesignated Preferred Stock may inhibit potential acquisition bids
for the Company, cause the market price for its Common Stock to fall and
diminish the voting rights of the holders of its Common Stock
If the Company's Board of Directors ("Board"), issues Preferred Stock,
potential acquirers may not make acquisition bids for the Company, the Company's
stock price may fall and the voting rights of existing stockholders may diminish
as a result. The Board has the authority to issue up to 5,000,000 shares of
Preferred Stock in one or more series. The Board can fix the price, rights,
preferences, privileges and restrictions of the Preferred Stock without any
further vote or action by the stockholders.
Talk City has anti-takeover defenses that could delay or prevent an acquisition
of the Company
Provisions of Talk City's Certificate of Incorporation, Bylaws and Delaware
law could make it more difficult for a third party to acquire the Company, even
if doing so would be beneficial to the stockholders.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Talk City's exposure to market risk for changes in interest rates relates
primarily to its investment portfolio. The Company does not use derivative
financial instruments in its investment portfolio. Talk City places its
investments with high quality issuers and, by policy, limits the amount of
credit risk exposure to any one issuer. The Company is averse to principal loss
and ensures the safety and preservation of its invested funds by limiting
default, market and reinvestment risk. Talk City classifies its cash equivalents
and short-term investments as "fixed rate" if the rate of return on such
instruments remains fixed over their term. These "fixed rate" investments
include fixed rate commercial paper, corporate notes, and market auction
preferred securities. We classify our cash equivalents and short-term
investments as "variable rate" if the rate of return on such investments varies
based on the change in a predetermined index or set of indices during their
term. These "variable rate" investments primarily include money market accounts
held at various securities brokers and banks. The table below presents the
amounts and related weighted average interest rates of the Company's investment
portfolio at September 30, 2000:
Average Book Fair
Interest Rate Value Value
--------------- --------- ---------
(In thousands)
Cash equivalents:
Fixed rate 6.66% $ 5,240 $ 5,240
Variable rate 6.66% 2,300 2,300
Short-term investments:
Fixed rate 6.29% 11,076 11,076
Variable rate 6.65% 1,914 1,914
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2.1 Agreement and Plan of Reorganization between the Company and Research
Connections, Inc., dated January 3, 2000.***
3.2 Second Amended and Restated Certificate of Incorporation of the
Company.*
3.3 Bylaws of the Company.*
4.1 Form of the Company's Common Stock certificate.*
4.2 Third Amended and Restated Shareholders Rights Agreement, dated April
23, 1999, between the Company and the parties named therein, as
amended on May 26, 1999.*
10.1 Form of Indemnification Agreement entered into by the Company with
each of its directors and executive officers.*
10.2 1996A Stock Option Plan and related agreements.*
10.3 Amended and Restated 1996 Stock Option Plan and related agreements.*
10.4 1999 Employee Stock Purchase Plan.*
10.5 1999 Director Option Plan.*
10.6 Office Lease Agreement, dated May 21, 1997, by and between the
Company and The Manufacturers Life Insurance Company (U.S.A.).*
10.7 Office Lease Agreement, dated February 28, 1999, by and between the
Company and SLG Graybar LLC.*
10.8 Repurchase Agreement, dated November 20, 1996, as amended, by and
between the Company and Peter H. Friedman.*
10.9 Repurchase Agreement, dated November 20, 1996, as amended, by and
between the Company and Jenna Woodul.*
10.10 Stock Option Agreement, dated March 1, 1999, by and between the
Company and Jeffrey Snetiker.*
10.11 Master Service Agreement, dated April 19, 1999, by and between the
Company and Frontier GlobalCenter.*
10.12 Network Affiliation Agreement, dated March 1, 1998 by and between the
Company and 24/7 Media Inc.*
10.13 Content and Services Agreement, effective July 19, 1998, by and
between the Company and WebTV Networks, Inc., as amended on July 27,
2000.****
10.14 Contract, dated May 13, 1997, by and between the Company and NFO
Research.*
10.15 Operating Agreement, dated August 24, 1998, by and between the
Company and Cox Interactive Media, Inc.*
10.16 Hearst-Talk City Operating Agreement, dated April 20, 1999, by and
between the Company and Hearst New Media and Technology division, a
division of Hearst Communications, Inc.*
10.17 Series D Preferred Stock Purchase Agreement, dated October 30, 1998,
by and between the Company and Hearst Communications, Inc., Hearst
New Media & Technology division, as amended on April 15, 1999.*
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10.18 NBC-Talk City Chat Services Agreement, dated August 21, 1998, by and
between the Company and NBC Multimedia, Inc., as amended on April 19,
1999.*
10.19 Letter Agreement, dated February 25, 1998, by and between the Company
and NBC Multimedia, Inc., as amended on July 27, 1998 and April 19,
1999.*
10.21 Lease Agreement, dated May 5, 1999, by and between the Company and
Pruneyard Associates, LLC.*
10.22 Sublease Agreement, Second Amendment to Lease and Consent to Sublease
Agreement, and Tri-Party Construction Agreement dated October 20,
1999, by and between the Company, Compuware Corporation and Pruneyard
Associates, LLC. **
27.1 Financial Data Schedule (filed only with the electronic submission of
Form 10-Q in accordance with the Edgar requirements).
______________
* Incorporated by reference from the Company's 424(b) Prospectus, dated July
19, 1999, as declared effective by the Securities and Exchange Commission
on July 19, 1999.
** Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ended September 30, 1999.
*** Incorporated by reference from the Company's Annual Report on Form 10-K for
the period ended December 31, 1999.
**** Incorporated by reference from the Company's Quarterly Report on Form 10-Q
for the period ended June 30, 2000.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the three months
ended September 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TALK CITY, INC.
(Registrant)
/s/ Jeffrey Snetiker
-------------------------------
Jeffrey Snetiker
Senior Vice President, Chief Financial and
Administrative Officer
(principal financial or chief financial officer and duly authorized signatory)
November 14, 2000
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